ITEM 1 - BUSINESS
(a) On July 31, 1996, the Company acquired all of the assets and certain liabilities of American Sintered Technologies, Inc. (AST) for the cash price of $6,937,000. In addition to the cash paid, the Company assumed $954,000 of various Pennsylvania Economic Agencies loans. The nature of the business of AST is the manufacture of ferrous and non-ferrous powdered metal components serving the automotive, lawn and garden, plumbing, hardware, and electrical hardware industries. The acquisition was accounted for as a purchase and is included in the Company's Metal Fabrications business segment.
The Precision Sheet Metal (PSM) plant in Los Angeles, California completed the phase-out of all operations during 1993. Identifiable assets of PSM included $1,129,000 for property and plant held for sale which are carried in Other Non-Current Assets at December 31, 1996.
On June 4, 1992 the assets of the VR/Wesson Industrial Supply warehouse in Beckley, West Virginia were sold. The Beckley operation was not significant to the overall operating performance of the Company.
(b) Incorporated by reference from the Notes to Consolidated Financial Statements pages 28 through 41.
(c)(1)(i) Fansteel is a specialty metals manufacturer of products for use in the metalworking; automotive; energy (coal mining, oil and gas drilling); military and commercial aircraft, aerospace and weapon systems; agricultural machinery; lawn and garden equipment; and plumbing and electrical hardware industries. The principal products of the Industrial Tools business segment include tungsten carbide cutting tools, milling tools, toolholding devices, mining tools and accessories, construction tools, and wear resistant parts. The principal products of the Metal Fabrications business segment include titanium, nickel base and alloy steel forgings; high integrity aluminum and magnesium sand mold castings; carbon steel, stainless steel, brass and aluminum special wire forms and fasteners; brass, bronze and ferrous alloy investment castings; and ferrous and non-ferrous powdered metal components.
Sales of the Company's products are made through a direct sales organization and through distributors, manufacturers' representatives and agents. In the Industrial Tools and Metal Fabrications business segments, distributors, manufacturers' representatives and agents account for the majority of sales.
ITEM 1 - BUSINESS (Contd.)
The percentage of net sales for classes of similar products which equaled or exceeded ten percent of the Company's consolidated net sales for the years indicated is set forth below:
Consolidated Net Sales Products Business Segment 1996 1995 1994
Tungsten carbide cutting tools Industrial Tools 30% 31% 29% Non-ferrous forgings Metal Fabrications 12 11 12 Investment castings Metal Fabrications 9 12 13
(c)(1)(ii) At this time, there are no new products in production or in the development stage that require investment of a material amount of the Company's assets.
(iii) The most important raw materials used by the Company are tungsten carbide powder, cobalt, titanium, magnesium, aluminum, iron, bronze, copper, and alloy steel. Prices of some of these raw materials have been volatile in recent years, and changes in raw material prices have had an impact on the Company's dollar sales volume. Several of the raw materials used, including cobalt, are purchased principally from foreign sources, many of them located in developing countries, and availability can be affected by political developments and trade restrictions, both domestic and foreign. The Company believes that the sources and availability of these materials are adequate for present needs, although spot shortages of certain raw materials may occur from time to time.
(iv) The Company owns a number of patents which relate to a wide range of products and processes and is licensed under certain patents. The Company does not consider any of its patents or group of patents to be material to either of its business segments taken as a whole.
(v) None of the operations of any business segment are seasonal.
(vi) Working capital requirements for both business segments are substantial, but the Company's investment in working capital is fairly typical of the specialty metals manufacturing industry.
(vii) The Company serves a wide variety of industries. No one individual customer accounts for a significant portion of the Company's overall business.
Substantial sales for those operating units within the Metal Fabrications segment servicing the aerospace market are concentrated in a relatively small customer base. The loss of any individual customer within this base could have an adverse
ITEM 1 - BUSINESS (Contd.)
effect on the segment. Relations with these customers have existed for years and the Company believes them to be sound.
(c)(1)(viii) The backlog of orders not shipped and believed to be firm as of the dates shown are set forth below (in thousands):
December 31, 1996 1995
Industrial Tools $ 6,317 $ 6,197 Metal Fabrications 38,379 25,711
$ 44,696 $ 31,908
In the Industrial Tools segment, virtually all backlog is shipped in less than 12 months, generally within 3 months. In the Metal Fabrications segment, shipments are typically made between 1 and 24 months after an order is received. The Company believes that approximately 92% of the backlog at December 31, 1996 will be shipped before the end of 1997.
Because of the substantial size of some orders received by the Company - particularly orders for products sold by the Metal Fabrications segment - the Company's backlog can fluctuate substantially from one fiscal period to another. Because of the differences in lead-time for filling orders among the Company's business segments, overall backlogs at different times will not necessarily be comparable as predictors of the Company's near-term sales.
(ix) The Company's Metal Fabrications segment has orders subject to termination at the election of the government. The Company would be compensated for costs up to the date of termination if terminated for the convenience of the government. Termination without compensation could result if the Company was in default as determined by the government. The Company is not aware of any current orders which would be terminated for default.
(x) In general, the Company competes in its markets on the basis of technical expertise, product reliability, quality, sales support, availability and price. Most of the Company's products are sold in highly competitive markets, and some of the Company's competitors are larger in size and have greater financial resources than Fansteel.
(c)(1)(xi) The development of new products and processes and the improvement of existing products and processes is conducted by each operating unit.
ITEM 1 - BUSINESS (Contd.)
(c)(1)(xi) The Company has a staff of technically trained people who support sales, manufacturing and quality assurance. The majority of the Company's products and processes require technically sophisticated application engineering and process control. This kind of technical support is charged to the cost of products sold.
(xii) The Company expensed $94,000 to continuing operations in 1996 for costs related to compliance with government environmental regulations. Capital expenditures in 1996 included $52,000 at the Hydro Carbide facility in Latrobe, Pennsylvania for a
chiller unit which reduces water consumption, and $16,000 at the Lexington facility in Lexington, Kentucky for a waste removal system.
During 1996, the Company charged $230,000 for continuing operations against reserves for environmental reclamation established in previous years. Reserves for environmental reclamation were $361,000 for continuing operations at December 31, 1996. The Company's Escast operation, located in Addison, IL, and included in the Metal Fabrications business segment, has been named as a responsible party for the clean-up costs of certain hazardous wastes located on-site. A cost sharing agreement with the former owner of Escast is in place for any future clean-up costs. The clean-up process has begun at the site under an Illinois Environmental Protection permit with total estimated costs of approximately $1.1 million. The Company believes the established reserves are adequate to cover its share of the clean-up costs.
During 1996, the Company charged $709,000 for discontinued operations against reserves for environmental reclamation and decommissioning established in previous years. In addition, the Company expended $759,000 for design and engineering costs for the proposed processing plant. Reserves for environmental reclamation and decommissioning were $3.9 million for discontinued operations at December 31, 1996. The Company discontinued its Metal Products business segment in 1989. Environmental reclamation and decommissioning is required for the segment's primary plant that processed certain ores which are subject to regulations of several government agencies. The residues from these processed ores were stored on-site. Remaining assets were written down to estimated realizable value, and provisions were made for the estimated costs for decommissioning. Application has been made to the appropriate agencies for a portion of the site to be decommissioned. A decommissioning plan for the remainder of the site, including the residue storage areas, has been submitted to the appropriate governmental agencies for approval. Before decommissioning procedures begin for the residue storage areas, the Company plans to extract materials within the residues which have a commercial value.
At December 31, 1996, the Company had reserves of $3.9 million for environmental clean-up costs for discontinued operations. The Company, in association with outside consultants, has developed a decommissioning plan for the site involved, and has ITEM 1 - BUSINESS (Contd.)
submitted that plan and a related decommissioning funding plan to the Nuclear Regulatory Commission ("NRC") as required by law. Prior to decommissioning, the Company proposes to construct and operate for approximately ten years a commercial plant to complete the processing of residues currently contained in storage ponds at the site, which would materially reduce the amount of radioactive materials to be disposed of during decommissioning. In conjunction with construction of the processing plant, the Company would modify the wastewater treatment plant at the site and install a drainage system. Decommissioning would include construction of an engineered on-site cell for containment of contaminated soils; consolidation and stabilization of the contaminated soils in the containment cell; and the performance of required plant surveys and characterizations after residue processing ceases
to determine whether additional contaminated soils exist which may require remediation.
The Company has applied for an amendment to its current NRC license and for a revision to its current wastewater discharge permit to allow construction and operation of the proposed processing plant, and believes that these regulatory authorizations will be issued in the near future. Preliminary engineering, design and feasibility studies have been completed for the proposed processing plant, which would extract commercially valuable materials such as tantalum, columbium, scandium and other rare earth and rare metal elements from the feedstock residues. The Company engaged a process design expert which confirmed the viability of the proposed plant. The estimated cost of construction is approximately $12 million. The estimated value of materials to be extracted is based on analysis of samples taken from the residues and a valuation of such materials using current market prices discounted to reflect possible price decreases, including those which could result from the increased quantities of certain of these materials made available for sale. The estimated costs of residue processing were developed by Company personnel and independent consultants using third party evaluations based on the pilot testing performed. Residue processing is expected to start approximately a year after licensing approval is received. The provisions for discontinued operations reflect management's belief that the current value of the extracted materials will at least equal the estimated cost of construction and costs of processing, including estimated costs for disposal of waste generated by the process. The annual recovery revenues are estimated to be in a range of $6,000,000 to $7,000,000. However, there can be no assurance as to the level of demand for the extracted materials or the actual prices which may be obtained for them, which could vary over time.
In October 1995 the NRC advised the Company that a decommissioning funding plan cost estimate based upon on-site disposal of most of the radioactive wastes at the site is appropriate to consider at this time. The NRC cautioned the Company, however, that on-site disposal may require preparation of an Environmental Impact Statement and that, in addition to
ITEM 1 - BUSINESS (Contd.)
the required NRC approval, local and other federal agencies may have to be satisfied that the Company's disposal plan is sound. Such an approval process can be expected to extend over a number of years. Management believes that a decommissioning plan including on-site containment will ultimately be acceptable to the appropriate regulatory authorities, based on current and proposed NRC regulations and a provision of the Nuclear Waste Policy Act of 1982 requiring the Department of Energy to take title to certain "special sites" which may include the Company's site; however, there is no assurance that a plan providing for on-site containment will ultimately be approved. Implementation of a decommissioning plan for the Company's site which includes off-site disposal may not be financially feasible.
The NRC decommissioning regulations require licensees to estimate the cost for decommissioning and to assure in advance
that adequate funds will be available to cover those costs. NRC regulations identify a number of acceptable methods for assuring funds for decommissioning, including surety instruments such as letters of credit, cash deposits and combinations thereof. The NRC October 1995 letter requested the Company to submit a decommissioning funding plan contemplating on-site containment and stated that the cost of residue processing should be included in the Company's cost estimate. In March 1996, the Company submitted a revised decommissioning plan and a related decommissioning funding plan. The initial level of assurance for decommissioning is $4,456,000 provided through letters of credit. The amount does not include assurance for costs of construction or operation of the residue processing facility. This initial level of assurance, however, may be changed upon further review by the NRC. The Company's available cash and/or borrowing capacity will be reduced by the amount of funding assurance as required at any particular time. As the decommissioning plan is implemented, deposited funds or the amount of any surety instruments may be reduced, provided the Company can demonstrate the sufficiency of the remaining funds or surety to assure the completion of decommissioning.
Based upon continuing assessment of the proposed decommissioning plan, taking into consideration the most current information, existing technology and regulations in effect, management believes that the amounts reserved at December 31, 1996 are adequate to cover the costs of environmental clean-up for discontinued operations and that the Company has the ability to meet the NRC's decommissioning funding assurance requirements. The Company's intent is to comply with all applicable federal environmental statutes and regulations promulgated thereunder, as well as all state law counterparts, which include but are not limited to the Resource Conservation and Recovery Act, 42 U.S.C., Section 6901 et. seq., Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C., Section 9601 et. seq., Water Pollution Control Act, 33 U.S.C., Section 1251 et. seq., and Nuclear Regulatory Commission regulations regarding storage of low-level source material.
ITEM 1 - BUSINESS (Contd.)
All of the Company's facilities are generally in compliance with applicable air pollution control regulations and possess the required permits from the appropriate state air pollution control agency in which they operate.
(xiii) The Company employed 1,031 persons as of December 31, 1996.
(d) Net sales, income and identifiable assets of foreign operations and export sales are not significant. The Company considers the United States as one inseparable geographic area for its domestic operations.
ITEM 2
ITEM 2 - PROPERTIES
Manufacturing facility locations and corresponding square footage are as follows:
Business Square Feet Location Segment Owned Leased Total
Plantsville, Connecticut Industrial 59,000 0 59,000 Tools
Gulfport, Mississippi Industrial 28,000 0 28,000 Tools
Latrobe, Pennsylvania Industrial 37,000 0 37,000 Tools
Lexington, Kentucky Industrial 98,000 1,000 99,000 Tools
Los Angeles, California Metal 48,000 5,000 53,000 Fabrications
Sarasota, Florida Metal 6,000 0 6,000 Fabrications
Addison, Illinois Metal 0 46,000 46,000 Fabrications
Creston, Iowa Metal 293,000 0 293,000 Fabrications
Washington, Iowa Metal 86,000 0 86,000 Fabrications
Emporium, Pennsylvania Metal 34,000 0 34,000 Fabrications
ITEM 2 - PROPERTIES (Contd.)
All plants are well-maintained and in good operating order. The plants have sufficient capacity to meet present market requirements. All of the properties described above are fully utilized on a 1 or 2 shift basis, except the Lexington facility, which is operating at 90% utilization.
The Company owns properties in North Chicago, Illinois and Muskogee, Oklahoma associated with operations discontinued in prior years. These properties are included as part of Net Assets of Discontinued Operations. The Company's PSM facility in Los Angeles, California completed the phase out of all operations in 1993. The remaining property and plant has been reclassified as property held for sale as part of Other Non- Current Assets.
The Company's executive offices are located in North Chicago, Illinois.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or its subsidiaries are a party or of which any of their property is the subject other than ordinary routine litigation incidental to the Company's business. None of these legal proceedings are material.
However, the Company is involved in certain regulatory proceedings involving environmental matters which are
discussed in Note 4 to the Consolidated Financial Statements contained in Item 8 hereof.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 1996.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below are the principal executive officers and directors of the Company:
Years of Service In Position with the Company and With Present Name Age Principal Occupation Fansteel Position
William D. 44 Director; Chairman of the Board, 4 2 Jarosz President and Chief Executive Officer
Betty B. 73 Director; Director of HBD 13 13 Evans Industries, Inc.
Robert S. 52 Director; Chairman and Chief 5 5 Evans Executive Officer, Crane Co.; Chairman and Chief Executive Officer, Medusa Corp.
Thomas M. 59 Director; Personal Investments 11 11 Evans, Jr.
Peter J. 47 Director; Kirkpatrick and 1 1 Kalis Lockhart (Attorneys)
R. Michael 43 Vice President and Chief 17 6 McEntee Financial Officer
Michael J. 44 Vice President, General Counsel 11 10 Mocniak and Secretary
Jack S. 67 Director; Vice President and 12 12 Petrik Director (Retired), Turner Broadcasting System, Inc.
Additional information as to Directors of the Company is herein incorporated by reference to the information under the caption "Nominees for Election as Directors" in the Company's definitive proxy statement for the annual meeting of shareholders on April 23, 1997.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The New York Stock Exchange is the principal market upon which the shares of the Company are traded.
The number of shareholders of the Company as of February 24, 1997 were 902.
Per share stock market and dividend information for each quarter of the last two fiscal years are set forth below:
Cash Dividends High Low Declared
1996: First Quarter $8 1/4 $5 5/8 $ - Second Quarter 7 5 3/4 - Third Quarter 7 5 3/4 - Fourth Quarter 7 1/8 6 1/8 -
1995: First Quarter $7 3/8 $6 1/8 $.10 Second Quarter 7 1/8 6 3/8 .10 Third Quarter 8 1/4 6 3/4 .10 Fourth Quarter 7 1/2 5 3/4 -
The Company announced on November 10, 1995 the suspension of its regular quarterly cash dividend pending review of its dividend policy relative to comparable publicly traded companies and its capital requirements. The Company believes it is in the best interests of shareholders to conserve capital in light of anticipated acquisitions and production facility expansions as well as uncertainties surrounding funding requirements for decommissioning at the Company's discontinued operations at Muskogee, Oklahoma. While the Company believes that its current reserve for environmental clean-up for discontinued operations is adequate, it decided to take this action pending greater certainty as to the costs which ultimately may be incurred.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data for the Company for the five year period ended December 31, 1996 are as follows: Years Ended December 31, (thousands of dollars except per share data) 1996 1995 1994 1993 1992
Operating Results Net Sales $120,834 $102,598 $ 89,287 $ 89,387 $127,145 Income from Continuing Operations 4,277 3,333 3,609 2,516 5,232 (Loss) from Discon- tinued Operations - - - (1,676) - Net Income 4,277 3,333 3,609 906 5,232 Per Share of Common Stock: Income from Continuing Operations .50 .39 .42 .29 .61 (Loss) from Discontinued Operations - - - (.19) - Net Income .50 .39 .42 .11 .61
Cash Dividends - .30 .40 .40 .50 Shareholders' Equity 6.43 5.93 5.83 5.82 6.12
Financial Position Working capital $ 28,542 $ 21,862 $ 21,101 $ 36,321 $ 34,071 Net property, plant and equipment 14,306 10,220 9,364 9,661 13,776 Total assets 82,127 74,530 72,881 73,291 78,307 Long-term debt 1,779 298 - - 600 Shareholders' equity 55,284 51,023 50,172 50,083 52,617
Other Data Common shares outstanding 8,598,858 8,598,858 8,598,858 8,598,858 8,598,858 Number of shareholders 812 891 1,055 1,094 1,099 Number of employees 1,031 911 867 799 955
Number of shareholders consists of the approximate shareholders of record which include nominees and street name accounts.
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(thousands of dollars except per share data) Mar. 31, Jun. 30 , Sep. 30, Dec. 31, Net sales $ 28,939 $ 30,638 $ 30,808 $ 30,449 Gross profit 4,905 5,344 5,343 5,251 Net income 1,000 1,159 1,114 1,004 Net income per common share .12 .13 .13 .12 Net sales $ 25,649 $ 25,732 $ 25,631 $ 25,586 Gross profit 4,895 4,286 4,328 4,137 Net income 1,076 720 836 701 Net income per common share .13 .08 .10 .08
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - 1996 Compared to 1995
Net sales for the year ended December 31, 1996 were $120,834,000, an increase of $18,236,000 or 18% over 1995 net sales of $102,598,000. The sales growth was due to improvements in many of the markets served with the most significant increases in the aircraft industry.
Industrial Tools business segment net sales for 1996 were $54,068,000 compared to $50,069,000 for 1995, an increase of $3,999,000 or 8%. Sales of tungsten carbide cutting tools product line increased primarily due to growth in the metalworking markets. The strategic locations of warehouses, along with quality parts, enabled the Company to service its customers' growing demands. Stiff price competition has had a negative effect on standard product sales within the tungsten carbide cutting tool line. Efforts are concentrated on supplying parts specialized to customers' requirements. After a sluggish year in 1995, the construction tools product line experienced an increase in the current year because of product improvement and new marketing strategies, including increased consignment of product to customers. Mining tools product line registered a moderate decline in the current year as several mines closed due to reduced demand for high sulfur coal. The wear parts product line was down slightly from last year, with gains in die-related parts offset by lower sales in nozzles and compacts used extensively for oil drilling.
Metal Fabrications business segment net sales for the year ended December 31, 1996 were $66,766,000, an increase of $14,237,000 or 27% over 1995 net sales of $52,529,000. Powdered metal components, manufactured by American Sintered Technologies, Inc. (AST), acquired on July 31, 1996, added $3,737,000 in the current year. The operations serving aircraft manufacturers benefited from a steadily improving market. Forgings product line revenues were significantly ahead of the 1995 pace due to a combination of price increases and parts for new programs. Sale price increases were initiated in 1996 to offset raw material price increases. New programs have been attained through aggressive pursuit of business within core markets, including commercial aircraft components for Boeing and McDonnell Douglas, and structural parts for the military aircraft. Forgings sold to the medical field also improved as customers gained market share on a global basis. Additional forging sales were realized with a greater utilization of material such as steel, aluminum, and nickel-based metals, whereas product shipped last year was concentrated more in the use of titanium. Sand mold casting product lines increased over the prior year due to an improved aircraft market. Marketing and sales efforts, specifically adding sales agents to promote wider coverage of territories, along with an emphasis on commercial programs, had a positive effect. Patterns for sand mold castings showed a significant increase as several new programs were secured. These new programs include aircraft structural components, helicopter parts, and aircraft engines. Sales of wire formed products were up in 1996, largely in lawn and garden equipment and vending machine parts. This increase in the current year was due to the growth in most markets served as well as penetration into new applications. Sales of investment castings decreased in the current year as customers implemented tighter inventory controls, and price competition caused the loss early in 1996 of several contracts in the firearms, construction, and automotive industries. However, sales were definitely in an upward trend over the last four months as some previously terminated contracts were reactivated.
Backlog of orders at December 31, 1996 was $44,696,000, compared to $31,908,000 at December 31, 1995, an increase of $12,788,000 or 40% with most of the increase coming from the aircraft industry within the Metal Fabrications segment. The backlog for the Industrial Tools business segment was $6,317,000 at December 31, 1996, an increase of $120,000 from one year ago. The majority of the change is within the tungsten carbide cutting tool product line. Cutting tools used by the automotive and aerospace industries showed the most improvement. Mining tools product line backlog decreased as the reduced demand for high-sulfur coal caused several coal mines to close. The construction tools product line backlog decreased partially due to a slowdown in foreign orders. The wear parts product line backlog for 1996 remained the same as 1995. Metal Fabrications business segment backlog at December 31, 1996 was $38,379,000, an increase of $12,668,000 from December 31, 1995. Backlog for powdered metal components product line, related to the AST acquisition in 1996, added $1,366,000 to the backlog. The forgings product line backlog nearly doubled, adding $9,671,000 over last year. Orders for several new commercial and military programs have been received in the last year. Backlog in this product line has also been increased by customers placing orders farther in advance due to long lead times for raw material supply. Product lines utilizing the sand mold casting process added $1,231,000 to the December 31, 1996 backlog, with an increased backlog for sand mold patterns indicating continued demand for new sand mold castings. Wire forming experienced an increase in backlog at year end in comparison to December 31, 1995 with growth in most industries served and expansion into components used in vending machines. Investment castings product line backlog started off slowly in 1996 with the fourth quarter improving enough to bring the year-end backlog in line with 1995.
Cost of products sold for the year ended December 31, 1996 was $99,991,000, compared to $84,952,000 for the same period of 1995, which is an increase of $15,039,000 or 18%. Cost of sales as a percent of net sales for the year ended December 31, 1996 was 82.8%, the same percentage as last year. Material, labor, and overhead components of 1996 costs decreased in relation to net sales due to greater production volumes and some price increases. However, these favorable changes were partially offset by a greater amount of tooling, patterns, and die
costs, which were primarily related to the development of new parts in the Metal Fabrications segment. Cost of products sold for 1995 included an unusual workers' compensation expense of $250,000. Cost of sales as a percent of net sales before unusual items was 82.6% for 1995.
Selling, general and administrative expenses for the year ended December 31, 1996 were $14,501,000, an increase of $1,290,000 or 9.8% from 1995 expenses of $13,211,000. This increase related mostly to variable expenses, such as commissions, which grew with the larger sales volume. Selling, general and administrative expenses as a percent of net sales for 1996 decreased to 12.0% compared to 12.9% for 1995.
Operating income for the year ended December 31, 1996 was $6,342,000 compared to $4,435,000 in 1995, an increase of $1,907,000 or 43%. Operating income as a percent of net sales for 1996 was 5.3% compared to 4.3% for 1995. Industrial Tool business segment operating income for 1996 was $3,052,000, a decrease of $57,000 from the prior year. While sales volume improved in this segment, it was offset by some higher material costs which could not be passed on to customers due to competitive pricing pressures. Metal Fabrications business segment operating income for 1996 was $3,352,000, an increase of $1,982,000 from 1995 results. The higher 1996 sales volume improved production efficiencies, which were partially offset by increased tooling costs.
Other income for the year ended December 31, 1996 was $711,000, a decrease of $368,000 from 1995 other income of $1,079,000. Interest earned, principally on marketable securities, for 1996 was $877,000, a decrease of $352,000 from the prior year. This decrease in interest was due mainly to the use of marketable securities for the cash purchase of AST.
Net income for the year ended December 31, 1996 was $4,277,000 or $.50 per share, compared to $3,333,000 or $.39 per share for the year ended December 31, 1995.
Inflation factors did not, and generally do not, significantly affect the overall operations of the Company.
Results of Operations - 1995 Compared to 1994
Net sales for the year ended December 31, 1995 were $102,598,000, an increase of $13,311,000 over 1994 net sales of $89,287,000.
Industrial Tools business segment net sales for 1995 were $50,069,000 compared to $43,558,000 for 1994, an increase of $6,511,000 or 15%. Sales of tungsten carbide cutting tools increased in 1995. Tungsten carbide rotary tools sales volume was positively affected through aggressive marketing and supply techniques. Availability of product demanded by customers was accomplished with strategic location of warehouses and consignment of inventory to major customers. The introduction and marketing of new products within the tungsten carbide inserts category of this product line positively impacted 1995 sales. Mining tool sales were virtually unchanged. Sales of construction tools were sluggish in 1995. Quality improvements were made, and the product was price competitive, but sales efforts were unsuccessful in reaching a broader market.
Metal Fabrications business segment net sales for the year ended December 31, 1995 were $52,529,000, an increase of $6,800,000 or 15% over 1994 net sales of $45,729,000. Sand mold castings product line sales increased 22% over 1994. Aircraft engine casting sales rose in 1995 due to an improved market. Sales of castings for various helicopter programs also increased in 1995. Sales of small aircraft engine components improved in 1995 as new production processes introduced in 1994 led to penetration in the commercial market. Forgings product line sales were ahead of the 1994 pace by 38% as sales to commercial aircraft manufacturers increased. Sales of investment castings improved 8% in 1995 due to expansion in the domestic manufacturing economy, particularly truck manufacturing. However, indications signaled a reduction in the production of
trucks, thus causing a slowdown in the demand for castings. Sales of wire formed products and garden products were down slightly in 1995.
Backlog of orders at December 31, 1995 was $31,908,000, compared to $27,274,000 at December 31, 1994, an increase of $4,634,000 or 17%. Industrial Tools business segment backlog at December 31, 1995 was $6,197,000, an increase of $1,710,000 from 1994. Introduction of new products within the tungsten carbide inserts offerings, specifically VR/Notch inserts and diamond tipped inserts, led to an increase in customer orders in 1995. Orders from producers of synthetic diamonds led to a backlog increase in other wear parts product line in 1995. Tungsten carbide rotary tool products attracted orders, resulting in a significant increase to the backlog. Backlog of construction tools product line grew with improved promotion of a quality product. Wear drill parts and nozzle product lines were adversely affected by a decline in the oil industry. Metal Fabrications business segment backlog at December 31, 1995 was $25,711,000, an increase of $2,924,000 from December 31, 1994. Forgings product line backlog was up $2,865,000 due to improved commercial aircraft market conditions, and continuing strength of the medical instruments industry. Product lines utilizing the sand mold castings process also increased backlog at December 31, 1995. The introduction of the cell manufacturing process in 1994 resulted in an increase of commercial orders for small aircraft cylinder heads. Orders for older helicopter castings also had a beneficial effect on the 1995 year-end backlog. New programs for 1996 were also reflected in the backlog increase. Orders for commercial aircraft structural components and helicopter gear housings strengthened the December 31, 1995 backlog. Investment castings product line backlog was off substantially from December 31, 1994. Stiff price competition in a tentative economy had a negative effect on this product line with a quick turnaround not expected. Wire forming experienced a slight decrease in backlog at the 1995 year end in comparison to December 31, 1994 as lawn and garden customers became more adapted to just-in-time ordering.
Cost of products sold for the year ended December 31, 1995 was $84,952,000, compared to $72,033,000 for the same period of 1994, which was an increase of $12,919,000 or 18%. Cost of sales as a percent of net sales for the year ended December 31, 1995 was 82.8% compared to 80.7% for the same period of 1994. Unusual items in cost of products sold included a large workers' compensation expense of $250,000 in 1995 and a cost recovery of $433,000 from processing thoriated magnesium in 1994. Cost of sales as a percent of net sales before unusual items was 82.6% for 1995 compared to 81.2% for 1994. Raw material price increases, not all of which could be passed on to customers, negatively impacted profit margins.
Selling, general and administrative expenses for the year ended December 31, 1995 were $13,211,000, an increase of $609,000 or 5% from 1994 expenses of $12,602,000. Selling, general and administrative expenses as a percent of net sales for 1995 were 12.9% compared to 14.1% for 1994. Efforts to contain expenses, through improved efficiencies and concentrated cost controls, resulted in the lower expense to sales ratio in 1995. Expansion of sales volume while restraining expenses is a continuing objective of the Company.
Operating income for the year ended December 31, 1995 was $4,435,000 compared to $4,652,000 in 1994, a decrease of $217,000 or 5%. Operating income as a percent of net sales for 1995 was 4.3% compared to 5.2% for 1994. Industrial Tool business segment operating income for 1995 was $3,109,000, an increase of $253,000 from 1994. Increased sales volume had a beneficial effect on operating income in 1995; however, this was partially offset by rising raw material prices. Metal Fabrications business segment operating income for 1995 was $1,370,000, a decrease of $439,000 from 1994 results. A one-time cost recovery from residue material skewed the 1994 results, while an unusual workers' compensation claim negatively affected the 1995 operating income.
Other income for the year ended December 31, 1995 was $1,079,000, a decrease of $215,000 from 1994 other income of $1,294,000. Other income for 1994 included a $251,000 gain on the sale of property related to an operation closed in 1993.
Interest earned, principally on marketable securities, for 1995 was $1,216,000, an increase of $162,000 from 1994. A rise in short-term interest rates improved the income performance of marketable securities.
Net income for the year ended December 31, 1995 was $3,333,000 or $.39 per share, compared to $3,609,000 or $.42 per share for the year ended December 31, 1994.
Outlook
Improvements in the Company's production processes, new product development, and investment in capital equipment have increased opportunities for growth, directed primarily at commercial markets. The Company is seeking increased share of current markets, as well as new markets, through investment in operating facilities and new acquisitions, such as the 1996 AST acquisition. The Company has utilized funding assistance on favorable terms from states and municipalities for expansion of production capabilities, and will continue to do so wherever available. Cost control programs are active in all operations throughout the Company.
The formerly defense-dependent operating units are continuing to place primary focus on becoming diversified suppliers to both military and commercial markets. Investment in equipment has been initiated and new production techniques employed to facilitate this transition. The Company is beginning to realize the benefits from these efforts with increased sales and orders.
Liquidity and Capital Resources
Cash and cash equivalents amounted to $3,588,000 at December 31, 1996, a decrease of $3,251,000 from December 31, 1995. The net cash effect of the AST acquisition was a usage totaling $6,937,000, much of which came from the disposition of marketable securities which had been classified as long-term assets. Capital expenditures for the year were $2,039,000, including building expansions at the Gulfport, MS and Washington, IA operations to service increased business volume, and a die sinking shop at the Los Angeles, CA operation to increase production capabilities. Cash flows from financing activities included $171,000 in debt payments and $957,000 in proceeds from long-term debt. In the fourth quarter of 1995, the Company announced the suspension of the quarterly shareholder dividend for the purpose of reserving cash for capital reinvestment, possible future acquisitions, and due to uncertainty regarding funding requirements for decommissioning at the Company's discontinued operation in Muskogee, Oklahoma. Cash of $968,000 was used for the design, management and engineering of the processing plant related to this discontinued operation for the reclamation of commercially valuable materials. Operations used $243,000 of cash. Net income, depreciation and amortization provided $4,277,000 and $1,933,000, respectively. As evidenced by accounts receivable increasing $3,557,000 and inventories increasing $2,664,000, working capital needs heightened due to higher sales, thus reducing available cash. Sales as a percentage of working capital remained stable at 20.3% in comparison to 1995.
It is expected that sufficient cash will be generated from operations to cover normal operating requirements. If the need arises, the Company has strong, long-term relationships with several large banking institutions.
Funding assistance by states and municipalities is investigated when any significant expenditures are proposed. Loans were received in 1995 from State of Iowa Development Programs for production improvements at our sand mold casting and wire forming operations. In 1996, the State of Mississippi Business Finance Corporation provided development loans for expansion of the Company's tungsten carbide products facility in Gulfport, MS. As part of the AST acquisition, the Company assumed $954,000 of development loans with interest rates ranging from 2% to 5%.
At December 31, 1996, the Company had $5,000,000 of current marketable securities, and $4,989,000 of non-current marketable securities, classified as held-to-maturity, invested in U.S. Treasury Notes. These securities had a fair market value of $9,950,000 at December 31, 1996. The intent of the Company is to hold these notes to maturity.
The Company discontinued its Metal Products business segment in 1989. Environmental reclamation and decommissioning are required for the segment's primary plant that processed certain ores which are subject to regulations of several government agencies. The residues from these processed ores were stored on site. Remaining assets were written down to estimated realizable value, and provisions were made for the estimated costs for decommissioning. Application has been made to the appropriate agencies for a portion of the site to be decommissioned. A decommissioning plan for the remainder of the site, including the residue storage areas, has been submitted to the appropriate governmental agencies for approval. Before decommissioning procedures begin for the residue storage areas, the Company plans to extract materials within the residues which have a commercial value.
At December 31, 1996, the Company had reserves of $3.9 million for environmental clean-up costs for discontinued operations. The Company, in association with outside consultants, has developed a decommissioning plan for the site involved, and has submitted that plan and a related decommissioning funding plan to the Nuclear Regulatory Commission ("NRC") as required by law. Prior to decommissioning, the Company proposes to construct and operate for approximately ten years a commercial plant to complete the processing of residues currently contained in storage ponds at the site, which would materially reduce the amount of radioactive materials to be disposed of during decommissioning. In conjunction with construction of the processing plant, the Company would modify the wastewater treatment plant at the site and install a drainage system. Decommissioning would include construction of an engineered on-site cell for containment of contaminated soils; consolidation and stabilization of the contaminated soils in the containment cell; and the performance of required plant surveys and characterizations after residue processing ceases to determine whether additional contaminated soils exist which may require remediation.
The Company has applied for an amendment to its current NRC license and for a revision to its current wastewater discharge permit to allow construction and operation of the proposed processing plant, and believes that these regulatory authorizations will be issued in the near future. Preliminary engineering, design and feasibility studies have been completed for the proposed processing plant, which would extract commercially valuable materials such as tantalum, columbium, scandium and other rare earth and rare metal elements from the feedstock residues. The Company engaged a process design expert which confirmed the viability of the proposed plant. The estimated cost of construction is approximately $12 million. The estimated value of materials to be extracted is based on analysis of samples taken from the residues and a valuation of such materials using current market prices discounted to reflect possible price decreases, including those which could result from the increased quantities of certain of these materials made available for sale. The estimated costs of residue processing were developed by Company personnel and independent consultants using third party evaluations based on the pilot testing performed. Residue processing is expected to start approximately a year after licensing approval is received. The provisions for discontinued operations reflect management's belief that the current value of the extracted materials will at least equal the estimated cost of construction and costs of processing, including estimated costs for disposal of waste generated by the process. The annual recovery revenues are estimated to be in a range of $6,000,000 to $7,000,000. However, there can be no assurance as to the level of demand for the extracted materials or the actual prices which may be obtained for them, which could vary over time.
In October 1995 the NRC advised the Company that a decommissioning funding plan cost estimate based upon on-site disposal of most of the radioactive wastes at
the site is appropriate to consider at this time. The NRC cautioned the Company, however, that on-site disposal may require preparation of an Environmental Impact Statement and that, in addition to the required NRC approval, local and other federal agencies may have to be satisfied that the Company's disposal plan is sound. Such approval process can be expected to extend over a number of years. Management believes that a decommissioning plan including on-site containment will ultimately be acceptable to the appropriate regulatory authorities, based on current and proposed NRC regulations and a provision of the Nuclear Waste Policy Act of 1982 requiring the Department of Energy to take title to certain "special sites" which may include the Company's site; however, there is no assurance that a plan providing for on-site containment will ultimately be approved. Implementation of a decommissioning plan for the Company's site which includes off-site disposal may not be financially feasible.
The NRC decommissioning regulations require licensees to estimate the cost for decommissioning and to assure in advance that adequate funds will be available to cover those costs. NRC regulations identify a number of acceptable methods for assuring funds for decommissioning, including surety instruments such as letters of credit, cash deposits and combinations thereof. The NRC October 1995 letter requested the Company to submit a decommissioning funding plan contemplating on-site containment and stated that the cost of residue processing should be included in the Company's cost estimate. In March 1996, the Company submitted a revised decommissioning plan and related decommissioning funding plan. The initial level of assurance for decommissioning is $4,456,000 provided through letters of credit. The amount does not include assurance for costs of construction or operation of the residue processing facility. This initial level of assurance, however, may be changed upon further review by the NRC. The Company's available cash and/or borrowing capacity will be reduced by the amount of funding assurance as required at any particular time. As the decommissioning plan is implemented, deposited funds or the amount of any surety instruments may be reduced, provided the Company can demonstrate the sufficiency of the remaining funds or surety to assure the completion of decommissioning.
Expenditures for environmental reclamation and decommissioning were $1,516,000, $1,221,000 and $1,061,000 in 1996, 1995, and 1994, respectively. Costs which are expected to be incurred within the next year are included as plant shutdown costs in Accrued Liabilities. Costs expected to be incurred after one year are reflected on the balance sheet in Discontinued Operations as part of Other Liabilities. Based upon continuing assessment of the proposed decommissioning plan, taking into consideration the most current information, existing technology and regulations in effect, management believes that the amounts reserved at December 31, 1996 are adequate to cover the costs of environmental clean-up for discontinued operations and that the Company has the ability to meet the NRC decommissioning funding assurance requirements.
The remaining land and buildings of the Company's former Precision Sheet Metal (PSM) operation within the Metal Fabrications business segment are carried as Other Assets - Property held for sale at a cost of $1,129,000 at December 31, 1996. The cost of preparing the property for sale, principally environmental clean-up, will be capitalized. Management believes that proceeds from the sale of the property will be adequate to recover its costs, including costs of preparing the property for sale. The Company believes the reserves established for other costs associated with the close-down of PSM are adequate to cover such costs.
The Company's Escast operation, located in Addison, IL, included in the Metal Fabrications business segment, has been named as a responsible party for the clean-up costs of certain hazardous wastes located on site. A cost sharing agreement with the former owner of Escast is in place for any future clean-up costs. The clean-up process has begun at the site under an Illinois Environmental Protection permit with total estimated costs of approximately $1.1 million. The Company believes the established reserves are adequate to cover its share of the clean-up costs.
Environmental matters arising at other units are routinely reviewed and handled through operations. The Company believes that the ultimate disposition of any other pending environmental matters will not have a material adverse effect upon the consolidated financial position of the Company.
The statements related to environmental matters are based on current expectations. These statements contain forward-looking estimates, and actual results may differ materially.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Fansteel Inc.:
We have audited the accompanying consolidated balance sheet of Fansteel Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and schedule are the responsibility of Fansteel Inc. management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fansteel Inc. at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
\s\ Ernst & Young LLP Chicago, Illinois January 17, 1997
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 1996 1995 1994
Net Sales $120,833,831 $102,597,754 $ 89,287,336 Cost and Expenses
Cost of products sold 99,990,541 84,951,756 72,033,115 Selling, general and administrative 14,500,746 13,210,850 12,601,816 114,491,287 98,162,606 84,634,931
Operating Income 6,342,544 4,435,148 4,652,405
Other Income (Expense) Interest income 876,745 1,229,317 1,076,740 Interest expense (40,184) (15,577) (17,769) Other (125,677) (134,957) 235,002 710,884 1,078,783 1,293,973
Income Before Income Taxes 7,053,428 5,513,931 5,946,378
Income Tax Provision 2,776,000 2,181,000 2,337,000
Net Income $ 4,277,428 $ 3,332,931 $ 3,609,378
Net Income Per Common Share $.50 $.39 $.42
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET
At December 31, 1996 1995 ASSETS Current Assets Cash and cash equivalents $ 3,588,290 $ 6,838,960 Marketable securities 5,173,804 2,072,902 Accounts receivable, less allowance of $276,000 in 1996 and 1995 18,700,927 14,305,629 Inventories Raw material and supplies 4,715,341 3,850,864 Work-in-process 13,461,036 11,610,410 Finished goods 6,423,995 5,942,269 24,600,372 21,403,543 Less: Reserve to state certain inventories at LIFO cost 7,083,466 6,888,236 Total inventories 17,516,906 14,515,307 Other assets - current Deferred income taxes 1,681,398 1,452,160 Other 1,370,062 1,002,076 Total Current Assets 48,031,387 40,187,034 Net Assets of Discontinued Operations 2,532,431 1,344,591 Property, Plant and Equipment Land 1,421,641 1,337,641 Buildings 10,559,942 9,396,838 Machinery and equipment 49,561,052 45,019,335 61,542,635 55,753,814 Less accumulated depreciation 47,236,179 45,533,604 Net Property, Plant and Equipment 14,306,456 10,220,210 Other Assets Marketable securities 4,989,159 13,608,993 Prepaid pension asset 7,697,238 7,709,808 Deferred income taxes 30,277 227,317
Property held for sale 1,128,851 1,200,837 Goodwill 3,358,580 - Other 53,063 31,063 Total Other Assets 17,257,168 22,778,018
$ 82,127,442 $ 74,529,853
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET (Contd.)
At December 31, 1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities Accounts payable $ 9,913,437 $ 9,162,757 Accrued liabilities 8,650,505 8,391,200 Income taxes 590,093 694,247 Current maturities of long-term debt 335,522 77,207 Total Current Liabilities 19,489,557 18,325,411 Long-term Debt 1,779,057 297,906 Other Liabilities Discontinued operations 3,500,000 3,500,000 Deferred income taxes 2,074,811 1,374,911 Obligations under capital leases - 8,638 Total Other Liabilities 5,574,811 4,883,549 Shareholders' Equity Preferred stock without par value Authorized and unissued 1,000,000 shares - - Common stock, par value $2.50 Authorized 12,000,000 shares; issued and outstanding 8,598,858 shares 21,497,145 21,497,145 Retained earnings 33,786,872 29,509,444 Unrealized (loss) on securities - 16,398 Total Shareholders' Equity 55,284,017 51,022,987
$ 82,127,442 $ 74,529,853
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1996 1995 1994
Cash Flows From Operating Activities Net income $ 4,277,428 $ 3,332,931 $ 3,609,378 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,933,166 1,998,557 1,975,038 Net pension charge (credit) 12,570 232,933 (153,175)
Deferred income tax charge 667,702 887,580 1,301,924 Gain from disposals of property, plant and equipment - (7,750) (291,852) Gain on sale of marketable securities (2,899) - - Change in assets and liabilities: (Increase) in marketable securities (147,702) (289,093) (169,988) (Increase) in accounts receivable (3,557,360) (1,257,235) (722,584) Decrease in income tax refunds receivable - - 208,450 (Increase) in inventories (2,664,065) (1,734,758) (1,425,746) (Increase) decrease in other assets - current (325,909) (52,597) 48,901 (Decrease) increase in accounts payable and accrued liabilities (309,505) (520,087) 389,570 (Decrease) increase in income taxes payable (104,154) 636,766 (465,823) (Increase) decrease in other assets (22,000) 160,171 2,579
Net cash (used in) provided by operating activities (242,728) 3,387,418 4,306,672
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF CASH FLOWS (Contd.)
For the Years Ended December 31, 1996 1995 1994
Cash Flows From Investing Activities Acquisition of American Sintered Technologies Accounts Receivable (837,938) - - Inventory (337,534) - - Other assets - current (42,077) - - Property, plant and equipment (3,884,000) - - Goodwill (3,454,540) - - Accounts payable and accrued liabilities 664,586 - - Debt 954,094 - -
Total acquisition of American Sintered Technologies (6,937,409) - - Investment in marketable securities (9,100,000) (5,280,031) (14,104,906) Proceeds from disposition of marketable securities 14,753,135 5,280,031 13,950,000 Proceeds from sale of assets held for sale 597,255 - - Proceeds from sale of property, plant and equipment - 7,750 303,513 Capital expenditures (2,039,452) (2,854,855) (1,654,453) Design and engineering for
processing plant (968,424) (821,954) -
Net cash (used in) investing activities (3,694,895) (3,669,059) (1,505,846)
Cash Flows From Financing Activities Payments on long-term debt (171,224) (17,197) (600,000) Proceeds from long-term debt 956,596 392,310 - Proceeds from capital leases - - 113,924 Principal payments for capital leases (98,419) (103,885) (90,589) Dividends paid - (2,579,658) (3,439,543) Net cash provided by (used in) financing activities 686,953 (2,308,430) (4,016,208)
Net (Decrease) In Cash And Cash Equivalents (3,250,670) (2,590,071) (1,215,382) Cash And Cash Equivalents At Beginning Of Year 6,838,960 9,429,031 10,644,413
Cash And Cash Equivalents At End Of Year $ 3,588,290 $ 6,838,960 $ 9,429,031
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unrealized Years Ended Common Retained (Loss) on December 31, Stock Earnings Securities Total
Balance at January 1 $ 21,497,145 $ 28,586,336 $ - $ 50,083,481 Net income - 3,609,378 - 3,609,378 Unrealized (loss) on securities - - (81,525) (81,525) Dividends ($.40 per share) - (3,439,543) - (3,439,543)
Balance at December 31 21,497,145 28,756,171 (81,525) 50,171,791
Net income - 3,332,931 - 3,332,931 Unrealized gain on securities - - 97,923 97,923 Dividends ($.30 per share) - (2,579,658) - (2,579,658)
Balance at December 31 21,497,145 29,509,444 16,398 51,022,987
Net income - 4,277,428 - 4,277,428 Unrealized (loss) on securities - - (16,398) (16,398)
Dividends ($.00 per - - - - share)
Balance at December 31 $ 21,497,145 $ 33,786,872 $ - $ 55,284,017
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
The consolidated financial statements include the accounts of Fansteel Inc. and its subsidiaries (the "Company").
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The Company considers all investments purchased with a maturity of three months or less to be cash equivalents. On December 31, 1996 and 1995, the Company had purchased $1,900,000 and $4,800,000, respectively, of U.S. Government securities under agreements to resell on January 2, 1997 and January 2, 1996, respectively. Due to the short-term nature of the agreements, the Company did not take possession of the securities which were instead held in the Company's safekeeping accounts at the banks.
Effective January 1, 1994, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company determines the appropriate classification at time of purchase. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at cost, adjusted for amortization of premiums and discounts to maturity. Marketable securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, which is based on quoted prices. Unrealized gains and losses, net of tax, are reported as a separate component of shareholders' equity. The cost of securities available-for-sale is adjusted for amortization of premiums and discounts to maturity. Interest and amortization of premiums and discounts for all securities are included in interest income. Realized gains and losses are included in other income. Cost of securities sold is determined on a specific identification basis.
Inventories are valued at the lower of cost, determined principally on the "last-in, first-out" (LIFO) basis, or market. Costs include direct material, labor and applicable manufacturing overhead. Inventories valued using the LIFO method comprised 92% and 93% of inventories at current cost at December 31, 1996 and 1995, respectively.
Acquisitions of properties and additions to existing facilities and equipment are recorded at cost. Accelerated depreciation is the principal method used for both financial reporting and income tax purposes on additions placed in service before January 1, 1996. For assets placed in service beginning in 1996, depreciation is recorded using the straight-line method over the estimated useful life in order to better match expenses and revenues for financial reporting purposes. This change in accounting method resulted in depreciation expense being $416,000 less in 1996 than it would have been if the prior method had been used. This change increased net income by $250,000 or $.03 per share for 1996. Accelerated depreciation is still the method used for income tax
purposes.
Goodwill of $3,359,000 at December 31, 1996, from the acquisition of American Sintered Technologies, Inc. on July 31, 1996, represents the excess of cost over fair value of the assets acquired and is being amortized over its estimated useful life of 15 years using the straight-line method for financial reporting and income tax purposes. Amortization of goodwill was $96,000 in 1996.
Revenue from sales of products is generally recognized upon shipment to customers. Revenue from sales of tooling, patterns and dies is generally recognized upon acceptance by the customer.
Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the temporary difference between assets and liabilities recognized for financial reporting and such amounts recognized for tax purposes which requires recognition of deferred tax liabilities and assets. Deferred tax liabilities and assets are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset will not be realized.
Certain reclassifications have been made to prior years' financial statements to conform with the 1996 presentation.
2. Marketable Securities
At December 31, 1996, all the Company's investments in marketable securities were classified as held-to-maturity. These securities included both a security due within one year and a security with a maturity date beyond one year. The security with a maturity date within one year is classified as Marketable Securities as a part of Current Assets and is stated at amortized cost plus accrued interest. The security with a maturity date beyond one year is included in Other Non-Current Assets and is stated at amortized cost.
The held-to-maturity securities at December 31, 1996 include the following:
Amortized Fair Cost Value Marketable Securities - Current:
U.S. Treasury Note, face value of $5,000,000, interest at 6.250%, due January 31, 1997 $ 5,000,000 $ 5,001,563
Accrued interest 173,804
5,173,804
Marketable Securities - Non-Current:
U.S. Treasury Note, face value of $5,000,000, interest at 5.125%, due April 30, 1998 4,989,159 $ 4,948,438
Net Book Value - Held-to-Maturity Securities: $ 10,162,963
At December 31, 1995, the Company held investments in marketable securities which it classified as either available-for-sale or held-to-maturity, depending upon the security.
Securities classified as available-for-sale at December 31, 1995 included both securities due within one year and securities with a maturity date beyond one year. Securities with a maturity date within one year were classified as Marketable Securities as a part of Current Assets and were stated at fair value plus accrued interest. Securities with a maturity date beyond one year were included in Other Non-Current Assets and were stated at fair value.
The available-for-sale securities at December 31, 1995 included the following:
Marketable Securities - Current: Amortized Fair Cost Value Northern Trust Advantage investment portfolio consisting of government securities, municipal bonds and commercial paper $ 1,840,760 $ 1,840,760
Accrued interest 232,142 232,142
$ 2,072,902 2,072,902
Marketable Securities - Non-Current:
Northern Trust Advantage investment portfolio consisting of government securities and municipal bonds $ 3,601,329 3,627,992
Net Book Value - Available- for-Sale Securities: $ 5,700,894
Securities classified as held-to-maturity were stated at amortized cost and were included in Other Non-Current Assets on the December 31, 1995 Consolidated Balance Sheet.
These held-to-maturity securities at December 31, 1995 included the following:
Amortized Fair Cost Value
U.S. Treasury Note, face value of $5,000,000, interest at 5.125%, due April 30, 1998 $ 4,981,001 $ 4,987,500
U.S. Treasury Note, face value of $5,000,000, interest at 6.250%, due January 31, 1997 5,000,000 $ 5,054,688
Net Book Value - Held-to- Maturity Securities: $ 9,981,001
The calculation of gross unrealized gain (loss) for the years ended December 31, 1996 and 1995 is as follows: Gross Unrealized Fair Value Cost Gain (Loss)
1996:
Held-to-maturity securities: U.S. Treasury Note, face value of $5,000,000,
interest at 5.125%, due April 30, 1998 $ 4,948,438 $ 4,989,159 $ (40,721)
U.S. Treasury Note, face value of $5,000,000, interest at 6.250%, due January 31, 1997 5,001,563 5,000,000 1,563
Gross Unrealized (Loss) $ (39,158)
1995:
Available-for-sale securities $ 5,468,752 $ 5,442,089 $ 26,663
Held-to-maturity securities: U.S. Treasury Note, face value of $5,000,000, interest at 5.125%, due April 30, 1998 4,987,500 4,981,001 6,499
U.S. Treasury Note, face value of $5,000,000, interest at 6.250%, due January 31, 1997 5,054,688 5,000,000 54,688
Gross Unrealized Gain $ 87,850
Net unrealized gains (losses) on held-to-maturity securities have not been recognized in the accompanying consolidated financial statements. Net unrealized gain on available-for-sale securities included in shareholders' equity at December 31, 1995 was $16,398, consisting of a gross unrealized gain of $26,663 net of deferred income taxes.
Net realized gains on marketable securities for the year ended December 31, 1996 were $2,899. There were no realized gains or losses for the years ended December 31, 1995 or 1994.
3. Accrued Liabilities
Accrued liabilities at December 31, 1996 and 1995 include the following:
1996 1995 Payroll and related costs $ 3,159,997 $ 2,552,041 Taxes, other than income 217,544 243,223 Profit sharing 770,873 464,472 Insurance 2,421,667 3,476,589 Plant shutdown and environmental 1,589,268 1,189,639 Other 491,156 465,236 $ 8,650,505 $ 8,391,200
4. Discontinued Operations, Contingent Liabilities, and Other Liabilities
The Company discontinued its Metal Products business segment in 1989. Environmental reclamation and decommissioning is required for the segment's primary plant that processed certain ores which are subject to regulations of several government agencies. The residues from these processed ores were stored on-site. Remaining assets were written down to estimated realizable value, and provisions were made for the estimated costs for decommissioning. Application
has been made to the appropriate agencies for a portion of the site to be decommissioned. A decommissioning plan for the remainder of the site, including the residue storage areas, has been submitted to the appropriate governmental agencies for approval. Before decommissioning procedures begin for the residue storage areas, the Company plans to extract materials within the residues which have a commercial value.
At December 31, 1996, the Company had reserves of $3.9 million for environmental clean-up costs for discontinued operations. The Company, in association with outside consultants, has developed a decommissioning plan for the site involved, and has submitted that plan and a related decommissioning funding plan to the Nuclear Regulatory Commission ("NRC") as required by law. Prior to decommissioning, the Company proposes to construct and operate for approximately ten years a commercial plant to complete the processing of residues currently contained in storage ponds at the site, which would materially reduce the amount of radioactive materials to be disposed of during decommissioning. In conjunction with construction of the processing plant, the Company would modify the wastewater treatment plant at the site and install a drainage system. Decommissioning would include construction of an engineered on-site cell for containment of contaminated soils; consolidation and stabilization of the contaminated soils in the containment cell; and the performance of required plant surveys and characterizations after residue processing ceases to determine whether additional contaminated soils exist which may require remediation.
The Company has applied for an amendment to its current NRC license and for a revision to its current wastewater discharge permit to allow construction and operation of the proposed processing plant, and believes that these regulatory authorizations will be issued in the near future. Preliminary engineering, design and feasibility studies have been completed for the proposed processing plant, which would extract commercially valuable materials such as tantalum, columbium, scandium and other rare earth and rare metal elements from the feedstock residues. The Company engaged a process design expert which confirmed the viability of the proposed plant. The estimated cost of construction is approximately $12 million. The estimated value of materials to be extracted is based on analysis of samples taken from the residues and a valuation of such materials using current market prices discounted to reflect possible price decreases, including those which could result from the increased quantities of certain of these materials made available for sale. The estimated costs of residue processing were developed by Company personnel and independent consultants using third party evaluations based on the pilot testing performed. Residue processing is expected to start approximately a year after licensing approval is received. The provisions for discontinued operations reflect management's belief that the current value of the extracted materials will at least equal the estimated cost of construction and costs of processing, including estimated costs for disposal of waste generated by the process. The annual recovery revenues are estimated to be in a range of $6,000,000 to $7,000,000. However, there can be no assurance as to the level of demand for the extracted materials or the actual prices which may be obtained for them, which could vary over time.
In October 1995 the NRC advised the Company that a decommissioning funding plan cost estimate based upon on-site disposal of most of the radioactive wastes at the site is appropriate to consider at this time. The NRC cautioned the Company, however, that on-site disposal may require preparation of an Environmental Impact Statement and that, in addition to the required NRC approval, local and other federal agencies may have to be satisfied that the Company's disposal plan is sound. Such an approval process can be expected to extend over a number of years. Management believes that a decommissioning plan including on-site containment will ultimately be acceptable to the appropriate regulatory authorities, based on current and proposed NRC regulations and a provision of the Nuclear Waste Policy Act of 1982 requiring the Department of Energy to take title to certain "special sites" which may include the Company's site; however, there is no assurance that a plan providing for on-site containment will ultimately be approved. Implementation of a decommissioning
plan for the Company's site which includes off-site disposal may not be financially feasible.
The NRC decommissioning regulations require licensees to estimate the cost for decommissioning and to assure in advance that adequate funds will be available to cover those costs. NRC regulations identify a number of acceptable methods for assuring funds for decommissioning, including surety instruments such as letters of credit, cash deposits and combinations thereof. The NRC October 1995 letter requested the Company to submit a decommissioning funding plan contemplating on-site containment and stated that the cost of residue processing should be included in the Company's cost estimate. In March 1996, the Company submitted a revised decommissioning plan and a related decommissioning funding plan. The initial level of assurance for decommissioning is $4,456,000 provided through letters of credit. The amount does not include assurance for costs of construction or operation of the residue processing facility. This initial level of assurance, however, may be changed upon further review by the NRC. The Company's available cash and/or borrowing capacity will be reduced by the amount of funding assurance as required at any particular time. As the decommissioning plan is implemented, deposited funds or the amount of any surety instruments may be reduced, provided the Company can demonstrate the sufficiency of the remaining funds or surety to assure the completion of decommissioning.
Expenditures for environmental reclamation and decommissioning were $1,516,000, $1,221,000 and $1,061,000 in 1996, 1995, and 1994, respectively. Costs which are expected to be incurred within the next year are included as plant shutdown costs in Accrued Liabilities. Costs expected to be incurred after one year are reflected on the balance sheet in Discontinued Operations as part of Other Liabilities. Based upon continuing assessment of the proposed decommissioning plan, taking into consideration the most current information, existing technology and regulations in effect, management believes that the amounts reserved at December 31, 1996 are adequate to cover the costs of environmental clean-up for discontinued operations and that the Company has the ability to meet the NRC decommissioning funding assurance requirements.
The net assets of discontinued operations at December 31, 1996 and 1995 include the following (in thousands of dollars):
1996 1995
Land $ 110 $ 110 Building 5,218 5,218 5,328 5,328 Less accumulated depreciation 4,805 4,805 Net land and buildings 523 523 Design and engineering costs for processing plant 2,009 822
$ 2,532 $ 1,345
The remaining land and buildings of the Company's former Precision Sheet Metal (PSM) operation within the Metal Fabrications business segment are carried as Other Assets - Property held for sale at a cost of $1,129,000 at December 31, 1996. The cost of preparing the property for sale, principally environmental clean-up, will be capitalized. Management believes that proceeds from the sale of the property will be adequate to recover its costs, including costs of preparing the property for sale. The Company believes the reserves established for other costs associated with the close-down of PSM are adequate to cover such costs.
The Company's Escast operation, located in Addison, IL, and included in the Metal Fabrications business segment, has been named as a responsible party for the clean-up costs of certain hazardous wastes located on-site. A cost sharing agreement with the former owner of Escast is in place for any future clean-up
costs. The clean-up process has begun at the site under an Illinois Environmental Protection permit with total estimated costs of approximately $1.1 million. The Company believes the established reserves are adequate to cover its share of the clean-up costs.
Environmental matters arising at other units are routinely reviewed and handled through operations. The Company believes that the ultimate disposition of any other pending environmental matters will not have a material adverse effect upon the consolidated financial position of the Company.
5. Debt
Long-term debt at December 31, 1996 and 1995 consisted of the following:
1996 1995
Mississippi Business Finance Corporation 5.487% Note, due 2011 $ 956,596 $ -
Loans from various Pennsylvania Economic Agencies with interest rates ranging from 2.0% to 5.0%, due from 1997 to 2009 860,076 -
Loans from various Iowa Economic Agencies with interest rates ranging from 0.0% to 4.0%, due 2000 297,907 375,113
Less current maturities 2,114,579 375,113
Total long-term debt 335,522 77,207
$ 1,779,057 $ 297,906
The above loans are collateralized by machinery and equipment with a net book value of $2,386,000.
The aggregate maturities for long-term debt for the five years after December 31, 1996 are $336,000, $317,000, $283,000, $241,000, and $112,000, respectively.
Interest paid on debt for the years ended December 31, 1996, 1995 and 1994 amounted to $17,000, $4,000, and $13,000, respectively.
The fair value of the Company's debt is $2,189,000 which was estimated using a discounted cash flow analysis, based upon the Company's current incremental borrowing rates for similar types of borrowing arrangements.
6. Income Taxes
Deferred income taxes reflect the tax effect of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows:
1996 1995
Deferred tax assets - current: Plant shutdown, idle facilities and environmental costs $ 154,316 $ 103,482 Self insurance accruals 648,718 825,569 Vacation accruals 395,352 339,829 State income taxes 291,582 238,216 Other 191,430 (54,936)
$ 1,681,398 $ 1,452,160
Deferred tax assets (liabilities) - non-current: State income tax net operating loss carryforwards net of valuation allowance $ 520,633 $ 549,350 State income taxes (490,356) (322,033)
$ 30,277 $ 227,317
Deferred tax (assets) liabilities - non-current: Pension credits $ 2,414,493 $ 2,426,922 Plant shutdown, idle facilities and environmental costs (438,344) (1,055,712) Tax depreciation in excess of book depreciation 131,046 - Other (32,384) 3,701
$ 2,074,811 $ 1,374,911
At December 31, 1996 and 1995, the Company had potential state income tax benefits of $926,000 and $1,085,000, respectively, from net operating loss carryforwards that expire in various years through 2010. For financial reporting purposes, valuation allowances of $405,000 and $536,000 at December 31, 1996 and 1995, respectively, were recognized for net operating loss carryforwards not anticipated to be realized before expiration.
Details of the provision for income taxes in the consolidated statements of operations are as follows:
1996 1995 1994 Current taxes Federal $ 1,747,000 $ 935,000 $ 900,000 State and other 481,000 379,000 331,000 2,228,000 1,314,000 1,231,000 Deferred income tax charge Federal 544,000 829,000 950,000 State 4,000 38,000 156,000 548,000 867,000 1,106,000 Total 2,776,000 2,181,000 2,337,000
The deferred income tax charge in 1996 results primarily from payments for certain plant shutdown, idle facilities and environmental costs accrued in prior years and for the net effect of timing of the deduction of certain employee fringe benefits.
The deferred income tax charges in 1995 and 1994 result primarily from payments for certain plant shutdown, idle facilities and environmental costs accrued in
prior years.
A reconciliation of the total provision for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income tax provision is as follows:
1996 1995 1994 Income tax provision at statutory rate $ 2,398,000 $ 1,875,000 $ 2,022,000 Add (deduct): State income taxes, net of federal income tax provision 320,000 275,000 321,000
Other, net 58,000 31,000 (6,000)
Total income tax provision $ 2,776,000 $ 2,181,000 $ 2,337,000
Income taxes paid for each of the three years in the period ended December 31, 1996 amounted to $2,189,000, $1,147,000 and $1,610,000, respectively.
Income tax refunds received during the three years in the period ended December 31, 1996 amounted to $30,000, $427,000 and $319,000, respectively.
7. Retirement Plans
The Company has several non-contributory defined benefit plans covering approximately 28% of its employees. Benefits for salaried plans are generally based on salary and years of service, while hourly plans are based upon a fixed benefit rate in effect at retirement date and years of service. The Company's funding of the plans is equal to the minimum contribution required by ERISA. Contributions to defined benefit plans totaled $22,380, $63,113 and $108,435 in 1996, 1995 and 1994, respectively.
The net pension expense (credit) in 1996, 1995 and 1994 is comprised of:
1996 1995 1994
Service cost $ 485,000 $ 368,000 $ 376,000 Interest cost on projected benefit obligations 3,058,000 3,181,000 3,003,000 Actual return on Plan assets (1,750,000) (6,021,000) 823,000 Net amortization and deferral (1,587,000) 2,660,000 (4,355,000) Net pension expense (credit) $ 206,000 $ 188,000 $ (153,000)
The plans' funded status and amounts recognized in the balance sheet at December 31 are as follows:
1996 1995 Actuarial present value of benefit obligations Vested $ 38,581,143 $ 40,274,444 Non-vested 572,069 538,534
Total accumulated benefit obligations $ 39,153,212 $ 40,812,978
Projected benefit obligations for services rendered to date $ 41,417,209 $ 43,253,191 Plan assets at fair value, primarily U.S.
Government securities and publicly traded stocks and bonds 40,136,249 41,902,910 Plan assets less than projected benefit obligations (1,280,960) (1,350,281) Effect of change in assumptions, net gains and losses 10,365,078 11,127,442 Unrecognized net excess plan assets at January 1, 1986 being recognized over approximately 15 years (1,386,880) (2,067,353)
Prepaid pension asset $ 7,697,238 $ 7,709,808
The assumptions used in determining the actuarial present value of projected benefit obligations were as follows:
1996 1995 1994
Discount rate 7.75% 7.50% 8.50%
Rate of increase in future compensation levels 5.00% 5.00% 5.50%
Expected long-term rate of return on assets 8.00% 8.00% 8.00%
The Company has several defined contribution plans covering approximately 85% of its employees. Almost all of the defined contribution plans have funding provisions which, in certain situations, require Company contributions based upon formulae relating to employee gross wages, participant contributions or hours worked. Almost all of the defined contribution plans also allow for additional discretionary Company contributions based upon profitability. The costs of these plans for 1996, 1995 and 1994 were $1,235,000, $869,000, and $839,000, respectively.
The Company makes medical insurance available and provides limited amounts of life insurance to retirees. Retirees electing to be covered by Company-sponsored health insurance pay the full cost of such insurance. The Company accrues the cost of the retiree life insurance benefits in relation to the employee's service with the Company. Costs of postretirement benefits other than pensions for the years ended December 31, 1996, 1995 and 1994 were $37,000, $37,000, and $44,000, respectively.
8. Business Segments
The Company is a specialty metals manufacturer. For financial reporting purposes, the Company classifies its products into the following two business segments:
Industrial Tools:
Tungsten carbide cutting tools, milling tools, toolholding devices, mining tools and accessories, construction tools, wear parts and related industrial parts.
Metal Fabrications:
Titanium, nickel base and high alloy steel forgings; aluminum and magnesium sand mold castings; powdered metal components; special wire products and investment castings.
Financial information concerning the Company's segments for the years ended
December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 NET SALES:
INDUSTRIAL TOOLS -
Sales $ 54,068,214 $ 50,068,802 $ 43,558,081
Intersegment sales (239) (95) -
54,067,975 50,068,707 43,558,081
METAL FABRICATIONS -
Sales 66,784,892 52,551,291 45,783,951
Intersegment sales (19,036 (22,244 (54,696)
66,765,856 52,529,047 45,729,255
$120,833,831 $102,597,754 $ 89,287,336
OPERATING INCOME (LOSS):
INDUSTRIAL TOOLS $ 3,052,446 $ 3,109,433 $ 2,856,607
METAL FABRICATIONS 3,351,717 1,370,067 1,809,048
CORPORATE (61,619 (44,352 (13,250
$ 6,342,544 $ 4,435,148 $ 4,652,405
Intersegment sales are accounted for at prices equivalent to the competitive market prices for similar products.
The percentages of net sales for classes of similar products which exceeded ten percent of the Company's consolidated net sales, for the period indicated, are set forth below: Percentage of Consolidated Net Sales Products Business Segments 1996 1995 1994
Tungsten carbide cutting tools Industrial Tools 30% 31% 29%
Nonferrous forgings Metal Fabrications 12% 11% 12%
Investment castings Metal Fabrications 9% 12% 13%
The identifiable assets, depreciation and capital expenditures for the years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 Identifiable assets Industrial Tools $17,383,706 $15,895,229 $14,007,160 Metal Fabrications 36,727,565 23,553,746 22,089,022 Corporate/Discontinued 28,016,171 35,080,878 36,784,736
Total assets $82,127,442 $74,529,853 $72,880,918
Depreciation Industrial Tools $ 773,130 $ 778,260 $ 716,800 Metal Fabrications 1,160,036 1,220,297 1,258,238 Corporate/Discontinued - - -
Total depreciation $ 1,933,166 $ 1,998,557 $ 1,975,038
Capital expenditures Industrial Tools $ 1,553,372 $ 1,062,578 $ 1,055,600 Metal Fabrications 4,370,080 1,792,277 598,853 Corporate/Discontinued - - -
Total capital expenditures $ 5,923,452 $ 2,854,855 $ 1,654,453
Capital expenditures for the Metal Fabrications segment include $3,884,000 from the acquisition of American Sintered Technologies, Inc. on July 31, 1996.
9. Lease Commitments
The Company leases data processing, transportation and other equipment, as well as certain facilities, under operating leases. Such leases do not involve contingent rentals, nor do they contain significant renewals or escalation clauses.
Total minimum future rentals under noncancelable leases at December 31, 1996 were $1,188,000, including $494,000 in 1997, $443,000 in 1998, $213,000 in 1999, $27,000 in 2000, and $11,000 in 2001 and thereafter. Rental expense was $1,174,000 in 1996, $1,094,000 in 1995, and $1,187,000 in 1994.
10. Acquisition
On July 31, 1996, the Company acquired all of the assets and certain liabilities of American Sintered Technologies, Inc. (AST) for the cash price of $6,937,000. In addition to the cash paid, the Company assumed $954,000 of various Pennsylvania Economic Agencies loans. The nature of the business of AST is the manufacture of ferrous and non-ferrous powdered metal components serving the automotive, lawn and garden, plumbing, hardware, and electrical hardware industries. The acquisition was accounted for as a purchase and is included in the Company's Metal Fabrications business segment.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and executive officers is included in Part I page 10.
Additional information concerning the Company's directors is incorporated by reference to information under the caption "Nominees for Election as Directors" in the Company's definitive proxy statement for the annual meeting of shareholders to be held on April 23, 1997.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Incorporated herein by reference to information under the caption "Compensation of Directors and Executive Officers" in the Company's definitive proxy statement for the annual meeting of shareholders to be held on April 23, 1997.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)(b)(c) The information required by this Item 12 is incorporated herein by reference to the information under the captions "Voting Securities and Principal Holders Thereof" and "Nominees for Election as Directors" in the Company's definitive proxy statement for the annual meeting of shareholders to be held on April 23, 1997.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the information under the caption "Nominees for Election as Directors" in the Company's definitive proxy statement for the annual meeting of shareholders to be held on April 23, 1997.
PART IV ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(a)(1) Index to Consolidated Financial Statements: Form 10-K Page Summary Quarterly Financial Data for the years ended December 31, 1996 and 1995. 12
Report of Independent Auditors. 21
Consolidated Statement of Income for each of the three years in the period ended December 31, 1996. 22
Consolidated Balance Sheet at December 31, 1996 and 1995. 23-24
Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 1996. 25-26
Consolidated Statement of Shareholders' Equity for each of the three years in the period ended December 31, 1996. 27
Notes to Consolidated Financial Statements. 28-41
(a)(2) Index to Consolidated Financial Statement Schedule:
Consolidated Financial Statement Schedule for each of the three years ended December 31, 1996:
II. Valuation and qualifying accounts 44
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in
the Consolidated Financial Statements and Notes thereto.
(a)(3) The following exhibits required by Item 601 of Regulation S-K are submitted as follows:
Exhibit 3.1 - Certificate of Incorporation
Exhibit 3.2 - By-Laws
Exhibit 10a - Incentive Compensation Plan
Exhibit 10b - Change in Control Agreement
Exhibit 22 - Subsidiaries of the Registrant
All other exhibits are omitted since the required information is not present or is not present in amounts sufficient to require submission.
(b) No reports have been filed on Form 8-K during the last quarter of the year ended December 31, 1996.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at Charged to Balance Beginning Cost and Deductions at End of Year Expenses (1) of Year
Allowance for Doubtful Accounts:
Year ended 12/31/96 $ 276,440 $ 11,665 $ 11,655 $ 276,440
Year ended 12/31/95 $ 276,440 $ 16,022 $ 16,022 $ 276,440
Year ended 12/31/94 $ 276,440 $ (21,929) $ (21,929) $ 276,440
(1) Accounts written off, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
FANSTEEL INC. Registrant
Date: March 10, 1997 By: \s\ William D. Jarosz William D. Jarosz, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated:
Signature Title Date
Director; Chairman of the Board, President and
\s\ William D. Jarosz Chief Executive Officer March 10, 1997 William D. Jarosz
Vice President and Chief \s\ R. Michael McEntee Financial Officer March 10, 1997 R. Michael McEntee
\s\ Betty B. Evans Director March 18, 1997 Betty B. Evans
\s\ R. S. Evans Director March 17, 1997 Robert S. Evans
\s\ Thomas M. Evans, Jr. Director March 21, 1997 Thomas M. Evans, Jr.
\s\ Peter J. Kalis Director March 13, 1997 Peter J. Kalis
\s\ Jack S. Petrik Director March 26, 1997 Jack S. Petrik
INDEX TO EXHIBITS
The following Exhibits to this report are filed herewith or, if marked with an asterisk (*), are incorporated by reference:
Exhibit Prior Filing or Sequential No. Page Number Herein
3.1 Certificate of Incorporation Company's Form 10-K filed March 31, 1993 (*)
3.2 By-Laws Annex II to the Company's annual proxy statement dated March 15, 1985, File No. 1-8676 (*)
10a Incentive Compensation Plan 48-50
10b Change in Control Agreement 51-59
22 Subsidiaries of the Registrant 60