ITEM 1 - BUSINESS
Fansteel Inc. was founded in 1907 as a New York corporation and reincorporated under the laws of the State of Delaware in 1985.
Fansteel Inc. and its subsidiaries (the “Company”) are manufacturers of high value precision engineered components for the global aerospace and industrial markets. The Company’s products are used in a variety of applications where performance counts including commercial aircraft, regional aircraft, business aircraft, personal aircraft, helicopters and turbine engines; energy (flow control) and power generation (land based gas turbines, large displacement diesel/natural gas/oil fueled engines and wind turbines); and agricultural equipment, construction machinery, lawn and garden and automotive.
On January 15, 2002 (the "Petition Date"), Fansteel Inc. and eight of its then subsidiaries (collectively, the "Filing Debtors") filed voluntary petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. After the Petition Date, the Predecessor Company (referring to the Company prior to the Effective Date) continued to operate its business and manage its affairs as debtor-in-possession ("DIP") with court approval for transactions outside the ordinary course of business. The Chapter 11 case with respect to a former subsidiary, Fansteel Schulz Products, Inc. ("Schulz"), was dismissed on November 27, 2002 pursuant to a bankruptcy court-approved sale by Fansteel Inc. of all of the stock of Schulz. By order dated December 23, 2003, the U.S. Bankruptcy Court for the District of Delaware (the "Court") confirmed the Second Amended Joint Reorganization Plan (the "Plan"). All the Filing Debtors other than Schulz (collectively, the "Debtors") emerged from Chapter 11 of the U.S. Bankruptcy Code on January 23, 2004 (the "Effective Date").
As of the Effective Date, all common stock and options to purchase common stock of the Predecessor Company were canceled. Pursuant to the Plan, on the Effective Date, the Company filed an amended and restated certificate of incorporation authorizing new shares of common stock, par value $.01 per share of the Company ("New Common Stock"). The Plan authorized the issuance of 3,600,000 shares of New Common Stock. Holders of allowed general unsecured claims against the Debtors were entitled by the Plan to receive approximately 50% stock ownership of the reorganized Company. The Pension Benefit Guarantee Corporation (the "PBGC") received approximately 21% of the common stock being issued in the reorganization as part of the settlement of its claims related to the under-funding of the Predecessor Company's now-terminated Consolidated Employees' Pension Plan (the "Pension Plan"), a defined benefit pension plan covered under Title IV of the Employee Retirement Income Security Act ("ERISA"). The stockholders of the Predecessor Company were entitled by the Plan to receive approximately 24% of the New Common Stock. All of the foregoing percentages were pursuant to the Plan, subjected to dilution by the 5% of New Common Stock reserved for an employee stock plan.
In accordance with the Plan, the Predecessor Company terminated the Pension Plan as of December 15, 2003. Fansteel and the PBGC entered into a settlement agreement pursuant to the Plan pursuant to which the PBGC received, in full satisfaction of the claims resulting from the Pension Plan's termination: (i) a $9,500,000, non-interest bearing, ten-year, note, dated January 23, 2004, from Fansteel Inc., secured by land, buildings, and equipment owned by or used in connection with operations of Fansteel de Mexico, together with (ii) distributions of cash and stock on account of a $1,500,000 allowed general unsecured claim and (iii) an additional 20% of the New Common Stock (subject to dilution for issuances pursuant to an employee stock plan).
The Plan also provided for settlement of various existing and potential environmental claims and obligations of the Debtors. In particular, the Plan provided for the following treatment of environmental claims and obligations with respect to the various properties as set forth below in full satisfaction and release of all such environmental claims against and obligations of any Debtor or its successors:
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(a) Holders of environmental claims and/or obligations arising from or with respect to the property at Number Ten Tantalum Place, Muskogee, Oklahoma (the "Muskogee Facility") shall receive and/or be the beneficiaries of the remediation of the Muskogee Facility to be undertaken by FMRI, Inc. ("FMRI"), one of the special purpose subsidiaries of the Company formed pursuant to the Plan. FMRI (and not Fansteel Inc.), pursuant to an Amended Decommissioning Plan and an Amended License (collectively, the "NRC License") issued by the Nuclear Regulatory Commission (the "NRC"), is solely and directly responsible for the monitoring and performance of remedial actions to be undertaken with respect to the Muskogee Facility. Pursuant to the Plan, the operations of FMRI are to be funded primarily by the proceeds of certain non-interest bearing notes issued and/or to be issued to FMRI by Fansteel Inc. as follows:
(i) A $30,600,000 unsecured note maturing December 31, 2013 payable with mandatory minimum semi-annual payments of $700,000, an additional mandatory annual payment, based on excess available cash flow, if any, with the maximum additional mandatory annual payment capped at $4,000,000 and the net proceeds of recoveries by Fansteel, if any, on certain insurance claims; and
(ii) A $4,200,000 unsecured note to cover estimated costs of groundwater treatment and monitoring to be completed to a standard to be agreed upon between FMRI and the NRC, maturing December 31, 2023 with annual payments of approximately $282,000 commencing on or about January 1, 2009 until maturity; and
(iii) An unsecured contingent note in an amount, to the extent necessary and as to be determined following further site characterization, reflecting additional costs to remediate soils in excess of costs estimated in the Amended Decommissioning Plan and the NRC License and treat/monitor groundwater. If an FMRI contingent note is required, it is anticipated that it would be issued in 2012.
FMRI can draw up to $4,500,000 from an existing decommissioning trust owned by Fansteel Inc. established in accordance with the Amended Decommissioning Trust Agreement with the NRC. The draws against the decommissioning trust may be made on a revolving basis as long as the aggregate amounts outstanding under such draws shall not exceed $2,000,000 and provided certain terms and conditions are satisfied. Consistent with the NRC License, FMRI in April 2004 drew $525,000 from the Trust. On April 13, 2005, the decommissioning trust was amended, with the consent of the NRC, to allow additional draws of up to $2,500,000 to be drawn by FMRI to complete Phase 1 of the decommissioning plan. The amounts of these additional draws are dependent upon, among other things, the weight of material disposed of offsite at the approved disposal site. In the second quarter of 2005, FMRI drew an additional $500,000 from the Trust. In the third quarter of 2005, FMRI drew an additional $1,160,000 from the Trust. In 2005, Fansteel prepaid $768,000 to FMRI from net insurance proceeds, which FMRI used to reduce amounts owing to the Trust. In 2006, FMRI drew an additional $652,000 and Fansteel prepaid $70,000 to FMRI from insurance proceeds. The net draws at December 31, 2006 were $2,000,000. In 2007, FMRI drew an additional $776,000 from the Trust, bringing total draws from the Trust to $2,800,000 at December 31, 2007. In 2008, $1,700,000 was withdrawn from the Trust, and the total net withdrawals at December 31, 2008 were $4,400,000. There was an insurance settlement of $50,000 made to FMRI in 2008, which was deposited into the Trust.
The NRC was also granted a pledge on the proceeds from any of the FMRI notes and benefits from an indemnity in its favor from FMRI with respect to Fansteel Inc.'s obligations under the notes.
(b) Holders of environmental claims and/or obligations arising from or with respect to the property at Number One Tantalum Place, North Chicago, Illinois (the "North Chicago Facility") shall receive and/or be the beneficiaries of the remediation of the North Chicago Facility to be undertaken by North Chicago, Inc. ("NCI"), one of the special purpose subsidiaries formed pursuant to the Plan, in accordance with the North Chicago Consent Decree. Pursuant to the Plan, the North Chicago Facility, consisting of Fansteel's real property and other assets associated with its operation, was transferred to NCI on the Effective Date. NCI (and not Fansteel Inc.) is solely and directly responsible for the monitoring and performance of remedial actions to be undertaken with respect to the North Chicago Facility. The operations of NCI were to be funded primarily from proceeds of certain non-interest bearing notes issued and/or to be issued to NCI by Fansteel Inc. as follows:
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(i) A $2,170,000 unsecured note maturing December 31, 2013 with payments matched to correspond to NCI's anticipated expenditures for remediation costs of the North Chicago Facility; and
(ii) An unsecured contingent note up to $500,000, to be issued in the future, if the costs of performing the response actions at the North Chicago Facility will exceed $2,025,000.
On November 13, 2003 the City of North Chicago (the "City") and Fansteel executed an option agreement (the "Option") allowing the City to acquire the North Chicago Facility for $1,400,000. Upon exercise of the Option, NCI was obligated under the Plan to transfer any funds received from the City to the United States Environmental Protection Agency (the "EPA") and was released from any and all of its obligations to implement the North Chicago response action under the North Chicago Consent Decree, subject to completing the environmental engineering/cost analysis report, and any outstanding notes issued and the obligation to issue the above-described contingent note by the Company to NCI was to be canceled. In addition, the Company was obligated to issue and deliver to the EPA an unsecured, non-interest bearing promissory note in the principal amount of $700,000, less any amounts previously paid to NCI under the original notes, payable in equal semi-annual payments to be made over a three-year period beginning six months after issuance. On December 31, 2004, the City notified NCI that it was exercising its option. On March 7, 2005, NCI sold the real property to the City, transferred the proceeds of $1,400,000 received from the City to the EPA and the Company delivered to the EPA an unsecured, non-interest bearing promissory note in the principal amount of $677,232, payable in equal semi-annual payments to be made over a three-year period beginning six months after issuance. The NCI Notes (including the obligation to issue a contingent note) were canceled, and the City entered into a six-month lease with monthly renewals at the same terms with Fansteel Inc. with respect to portions of the North Chicago Facility. In July 2005, Fansteel prepaid $147,000 to the outstanding note issued to the EPA from net insurance proceeds received. On December 7, 2005, the Company ended its lease with the City for portions of the North Chicago Facility. On September 7, 2007, the Company made the final payment on the promissory note.
(c) Holders of environmental claims and/or obligations arising from or with respect to the property at 203 Lisle Industrial Road, Lexington, Kentucky (the "Lexington Facility"), shall receive and/or be the beneficiaries of the remediation of the Lexington Facility to be undertaken by FLRI, Inc. ("FLRI"), a special purpose subsidiary formed pursuant to the Plan. Pursuant to the Plan, the Lexington Facility, consisting of Fansteel's real property and other assets associated with the operation, was transferred to FLRI on the Effective Date. FLRI (and not Fansteel Inc.) is solely and directly responsible for the monitoring and remedial actions to be undertaken with respect to the Lexington Facility and the operations of FLRI are to be funded primarily by:
(i) A $1,780,000 unsecured, non-interest bearing note maturing December 31, 2013 issued by Fansteel Inc. to FLRI with payments matched to correspond to FLRI's anticipated expenditures for remediation costs; and
(ii) A contingent note, to be issued in the future, in an amount to be determined by FLRI following completion of site characterization and sufficient to fund any remaining costs of remediation that may exist.
The land and building of the Lexington facility are included on the balance sheet as property held for sale at $720,000, which includes a reduction of $608,000 made in September 2007 based on the latest appraisal of its current market value, less costs to dispose. A number of third parties had expressed interest in purchasing this facility. The Company closed on the sale of this property on March 6, 2009 thereby extinguishing the primary note.
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(d) Holders of environmental claims and/or obligations arising from or with respect to the property at 801 Market Street, Waukegan, Illinois (the "Waukegan Facility"), shall receive and/or be the beneficiaries of the remediation of the Waukegan Facility to be undertaken by Waukegan, Inc. ("WI"), one of the special purpose subsidiaries formed pursuant to the Plan. Pursuant to the Plan, the Waukegan Facility, consisting of Fansteel's real property and other assets associated with the operations was transferred to WI. WI (and not Fansteel Inc.) is solely and directly responsible for the monitoring and remedial actions to be undertaken with respect to the Waukegan Facility and the operations of WI were to be funded by the proceeds of a $1,250,000 unsecured, non-interest bearing note maturing December 31, 2013 issued by the Company to WI with payments matched to correspond to WI's anticipated expenditures for remediation costs. During June 2004, WI sold the Waukegan Facility to Ampsky & Associates, LLC (“Ampsky”) for approximately $100,000 in cash and the assumption/indemnification by Ampsky of all environment claims and obligations. As a result, the Company's $1,250,000 note has been extinguished.
(e) The remaining environmental claims and obligations arising from or related to Fansteel's (i) Li Tungsten site Superfund Site in Glen Cove, New York, (ii) Old Southington Landfill Site in Southington, Connecticut and (iii) Operating Industries, Inc. Superfund Site in Monterrey Park, California are each subject to an EPA Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") Potentially Responsible Parties (“CERCLA PRP”) Settlement Agreement approved by order of the Court entered on November 17, 2003. In full satisfaction of such claims and obligations under the Plan, the holders of such claims received a pro rata share of the cash distribution to holders of general unsecured claims as if such parties held allowed general unsecured claims of: $132,000 (Polychlorinated Biphenyls or "PCB" Treatment), $460,898 (Operating Industries), $25,000 (Li Tungsten), and $100,000 (Old Southington), and certain proceeds, if any, net of insurance recoveries.
(f) Substantially all of the environmental claims and obligations associated with the facility owned and operated by Wellman located at 1746 Commerce Road, Creston, Union County, Iowa (the "Iowa Facility") have been resolved in accordance with the Administrative Order on Consent by and between Wellman Dynamics Corp., a subsidiary of the Company ("Wellman") and the EPA, approved by order of the Court on November 4, 2003. The Administrative Order on Consent provides for EPA approval of a work plan for Wellman to characterize the extent of any contamination associated with certain Solid Waste Management Units ("SWMUs") and to evaluate alternatives to remediate any residual contamination associated with SWMUs in accordance with Wellman's on-going obligations under the Resource Conservation and Recovery Act of 1976 and the Waste Disposal Amendments of 1984 (collectively, "RCRA") at the Iowa Facility. Wellman estimates the costs associated with the closure activities for the SWMUs will aggregate approximately $2,166,000 through 2009. Environmental liabilities are estimated to be funded from the cash flow generated by operations of Wellman.
For the years ended December 31, 2008 and December 31, 2007, the Company did not have any significant capital expenditures for environmental control facilities. Compliance with current environmental provisions did not have a material effect upon capital expenditures, earnings or the competitive position of Fansteel.
On December 31, 2004, Fansteel Inc. sold substantially all of the assets (including, but not limited to, machinery and equipment, raw material items, work-in-process items, finished goods items, receivables, machinery and equipment contracts, customer contracts and supplier contracts, but excluding real estate, fixtures and certain other assets) of the division of the Company known as "Washington Manufacturing" (the "Washington Division") to Whitesell Corporation (“Whitesell”), a customer of the Washington Division, for consideration consisting of a combination of (i) cash (in the initial amount of approximately $2,000,000, subject to post-closing adjustment) and (ii) the assumption by Whitesell of certain liabilities of the Washington Division (in the initial amount of approximately $1,000,000, determined in accordance with U.S. generally accepted accounting principles consistently applied, subject to post-closing adjustment) (collectively, the “Washington Sale”) . A loss of $1,600,000 was recognized in 2004 from this sale.
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Whitesell had been leasing the buildings of Washington Manufacturing until it vacated in December 2006 at which time the Company began to actively try to sell the Washington Manufacturing property and has classified it as property held for sale in the accompanying balance sheet. In December 2006 the value of the property was reduced by $738,000 to reflect current market value, less selling costs. On January 22, 2008, the Company entered into an agreement with a buyer for the purchase of the remaining assets at the Washington Manufacturing facility for $475,000, which is approximately equal to the book value. The Company closed on the sale of this property on March 13, 2008.
In the second quarter 2004, the Company sold all the assets and liabilities of its special purpose subsidiary Waukegan Inc. Net proceeds were $100,000 and a gain of $773,000 was recognized due to the elimination of the environmental liabilities on the site as part of the sale.
In fourth quarter 2003, the Company sold its Hydro Carbide and California Drop Forge operations, certain other assets located in the Company’s Lexington, Kentucky and Plantsville, Connecticut facilities and substantially all of the assets of Phoenix Aerospace to an entity affiliated with certain Directors of the Predecessor Company in accordance with the Plan approved by the Bankruptcy Court. Net proceeds for this sale were $12,206,000 and a loss of $1,858,000 was recognized.
In a separate transaction, in accordance with the Plan approved by the Bankruptcy Court, the Company sold real property, equipment and trademarks of the Plantsville, Connecticut facility in the fourth quarter of 2003 with net cash proceeds of $890,000 and a loss of $110,000.
The Hydro Carbide, Lexington and Plantsville operations were in the Industrial Tools business segment, which has since been eliminated as all of the operations have been sold. California Drop Forge and Phoenix Aerospace were included in the Advanced Structures business segment. The Washington Division was included in the Industrial Metal Components business segment.
For financial reporting purposes, the Company classifies its products into two business segments: Advanced Structures (highly engineered aluminum and magnesium sand castings and precision assemblies) and Industrial Metal Components (high precision net shape powdered metal components and custom assemblies and engineered investment castings and final assembly modules). Business segment information is incorporated by reference herein from the Notes to the Consolidated Financial Statements, Note 12.
Sales of the Company’s products are made through a direct sales organization and through distributors, manufacturers’ representatives and agents. In each of the two business segments, distributors, manufacturers’ representatives and agents account for the majority of sales. 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:
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While product development is an ongoing and continual part of our business development strategies, 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.
The most important raw materials used by the Company are magnesium, aluminum, iron, bronze, copper, stainless steel, and alloy steel. Price increases were experienced in the recent past and we expect this trend to continue. To offset these price increases, the Company began adding material surcharges in March 2004 and second sourcing certain critical suppliers and/or commodities. The Company believes that the sources and availability of these materials are adequate for present needs.
The Company does not own any patents.
None of the operations of any business segment are seasonal, although a number of customers have summer and year-end shutdowns.
Working capital requirements for each business segment are substantial, but the Company's investment in working capital is fairly typical of the metal fabrication manufacturing industry.
Companies controlled by United Technologies Corporation (“UTC”) represent a significant customer for the Company, whose sales were 22%, 23%, and 19%, of total Company sales in 2008, 2007, and 2006, respectively. International Truck and Engine Corporation (“International Engine”), a subsidiary of Navistar International Corporation, is another significant customer for the Company, whose sales represented 7%, 10%, and 10% of total Company sales in 2008, 2007, and 2006.
In addition to UTC and International Engine, the Company sells to several other customers that make up a significant portion of the Company’s total sales. While none of these other customers individually represent more than 10% of sales, as a group they make up a considerable portion of the Company’s total sales. Although it is not anticipated, the loss of UTC, International Engine or one or more of these other significant customers would have a substantial impact on the Company’s operations and profitability. While the Company has long-term relationships with these companies, there is no guarantee that these relationships will continue. In addition, these customers are in the aerospace and automotive industries, which tend to be volatile. In particular, the United States automotive industry has been unstable in recent years, with several large automotive companies struggling financially and some filing Chapter 11 bankruptcy.
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The backlog of orders not shipped and believed to be firm as of the dates shown are set forth below:
In the Advanced Structures business segment, shipments are typically made between 1 and 24 months after an order is received. In the Industrial Metal Components segment, virtually all backlog is shippable in less than 12 months, generally within 3 months.
Because of the substantial size of some orders received by the Company, particularly orders for products sold by the Advanced Structures segment, the Company’s backlog can fluctuate substantially from one fiscal period to another. Because of the differences in lead-time for filling orders at the Company’s business segments, overall backlogs at different times will not necessarily be comparable as predictors of the Company’s near-term sales.
The Company does not have any direct contracts with the government. However, the Advanced Structures segment has some customers who do have contracts with the government that are subject to termination.
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.
The Company’s executive offices are located at 1746 Commerce Road, Creston, Iowa, 50801.
The Company employed 693 persons as of December 31, 2008.
Net sales and income of foreign operations and export sales are not significant. The Company has a wholly owned subsidiary, Fansteel de Mexico, which is a maquiladora located in Reynosa, Tamaulipas Mexico and is part of the Industrial Metal Components segment. This subsidiary only made sales to its parent company, Fansteel Inc.
Long-lived assets located at the Fansteel de Mexico facility, all of which are security for the PBGC note, are detailed below:
The Company considers the United States as one inseparable geographic area for its domestic operations.
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ITEM 1A
ITEM 1A - RISK FACTORS
Investment in the Company’s securities involves a number of risks and uncertainties. Careful consideration should be given to the following risks, along with the cautionary statement regarding “forward-looking statements” in Part II, Item 7 of this report and other information included in this report, before purchasing the Company’s securities. Besides the risks listed below, the Company faces risks that are currently unknown or that are currently considered to be immaterial, but may also impact business or adversely affect the Company’s financial condition or results of operations.
Emergence From Bankruptcy
On January 15, 2002 (the "Petition Date"), Fansteel Inc. and eight of its then subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. After the Petition Date, the Predecessor Company (referring to the Company prior to the Effective Date) continued to operate its business and manage its affairs as debtor-in-possession ("DIP") with court approval for transactions outside the ordinary course of business. By order dated December 23, 2003, the U.S. Bankruptcy Court for the District of Delaware (the "Court") confirmed the Second Amended Joint Reorganization Plan (the "Reorganization Plan"). All the Debtors emerged from Chapter 11 of the U.S. Bankruptcy Code on January 23, 2004 (the "Effective Date").
The Reorganization Plan left the Company with significant environmental liabilities going forward that must be funded from continuing operations.
Environmental Issues
The Company has significant environmental issues primarily related to special purpose entities included in discontinued operations, particularly the Muskogee Facility, that could have a material impact on the Company’s results. The ability of the Company to fund the clean up of this site could have a material adverse impact on the Company. For further details, see Note 4 Discontinued Operations including Certain Environmental Remediation.
High Level Of Debt
The Company's high level of debt could have important consequences. The Company's ability to pay debt service and other contractual obligations will depend on the Company's future performance and cash flow generation, which in turn will be affected by prevailing economic and industry conditions and financial, business and other factors, many of which are beyond the Company's control. If the Company has difficulty providing for debt service or other contractual obligations in the future, the Company may be forced to take actions such as reducing or delaying capital expenditures, reducing costs, selling assets, refinancing or reorganizing its debt or other obligations and seeking additional equity capital, or any combination of the above. The Company may not be able to take any of these actions on satisfactory terms, or at all.
The Company Has A Few Large Customers
Companies controlled by United Technologies Corporation (“UTC”) represent a significant customer for the Company, whose sales were 22%, 23%, and 19% of total Company sales in 2008, 2007, and 2006, respectively. International Truck and Engine Corporation (“International Engine”), a subsidiary of Navistar International Corporation, is another significant customer for the Company, whose sales represented 7%, 10%, and 10% of total Company sales in 2008, 2007, and 2006.
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In addition to UTC and International Engine, the Company sells to several other customers that make up a significant portion of the Company’s total sales. While none of these other customers individually represent more than 10% of the Company’s net sales, as a group they make up a considerable portion of the Company’s total sales. Although it is not anticipated, the loss of UTC, International Engine or one or more of these other significant customers would have a substantial impact on the Company’s operations and profitability. While the Company has long-term relationships with these companies, there is no guarantee that these relationships will continue. In addition, these customers are in the aerospace and automotive industries, which tend to be volatile. In particular, the United States automotive industry has been unstable in recent years, with several large automotive sector companies struggling financially and some filing Chapter 11 bankruptcy.
Competition
Each of the Company’s businesses participates in markets that are highly competitive. Many of these competitors are much larger than the Company’s businesses, have greater name recognition, have more financial resources and can sell their products at prices lower than ours, giving them a greater competitive edge. The Company competes primarily on the basis of product quality, product performance, value, and long-term customer relationships. The competition that the Company faces in these markets may prevent the Company from achieving sales and profit goals, which could affect the Company’s financial condition and results of operations.
In addition the Company faces increased competition, primarily in the Industrial Metal Components business segment, from offshore sources, such as China, that offer lower production costs.
Material Prices
The Company started to experience raw material price increases beginning in 2004 and these material price increases have continued into 2008. The Industrial Metal Components segment has been impacted particularly hard with some material prices nearly doubling from 2005 levels. To offset these price increases, the Company began adding material surcharges in March 2004 and in 2008 the Company continues to add material surcharges. There is no guarantee that the Company will be able to continue to pass these material surcharges on to its customers, and in fact, some customers have refused to accept these surcharges. These customers’ margins are being analyzed to determine if their business is profitable enough to retain.
Manufacturing in Foreign Countries
The Company has a manufacturing facility in Mexico that is subject to currency exchange rate fluctuations.
Liquidity of the Company Stock
The Company has a limited number of shareholders and the stock is thinly traded.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 2
ITEM 2 - PROPERTIES
Manufacturing facility locations and corresponding square footage at December 31, 2008 are as follows:
All plants are maintained in good operating order and have sufficient capacity to meet present market requirements. The Creston, Iowa location will be expanded by approximately 20,000 square feet during the first quarter 2009 to meet additional capacity requirements for a strategic customer. Each of the properties described above is utilized on a multi-shift basis depending on production requirements and standard work schedules.
The Company owns properties in Lexington, Kentucky, and Muskogee, Oklahoma that are associated with operations discontinued in prior years. The Lexington Facility was sold on March 6, 2009.
On March 7, 2005, the Company’s North Chicago Facility, which was also associated with an operation discontinued in prior years, was sold to the City of North Chicago and portions of this facility were leased back by the City of North Chicago until the Company’s executive offices were relocated on November 22, 2005 to Deerfield, Illinois. On January 22, 2008, the Company entered into an agreement with a buyer for the purchase of the remaining assets at the Washington Manufacturing facility. The Company closed on the sale of this property on March 13, 2008. On April 1, 2008, the Company entered into an agreement to lease warehouse space in Lorimor, Iowa for its Wellman Dynamics Corporation operation. The term of the lease extends through October 31, 2010. As of March 31, 2009 the leased offices in Deerfield, Illinois were closed and moved to Creston, Iowa. There is no further lease obligation associated with the former offices in Deerfield, Illinois.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
FMRI
On September 29, 2006, A&M Engineering and Environmental Services Inc. (“A&M”) filed suit in the District Court for Tulsa County, State of Oklahoma against FMRI, a special purpose subsidiary of Fansteel, and Penn Environmental & Remediation Inc (“Penn”). On April 27, 2005, A&M and FMRI entered into a contract to excavate, dry, bag, stage and transport residue material to an acceptable offsite depository. Penn was designated as the engineer for purposes of the contract. In May 2006, FMRI was notified by A&M that they were canceling the transportation portion of the contract, but continued to perform under the balance of the contract. A&M submitted change orders totaling $1,200,000 under the contract that required approval by the engineer. The changes orders were not approved. A&M subsequently filed suit. The contract provisions require the use of mediation for resolution before filing suit. In November 2006, FMRI participated in failed meetings with A&M to stay their suit and enter into mediation. On December 1, 2006, FMRI notified A&M that the contract was being terminated for cause. Since A&M took no actions to commence cure efforts, the contract was terminated effective December 20, 2006 with FMRI expressly reserving its rights under the contract.
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On December 7, 2006, FMRI filed with the District Court for Tulsa County in response to the A&M complaint. In these pleadings, FMRI objected to venue and requested transfer to Muskogee County and cited A&M for breach of contract, breach of change order, fraud, breach of implied duty of good faith and fair dealing, and sought damages including liquidation damages, project completion costs, and faulty work. FMRI believes it has counter claims against A&M for amounts well in excess of the $1,200,000 claimed by A&M. Both sides have filed interrogatories and document requests for the suit. A Scheduling Order was filed with the District Court of Tulsa County after a February 26, 2007 scheduling conference with the presiding judge. The order included a schedule for an evidentiary hearing with the judge from September 17 - 21, 2007 regarding A&M’s intentions to enjoin FMRI’s access to a portion of the Decommissioning Trust Fund (i.e., at least equal to A&M’s monetary claims against FMRI). Per this order, the actual jury trial for this suit was to be scheduled sometime after June 2008.
On May 29, 2007, A&M filed another Notice to the Court stating that it would be unable to file its Motion on June 1, 2007 for Injunctive Relief in accordance with the Scheduling Order. A&M cited more time was needed to review documents. This notice also stated that A&M did not know what the delayed dates for these activities might be and therefore they are not rescheduling dates at this time. The first of the A&M depositions of FMRI personnel were scheduled to begin May 23 and 24, 2007. A&M also postponed these depositions and have not rescheduled them to date. November 2007 and in August 2008, the judge ordered another 60-day extension due to the suspension of activities during an objection made by A&M that was denied by the judge during an October 1, 2008 hearing. Accordingly, discovery activities including depositions and expert reports are allowed through July 2009, and the jury trial is now scheduled for December 2009.
FMRI cannot provide any assurance to a successful outcome and an unsuccessful outcome could hinder FMRI in its obligation to remediate the Muskogee Facility. Any exposure is limited to FMRI and not Fansteel.
Environmental Claims and Insurance Recoveries
Certain environmental claims have been made against the Company by the EPA and various other regulatory agencies, entities and persons in connection with the investigation and cleanup of certain sites. Pursuant to the Reorganization Plan, all such claims were treated and resolved and as part of such treatment, the Company has sought recovery from certain of its insurers in respect of certain defense and cleanup costs relating to the claims. The Department of Justice notified the Company on April 29, 2005 that the NRC and other interested federal agencies did consent to the following settlements: On May 26, 2005, the Company reached agreement with Zurich American Insurance Company and Zurich International (Bermuda) Ltd. (collectively, "Zurich") and on April 18, 2005 with KWELM Management Services Limited on behalf of the Scheme Administrator for KWELM in an insolvency proceeding under the laws of Great Britain and the Joint Liquidators for The Bermuda Fire & Marine Insurance Company (collectively, "KWELM"). Zurich agreed to a settlement providing for a cash settlement payment to the Company of $1,400,000, which was received on June 9, 2005. KWELM agreed to a Notified Scheme Claim totaling $400,000. Cash distributions in respect of the claims would be paid out to the Company in accordance with KWELM's approved Scheme of Arrangement, which the Scheme administrator had represented that Fansteel could anticipate total cash payments equal to approximately 50% to 57% of its Notified Scheme Claim (approximately $200,000 - $228,000). Payments from KWELM during 2005 were $330,304 and during 2006 were $5,349 for a total of $335,653, or 84% of the total claim. The proceeds of the settlements were used in accordance with the Reorganization Plan to pay certain professional fees and expenses related to such settlements. The net proceeds from the settlements were allocated in accordance with the Reorganization Plan and, among other things, resulted in prepayments under the FMRI Notes of $831,000, the FLRI Primary Note of $111,000 and the ED Note of $147,000 and payments aggregating $66,000 on account of EPA CERCLA claims. In December 2007, the Company received a settlement payment from Hartford Insurance. The net proceeds from the settlements were allocated in accordance with the Reorganization Plan and, among other things, resulted in prepayments under the FMRI Notes of $50,000, and payments aggregating $17,000 on account of EPA CERCLA claims. In December 2008, the Company received a settlement payment from Chubb Insurance. The net proceeds from the settlement were allocated based on the Reorganization Plan, which resulted in prepayments under the FMRI notes of $126,000, and to pay certain professional fees and expenses related to such settlements.
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Other Legal Actions
During the third quarter 2006, Fansteel filed to close its bankruptcy case, as it believed all bankruptcy issues had been substantially resolved. On September 23, 2006, the Company received notice that the Department of Justice ("DOJ") objected to the case closure, stating that the Company had not responded to a letter requesting information regarding the status of various environmental remediation sites. The Company did not receive the DOJ letter until 2 days after the DOJ notice of objection was filed. The Company through legal counsel has had discussions with the DOJ to resolve their objection. The Company is in the process of resolving the DOJ’s objections.
In August 2007, the Company received notice that a former business of the Company was being added as party to a lawsuit involving a product liability issue with hard metal lung disease. One of the Company’s insurance carriers is committed to defending the Company in this lawsuit.
From time to time, the Company is involved in routine litigation incidental to its business. The Company is not a party to or aware of any pending or threatened legal proceeding that it believes would have a material adverse effect on its results of operations or financial condition.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2008, the Company and its controlling shareholders agreed not to conduct an Annual Meeting for the year ended 2007 in 2008. This decision was based on the cost involved, and the few, if any, attendees at prior meetings.
Executive Officers of the Registrant
Set forth below are the executive officers of the Company:
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PART II.
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s stock is available for trading under the ticker symbol FELI on the “pink sheets” published by Pink Sheets LLC.
The number of shareholders of the Company as of December 31, 2008 was 710. This number includes record holders and individual participants in security position listings.
The following table sets forth the quarterly high and low bid prices and dividend information of each quarter of the last fiscal year. The quotations below reflect inter-dealer prices, without retail mark-ups, markdowns or commissions and do not necessarily represent actual transactions.
Under provisions of the notes to FMRI for funding environmental remediation, the Company is restricted from declaring or paying dividends.
Performance Graph
Pursuant to the Reorganization Plan, on the Effective Date, all common stock and options to purchase common stock of the Predecessor Company were canceled. The Company's New Common Stock was deemed to have been issued on the Effective Date, actually issued on February 23, 2004 and did not begin trading on the "pink sheets" published by Pink Sheets LLC until February 24, 2004.
The following graph compares the cumulative total shareholder return on the New Common Stock to the cumulative total return of the NASDAQ Market Index, and the Russell 2000 Index for the period from December 31, 2004 to December 31, 2008. The graph assumes that $100 was invested in the New Common Stock and each of the indices listed below on December 31, 2004 and that all dividends were reinvested. The performance of the New Common Stock reflected below is not indicative of the Company's future performance.
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ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The table below summarizes certain selected financial data of the Company and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and notes.
(a)
Results in the one-month ended January 23, 2004 included a gain of $43,455,000 from the adoption of fresh start accounting and a gain of $15,048,000 from the discharge of debt from the Plan.
(b)
Basic earnings per share and diluted earnings per share are the same.
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ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto that are included in this Form 10-K. Certain statements made in this section or elsewhere in this report contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to certain risks, uncertainties and assumptions, which could cause actual results to differ materially from those projected. From time to time, information provided by the Company or statements made by its employees may contain other forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: general economic conditions, including inflation, interest rate fluctuations, trade restrictions and general debt levels; competitive factors, including price pressures, technological development and products offered by competitors; inventory risks due to changes in market demand or business strategies; and changes in effective tax rates. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Results of Operations
2008 As Compared To 2007
Net Sales
The following table sets forth the combined net sales of the Company included in the consolidated statement of operations:
Consolidated net sales for the year ended December 31, 2008 increased $5,100,000, or 6.8%, from the year ended December 31, 2007. Included in net sales for the year ended December 31, 2008 were material surcharges of $4,500,000 compared with $4,400,000 for the year ended December 31, 2007, an increase of $100,000. The remainder of the improvement came from the Advanced Structures segment.
Advanced Structures’ net sales for the year ended December 31, 2008 were higher by $6,800,000, or 15.7%, compared to the year ended December 31, 2007. Helicopter, NASCAR and military flight product sales provided the majority of the increase. Tooling sales were also strong for military flight and military vehicle product lines further contributing to the sales improvement over the prior year.
The Industrial Metal Components' net sales for the year ended December 31, 2008 decreased $1,700,000, or 5.4%, compared with the year ended December 31, 2007. A 7.5% decrease related to investment casting sales to the diesel engine components market was offset by 3.9% increase in pump and valve market. Net sales of powdered metal components showed a decline of 5.8%, while increases in hardware, lawn and garden and automotive products were partially offset by declines in heavy-duty trucks and recreational vehicles. Plant shutdowns, the discontinuing of selected vehicle lines by the major auto companies and labor disruptions may have a negative impact on existing automotive business going forward.
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Cost of Products Sold
The following table sets forth the combined cost of products sold of the Company included in the consolidated statement of operations:
Cost of products sold of $68,100,000 for the year ended December 31, 2008 increased by $3,800,000 compared to $64,300,000 for the year ended December 31, 2007 largely due to the higher volume. As a percent of net sales, cost of products sold decreased slightly to 85.3% for the year ended December 31, 2008 compared with 85.9% for the year ended December 31, 2007.
Cost of products sold of $42,000,000 in the Advanced Structures segment for the year ended December 31, 2008 increased $4,500,000 compared with cost of products sold of $37,500,000 in the year ended December 31, 2007. Cost of products sold increased due to higher volume and a technically more demanding product mix. This was offset by a $1,050,000 training grant received in the year ended December 31, 2008 compared with none in the year ended December 31, 2007. As a percent of net sales, cost of products decreased by 2.7 points in the year ended December 31, 2008 compared with the year ended December 31, 2007. Training grant monies reduced 2008 cost of products sold by 2.1 percentage points.
The Industrial Metal Components’ cost of products sold were $26,200,000 for the year ended December 31, 2008, a decrease of $600,000 compared to cost of products sold of $26,800,000 for the year ended December 31, 2007. As a percent of net sales, cost of products were 87.7% for the year ended December 31, 2008 compared with 84.9% for the year ended December 31, 2007. The increase in cost of products sold as a percent of net sales was due to higher costs related to new customer ramp-up and higher material costs.
Selling, General and Administrative Expense
The following table sets forth the combined selling, general and administrative expenses of the Company included in the consolidated statement of operations:
Total selling, general and administrative expenses of $6,300,000 for the year ended December 31, 2008 decreased by $1,100,000, or 14.8%, over 2007 expenses of $7,400,000. As a percent of sales, selling, general and administrative expenses for the year ended December 31, 2008 decreased to 7.9% compared with 9.9% for the year ended December 31, 2007. Unusual nonrecurring professional fees incurred in 2007 at Corporate of $597,000 accounted for a portion of the 2008 decrease. The remainder of the decrease in 2008 was due to cost reduction efforts.
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In the Advanced Structures segment, selling, general and administrative expenses for the year ended December 31, 2008 decreased by $219,000, or 7.0%, compared with the year ended December 31, 2007 and as a percent of sales improved to 5.7% in 2008 compared with 7.1% in 2007. Selling expenses decreased $100,000 from the year ended December 31, 2007, due primarily to staff reductions. The remainder of the decrease resulted from reduced Corporate costs.
Selling, general and administrative expenses in the Industrial Metal Components segment for the year ended December 31, 2008 decreased by $281,000 compared with the year ended December 31, 2007. As a percent of sales, selling, general and administrative expenses improved slightly in 2008. Along with the reduced sales volume, selling, general and administrative expenses were favorably impacted by staff reductions and cost containment efforts.
In 2007, Corporate selling, general and administrative expenses represented costs for professional fees related to strategic initiatives and an investigation by a special committee of the Board of Directors totaling $597,000 for the twelve months ended December 31, 2007. No such expenses were incurred in 2008.
Operating Income (Loss)
The following table sets forth the combined operating income (loss) of the Company included in the consolidated statement of operations:
Operating income of $5,400,000 for the year ended December 31, 2008 increased by $2,300,000 compared to operating income of $3,100,000 for the year ended December 31, 2007. Operating income was 6.8% of sales, and 4.2% of sales, for the years ended December 31, 2008 and December 31, 2007, respectively, an improvement 2.6 percentage points.
Operating income of $5,200,000 in the Advanced Structures segment for the year ended December 31, 2008 increased $2,500,000 compared with operating income of $2,700,000 for the year ended December 31, 2007. Operating income for this segment was positively impacted by the volume increase of $6,800,000. Additionally, improved scrap rates, along with the resulting increased throughput, were a major factor in the improved performance of this segment.
The Industrial Metal Components segment had operating income of $227,000 for the year ended December 31, 2008 compared to an operating income of $1,041,000 for the year ended December 31, 2007. The investment casting operation experienced a slight decrease in sales, as well as increased payroll costs. The powder metal facility had a 6% decline in sales and increased expenses for start-up of new customer programs.
All Corporate costs were allocated to the business segments in 2008. An operating loss of $597,000 for the year ended December 31, 2007 at Corporate resulted from non-recurring professional fees related to strategic initiatives and an investigation by a special committee of the Board of Directors that were not allocable to the business segments.
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Other Expenses
The following table sets forth the combined other expenses of the Company included in the consolidated statement of operations:
Other expenses increased $650,000 in the year ended December 31, 2008 compared to the year ended December 31, 2007. In 2008, an $827,000 unrealized loss on foreign currency is included in other with no corresponding expense in 2007. Interest expense decreased $203,000 year over year by refinancing the Fifth Third credit facilities.
Discontinued Operations
Discontinued operations reported losses of $1,900,000 and $3,800,000 for the years ended December 31, 2008 and December 31, 2007, respectively. The losses for both periods relate in part to the accretion of discounted environmental liabilities arising from the Company’s unsecured note obligations to its special purpose subsidiaries and the note payable to the Pension Benefit Guarantee Corporation for the terminated pension plan. The 2008 loss is net of a $1,126,000 tax benefit. The 2007 loss also includes a write-down of $608,000 related to a reduction in value of property held for sale at the special purpose subsidiary, FLRI.
Net Income (Loss)
The Company had a net loss of $703,000 for the year ended December 31, 2008 compared to a net loss of $2,501,000 for the year ended December 31, 2007, with discontinued operations having a significant impact on the net loss in each year.
2007 As Compared To 2006
Net Sales
The following table sets forth the combined net sales of the Company included in the consolidated statement of operations:
Consolidated net sales for the year ended December 31, 2007 increased $7,300,000, or 10.8%, from the year ended December 31, 2006. Included in net sales for the year ended December 31, 2007 were material surcharges of $4,400,000 compared with $3,000,000 for the year ended December 31, 2006, an increase of $1,400,000. The remainder of the improvement came from sand casting sales in the Advanced Structures segment along with higher sales of investment castings in the Industrial Metal Components segment.
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Advanced Structures’ net sales for the year ended December 31, 2007 were higher by $3,300,000, or 8.3%, compared to the year ended December 31, 2006. Helicopter, NASCAR and military flight product sales provided the majority of the increase. Improvements in these product lines were more than enough to offset the May 2006 loss of a key contract for missile components that accounted for $2,200,000 in sales for the year ended December 31, 2006. Tooling sales were also strong for military flight and military vehicle product lines further contributing to the sales improvement over the prior year.
The Industrial Metal Components' net sales for the year ended December 31, 2007 increased $4,000,000, or 14.5%, compared with the year ended December 31, 2006, with 34% of the increase related to material surcharges which the Company has added to offset the continued increase in material costs for brass, bronze and stainless steel. The remainder of the increase was due to strong investment casting sales, with sales to the automotive market, primarily diesel engine components, providing the majority of the increase along with improvement in most other product lines. Net sales of powdered metal components showed a slight improvement of 0.7%, with increases in hardware, lawn and garden and automotive products partially offset by declines in heavy-duty trucks and recreational vehicles. Plant shutdowns and the discontinuing of selected vehicle lines by the major auto companies, as well as labor disruptions may have a negative impact on existing automotive business going forward.
Cost of Products Sold
The following table sets forth the combined cost of products sold of the Company included in the consolidated statement of operations:
Cost of products sold of $64,300,000 for the year ended December 31, 2007 increased by $4,200,000 compared to $60,100,000 for the year ended December 31, 2006 largely due to the higher volume. As a percent of net sales, cost of products sold improved to 85.9% for the year ended December 31, 2007 compared with 88.9% for the year ended December 31, 2006 due to cost reductions and reduced unusual charges, which were $1,165,000 at the investment casting operation for the year ended December 31, 2006.
Cost of products sold of $37,500,000 in the Advanced Structures segment for the year ended December 31, 2007 increased $3,600,000 compared with cost of products sold of $33,900,000 in the year ended December 31, 2006. Cost of products sold increased due to higher volume and a technically more demanding product mix that resulted in higher scrap and rework in 2007. Additionally, no training grant monies were received in the year ended December 31, 2007 compared with $795,000 received in the year ended December 31, 2006. As a percent of net sales, cost of products increased by 2.0 points in the year ended December 31, 2007 compared with the year ended December 31, 2006. Training grant monies reduced 2006 cost of products sold by 2.0 percentage points.
The Industrial Metal Components’ cost of products sold were $26,800,000 for the year ended December 31, 2007, an increase of $600,000 compared to cost of products sold of $26,200,000 for the year ended December 31, 2006. As a percent of net sales, cost of products were 84.9% for the year ended December 31, 2007 compared with 95.0% for the year ended December 31, 2006. Cost of products sold in 2006 included unusual charges of $1,165,000 at the investment casting operation for expedited freight, inspection costs and scrap related to the start-up of new customer parts, which increased 2006 cost of sales by 4.2 percentage points. The increase in volume at the investment casting operation along with cost reductions at both the investment casting and powder metal plants provided further improvement in 2007.
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Selling, General and Administrative Expense
The following table sets forth the combined selling, general and administrative expenses of the Company included in the consolidated statement of operations:
Total selling, general and administrative expenses of $7,400,000 for the year ended December 31, 2007 increased by $1,000,000, or 15.9%, over 2006 expenses of $6,400,000. As a percent of sales, selling, general and administrative expenses for the year ended December 31, 2007 increased to 9.9% compared with 9.5% for the year ended December 31, 2006. Unusual professional fees incurred at Corporate of $597,000 accounted for a significant portion of the increase in selling, general and administrative expenses in 2007 and were nearly 1% of Company net sales.
In the Advanced Structures segment, selling, general and administrative expenses for the year ended December 31, 2007 decreased by $64,000, or 2.0%, compared with the year ended December 31, 2006 and as a percent of sales improved to 7.1% in 2007 compared with 7.9% in 2006. Selling expenses decreased as the year ended December 31, 2007 included $88,000 for bad debt recoveries while the year ended December 31, 2006 included $181,000 of bad debt expense. Partially offsetting this improvement was compensation expense of $164,000 for the second quarter 2007 grant of 12 shares of stock to key managers of Wellman Dynamics Corporation, a 98.8% owned subsidiary (after the grant) of Fansteel Inc., which is included in this segment.
Selling, general and administrative expenses in the Industrial Metal Components segment for the year ended December 31, 2007 increased by $488,000 compared with the year ended December 31, 2006, as a result of sales commissions, higher payroll, incentive compensation, employee activities and professional fees. As a percent of sales, selling, general and administrative expenses remained flat at 11.8% for both years.
Corporate selling, general and administrative expenses were unallocated costs for professional fees related to strategic initiatives and an investigation by a special committee of the Board of Directors totaling $597,000 for the twelve months ended December 31, 2007. No such unallocated expenses were incurred in 2006.
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Operating Income (Loss)
The following table sets forth the combined operating income (loss) of the Company included in the consolidated statement of operations:
Operating income of $3,100,000 for the year ended December 31, 2007 increased by $2,000,000 compared to operating income of $1,100,000 for the year ended December 31, 2006. Excluding unusual items, (in 2007, corporate professional fees of $597,000 and Advanced Structures segment compensation expense of $164,000 and in 2006 Industrial Metal Components segment customer new product costs of $1,165,000 less Advanced Structures segment training grant monies of $795,000), operating income would have been $3,871,000, or 5.2% of sales, and $1,431,000, or 2.1% of sales, for the years ended December 31, 2007 and December 31, 2006, respectively, an improvement of $2,440,000 or 3.1 percentage points.
Operating income of $2,700,000 in the Advanced Structures segment for the year ended December 31, 2007 decreased by $276,000 compared with operating income of $2,900,000 for the year ended December 31, 2006. Despite the increase in volume for this segment, higher manufacturing costs, particularly scrap, had a negative impact along with compensation expense incurred for the granting of shares of stock to key management in this segment. Additionally, results in the year ended December 31, 2006 were positively impacted by $795,000 in training grants received from the state of Iowa.
The Industrial Metal Components segment had operating income of $1,041,000 for the year ended December 31, 2007 compared to an operating loss of $1,881,000 for the year ended December 31, 2006. The investment casting operation was the main reason for the improvement in this segment based on the higher 2007 sales volume and the decrease in unusual charges for the start-up of new customer parts, which totaled $1,165,000 in 2006. Despite only a slight increase in sales, powdered metal operating income improved due to tighter expense control.
An operating loss of $597,000 for the year ended December 31, 2007 at Corporate resulted from unusual professional fees related to strategic initiatives and an investigation by a special committee of the Board of Directors that were not allocable back to the business segments. All Corporate costs were allocated to the business segments in 2006.
Other Expenses
The following table sets forth the combined other expenses of the Company included in the consolidated statement of operations:
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Other expenses increased $215,000 in the year ended December 31, 2007 compared to the year ended December 31, 2006, with increased borrowing in 2007 resulting in $131,000 of higher interest expense. Other expenses also increased $67,000 due to foreign currency translation at the investment casting operations and $17,000 due to minority interest related to Wellman Dynamics.
Discontinued Operations
Discontinued operations reported losses of $3,800,000 and $4,700,000 for the years ended December 31, 2007 and December 31, 2006, respectively. The losses for both periods relate in part to the accretion of discounted environmental liabilities arising from the Company’s unsecured note obligations to its special purpose subsidiaries and the note payable to the Pension Benefit Guarantee Corporation for the terminated pension plan. The 2007 loss also includes a write-down of $608,000 related to a reduction in value of property held for sale at the special purpose subsidiary, FLRI. Results in 2006 included a charge of $738,000 to write down the Washington Manufacturing property to market value.
Income taxes
No income tax provision or benefit has been recognized for any periods presented as valuation allowances have been recorded for all net operating loss benefits and net deferred tax assets.
Net Income (Loss)
The Company had a net loss of $2,500,000 for the year ended December 31, 2007 compared to a net loss of $5,300,000 for the year ended December 31, 2006, with discontinued operations having a significant impact on the net loss in each year.
Liquidity and Capital Resources
On December 31, 2008 and December 31, 2007, the Company had cash of $322,000 and $298,000 respectively.
Continuing operations provided cash of $2,112,000 for the year ended December 31, 2008. Working capital provided cash of $6,966,000. Short term borrowings provided $1,000,000, and debt reduction used $3,997,000 of cash. Discontinued operations used $2,088,000 for the year ended December 31, 2008 primarily for funding the on-going environmental remediation at the Muskogee Facility.
Continuing operations provided cash of $4,787,000 for the year ended December 31, 2007, due mostly to improvements in working capital of $2,598,000 and borrowings from the Fifth Third revolving line of credit of $3,653,000. Excluding net borrowings of $3,340,000, continuing operations provided $1,447,000 for the year ended December 31, 2007. Discontinued operations used $4,506,000 for the year ended December 31, 2007 primarily for funding the on-going environmental remediation at the Muskogee Facility.
Operating Activities
For the year ended December 31, 2008, operating activities provided $6,966,000 in cash with improvements in working capital coming from decreases in receivables and other assets, increases in accounts payable and accrued liabilities. Accounts receivable decreased by $1,816,000 due to collection efforts. Accounts Payable and Accrued Liabilities increased $441,000 due to timing of payments and improved cash management and the foreign currency contracts liability at December 31, 2008.
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For the year ended December 31, 2007, operating activities provided $2,598,000 in cash with improvements in working capital coming from decreases in receivables and other assets, increases in accounts payable and accrued liabilities partially offset by increases in inventories and other current assets. Accounts receivable decreased by $931,000 due to strong collections and a 7-day decrease in days outstanding. Inventories increased by $1,100,000 due to the higher sales volume and a decrease in inventory turns. The majority of the inventory increase occurred in the Advanced Structures segment, which requires higher inventory levels due to the length of throughput times in the complicated sand casting process.
Investing Activities
For the year ended December 31, 2008, investing activities used $1,867,000 for capital expenditures at both business segments. For the year ended December 31, 2007, investing activities used $1,152,000 for capital expenditures, primarily for replacement equipment for both business segments.
Financing Activities
Financing activities used $2,997,000 for the year ended December 31, 2008, compared to providing $3,340,000 for the year ended December 31, 2007. Borrowings for the year ended December 31, 2008 from the short-term loan were $1,000,000. Payments in 2008 of long-term debt were $2,180,000.
In order to increase the Company’s liquidity and ability to meet operational and strategic needs, Fansteel Inc. and its wholly-owned subsidiary, Wellman Dynamics Corporation, as borrowers, entered into a Loan and Security Agreement with Fifth Third Bank (Chicago), as lender, on July 15, 2005 with an original principal amount of $15,000,000. As the Company’s businesses have grown, so have the Company’s needs for funding working capital, capital expenditures and other requirements. With the corresponding increase in its borrowing base, consisting of accounts receivable, inventories and machinery and equipment, the Company sought to increase its revolving line of credit above the $15,000,000 level. Accordingly, this loan agreement with Fifth Third Bank was amended on December 4, 2006.
Under the December 4, 2006 amended loan facility, subject to certain borrowing conditions, the Company could incur revolving loans, credit card charges and letter of credit issuances in an amount up to $21,500,000 from a borrowing base comprised of a percentage of eligible accounts receivable and inventories and $2,000,000 for machinery and equipment. Revolving loans included $1,500,000 for borrowing under credit cards issued by the Lender, not subject to the borrowing base. The term was extended with revolving loans due and payable in full on January 5, 2009. As borrowers under this Loan and Security Agreement, the Company is required to meet certain covenants, including those that require minimum EBITDA levels, limit leverage and establish debt service requirements. The interest rate on the line is at prime and there is a .25% unused line fee. Substantially all of the assets of the borrowers are pledged as security for this financing.
On June 5, 2007 the Company and Fifth Third Bank again amended the loan facility, increasing the maximum revolving loan amount to $22,500,000. Revolving loans were amended to include $1,500,000 for borrowing that is not subject to the borrowing base limits. Amounts borrowed as part of the $1,500,000 were charged interest at prime rate plus one percentage point. The $1,500,000 borrowing revolving note was scheduled to terminate on September 30, 2007.
On September 12, 2007, the Company amended its Loan and Security Agreement with Fifth Third Bank for the third time. Under this amended loan facility, subject to certain borrowing conditions, the Company may incur revolving loans in an amount up to $21,500,000 from a borrowing base comprised of a percentage of eligible accounts receivable and inventories and $2,000,000 for machinery and equipment until March 2, 2009. Revolving loans were amended to eliminate $1,500,000 for borrowing that is not subject to the borrowing base limits. A term loan for a maximum of $3,000,000 was added to the loan facility. Draws on the term loan could be made until February 29, 2008. Interest on the term loan is at 13%. The term loan includes a success fee of 3% to 7% of principal amount repaid before March 2, 2009 depending on when the repayment occurs. This fee was paid on September 3, 2008 in conjunction with the execution of the Fifth Amendment. Fansteel Inc. pledged its 1,000 shares of Wellman stock as security for the term loan.
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On August 29, 2008, the Company and Fifth Third amended its Loan and Security Agreement for the fourth time. The Fourth Amendment established the maximum revolving loan limit of $19,500,000 base, comprised of a percentage of eligible accounts receivable and inventories, as well as the orderly liquidation value of certain machinery and equipment. The term of the loan was extended until September 5, 2010, with a borrowing base of $1,500,000 or the outstanding amounts of the Company’s credit cards issued by Fifth Third Bank.
On September 3, 2008, the Company amended its Loan and Security Agreement with Fifth Third Bank for the fifth time. The term loan for a maximum of $3,000,000 was revised. Interest only was payable from January 1, 2008 through January 4, 2009. Beginning on January 5, 2009, principal and interest is payable each month for the amortization period of three years. An excess cash flow covenant was added to the term loan, which required the Company to reclassify $300,000 of the term loan as short term at December 31, 2008. The excess cash flow sweep is eliminated once the balance is $2,000,000 or below.
The Company's high level of debt could have important consequences, including, among others, the following:
§
Inability of the Company's current cash generation level to support future interest and principal payments on the Company's existing indebtedness;
§
Inadequate cash for other purposes, such as capital expenditures and the Company's other business activities, since the Company may need to use all or most of the operating cash flow to pay principal and interest on its outstanding debt;
§
Making it more difficult for the Company to satisfy its contractual obligations;
§
Increasing the Company's vulnerability to general adverse economic and industry conditions;
§
Limiting the Company's ability to fund future working capital, capital expenditures or other general corporate requirements;
§
Placing the Company at a competitive disadvantage compared to the Company's competitors that have less debt relative to their operating scale;
§
Limiting the Company's flexibility in planning for, or reacting to, changes in the Company's business and its industry; and
§
Limiting, along with the financial and other restrictive covenants in the Company's indebtedness, among other things, the Company's ability to borrow additional funds, make acquisitions, dispose of assets or pay cash dividends.
In the longer term, the Company's ability to pay debt service and other contractual obligations will depend on improving the Company's future performance and cash flow generation, which in turn will be affected by prevailing economic and industry conditions and financial, business and other factors, many of which are beyond the Company's control. If the Company has difficulty providing for debt service or other contractual obligations in the future, the Company may be forced to take actions such as reducing or delaying capital expenditures, reducing costs, selling assets, refinancing or reorganizing its debt or other obligations and seeking additional equity capital, or any combination of the above. The Company may not be able to take any of these actions on satisfactory terms, or at all.
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Critical Accounting Policies
The Company's discussion and analysis of financial conditions and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of the 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. The Company bases its estimates on historical experience and assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates. The Company believes the accounting policies described below are the policies that most frequently require estimates and judgments and are therefore critical to the understanding of its results of operations.
Trade accounts receivable are classified as current assets and are reported net of allowances for doubtful accounts. The Company records such allowances based on a number of factors, including historical trends and specific customer liquidity.
In accordance with Statement of Position No. 96-1, there are no future recoveries included as net amounts in the environmental liabilities or any insurance receivables included on the balance sheet. Insurance recoveries are not recorded until a settlement is received.
Excess reorganization value, initially determined as of the Effective Date, represents the excess of the Company's enterprise value over the aggregate fair value of the Company's tangible and identifiable intangible assets and liabilities at the balance sheet date. Excess reorganization value is not amortized; however, it is evaluated at a minimum annually or when events or changes occur that suggest impairment in carrying value.
The Company periodically re-evaluates carrying values and estimated useful lives of long-lived assets to determine if adjustments are warranted. The Company uses estimates of undiscounted cash flows from long-lived assets to determine whether the book value of such assets is recoverable over the assets' remaining useful lives.
The Company recognizes sales when the risks and rewards of ownership have transferred to the customer, which is generally considered to have occurred as products are shipped. Revenue is recognized from sales of tooling, patterns and dies upon customer acceptance or other mutually established, accepted and written purchase order documentation.
Statement of Position No. 96-1, Environmental Remediation Liabilities, provides authoritative guidance on the recognition, measurement, display and disclosure of environmental remediation liabilities. The Company is involved in numerous remediation actions to clean up hazardous wastes as required by federal and state laws. Environmental liabilities are estimated with the assistance of third-party environmental advisors and governmental agencies based upon an evaluation of currently available facts, including the results of environmental studies and testing, and considering existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. Future information and developments require the Company to continually reassess the expected impact of these environmental matters. Environmental remediation is recorded as a discounted liability in accordance with the principles of fresh start accounting, which was adopted with the confirmation of the Plan of Reorganization as of January 23, 2004 when the Company emerged from bankruptcy. The expected timing of estimated cash payments at that time were used to determine the discounted value of those payments. Accretion of the discount is recorded each period.
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Recent Accounting Pronouncements
In October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Statement of Financial Accounting Standards (“SFAS”) No. 157-3 (“SFAS 157-3”), “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” which clarifies the application of SFAS 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. FSP SFAS 157-3 is effective immediately and applies to prior periods for which financial statements have been issued, including interim or annual periods ending on or before September 30, 2008. The adoption of FSP SFAS 157-3 did not have a material impact on the Company’s consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This FSP provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company does not currently have any share-based awards. Therefore, application of this FSP is not expected to have an effect on the Company’s financial reporting.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This Standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. The Standard is effective 60 days following SEC approval of the Public Company Accounting Oversight Board amendments to remove the hierarchy of generally accepted accounting principles from the auditing standards. SFAS 162 is not expected to have an impact on the Company’s financial condition, results of operations or cash flows.
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Application of this FSP is not expected to have a significant impact on the Company’s financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133”. SFAS 161 amends and expands the disclosure requirements of Statement 133 to provide a better understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and their effect on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS 161 will have on the consolidated financial statements.
In February 2008, FASB issued Staff Position No. SFAS 157-2 which provides for a one-year deferral of the effective date of SFAS No. 157, “Fair Value Measurements,” for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company is evaluating the impact of this standard as it relates to the Company’s financial position and results of operations.
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In December 2007 FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS 141 (revised 2007), Business Combinations. SFAS 160 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which the statement is adopted, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The effect of adopting SFAS 160 is not expected to be material.
In December 2007 the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets and liabilities assumed and any non-controlling interest at their fair values as of the acquisition date. SFAS 141R requires, among other things, that the acquisition related costs be recognized separately from the acquisition. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The effect of adopting SFAS 141R will be dependent on the nature and the size of the acquisition completed after the adoption of SFAS 141R.
In February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits an entity to elect to measure eligible items at fair value (“fair value option”) including many financial instruments. The provisions of SFAS 159 are effective for the Company as of January 1, 2008. If the fair value option is elected, the Company will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to an item for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. The fair value option may be applied for a single eligible item without electing it for other identical items, with certain exceptions, and must be applied to the entire eligible item and not to a portion of the eligible item. The Company did not elect to adopt the fair value option pursuant to SFAS 159.
In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is partially effective for the Company beginning on January 1, 2008. The requirements of SFAS 157 will be applied prospectively except for certain derivative instruments that would be adjusted through the opening balance of retained earnings in the period of adoption. In February 2008, FASB issued Staff Position No. FAS 157-2 which provides for a one-year deferral of the effective date of SFAS 157 for non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The Company has adopted SFAS 157, and has included the effect of its adoption in the 2008 financial statements and notes within the 2008 Form 10-K.
In September 2006 the FASB also issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an Amendment of FASB Statements No. 87, 88, 106, and 132(R)” and was effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. SFAS No. 158 requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The Company adopted SFAS No. 158 effective December 31, 2006. The non-cash effect of the adoption resulted in an increase in total liabilities of $343,000 and a reduction in total shareholders’ equity of $343,000, net of tax. The adoption of SFAS No. 158 did not affect the Company’s results of operations.
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Inflation
Inflationary factors such as increases in the costs of raw materials, labor, and overhead affect the Company's operating profits. Significant portions of raw materials consumed by the Company are various steel alloys. In 2004, price increases were experienced and these price increases have continued into 2008. To offset these price increases, the Company began adding material surcharges in March 2004 and in 2008 the Company continues to add material surcharges. Material surcharges accounted for 5.6% of net sales for the year ended December 31, 2008 and 5.9% of net sales for the year ended December 31, 2007.
Although the Company's recent results have not been significantly affected by inflation, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on its operating results.
Off-Balance Sheet Arrangements
The Company is not party to off-balance sheet arrangements other than normal operating leases.
Contractual Obligations
The following table summarizes payments due by year for the contractual obligations at December 31, 2008:
The above table excludes discounts of the long-term debt and environmental liabilities, but does include any related interest. The Fifth Third revolving line is at prime and the rate used for this table is 3.25%
The payments for environmental liabilities are based on estimated timing of remediation activities and not mandatory payment schedules. A minimum annual funding of $1,682,000 is required for environmental liabilities related to FMRI.
The Fifth Third revolving line has a renewal date of September 5, 2010. The revolving line of credit requires immediate repayment from cash receipts. Borrowings can be made as needed, based on availability. Any outstanding term loan is repayable in full on the renewal date. The availability at December 31, 2008 was $3,335,000, compared with $1,963,000 at December 31, 2007.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not currently subject to market risks of a material nature for interest risks, foreign currency rates or other market price risks. The only debt subject to interest fluctuations is the short-term borrowing under the revolving line of credit. A significant portion of raw materials consumed by the Company is various steel alloys. The Company began to experience price increases on raw materials in 2004 and raw material price increases have continued into 2008. To offset these price increases in raw materials, the Company began adding material surcharges in March 2004 and has continued to add material surcharges into 2008.
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ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Fansteel Inc.
Consolidated Statement of Operations
See Notes to Consolidated Financial Statements
______________________________________________
a Basic earnings per share and diluted earnings per share are the same.
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Fansteel Inc.
Consolidated Balance Sheet
See Notes to Consolidated Financial Statements
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Fansteel Inc.
Consolidated Balance Sheet
See Notes to Consolidated Financial Statements
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Fansteel Inc.
Consolidated Statement of Shareholders Deficit
See Notes to Consolidated Financial Statements
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Fansteel Inc.
Consolidated Statement of Cash Flows
See Notes to Consolidated Financial Statements
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Notes to Consolidated Financial Statements
Note 1 - Description of Business
Fansteel Inc. and its subsidiaries (the “Company”) are manufacturers of high value precision engineered components for the global aerospace and industrial markets. The Company’s products are used in a variety of applications where performance counts including commercial aircraft, regional aircraft, business aircraft, personal aircraft, helicopters and turbine engines; energy (flow control) and power generation (land based gas turbines, large displacement diesel/natural gas/oil fueled engines and wind turbines); and agricultural, construction machinery, lawn and garden and automotive.
For financial reporting purposes, the Company classifies its products into two business segments: Advanced Structures (highly engineered aluminum and magnesium sand castings and precision assemblies) and Industrial Metal Components (high precision net shape powdered metal components and custom assemblies and engineered investment castings and final assembly modules).
The Company also has special purpose subsidiaries included as part of discontinued operations that were established solely for the obligation of remediation of environmental issues at former operations of the Company as part of the Second Amended Joint Reorganization Plan (the "Reorganization Plan") that was effective January 23, 2004 (the "Effective Date").
Key managers of Wellman Dynamics Corporation (“Wellman”), a wholly owned subsidiary of Fansteel included in the Advanced Structures segment, were granted 12 shares of Wellman stock in the second quarter 2007, and in conjunction with this grant, compensation expense of $164,000 was recorded. Fansteel’s ownership in Wellman was reduced to 98.8% after the grant.
Note 2 - Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Fansteel Inc. and its subsidiaries. Inter-company accounts and transactions have been eliminated in consolidation.
Estimates
The preparation of the 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.
Cash and Cash Equivalents
The Company considers all investments purchased with maturity of three months or less to be cash equivalents. At December 31, 2008 and December 31, 2007, the Company had not purchased any investments with maturities of three months or less.
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Receivables
Trade accounts receivable are classified as current assets and are reported net of allowances for doubtful accounts. The Company records such allowances based on a number of factors, including historical trends and specific customer liquidity.
Inventories
Inventories are valued at the lower of cost, determined on the "first-in, first-out" (FIFO) basis, or market. Costs include direct material, labor and applicable manufacturing overhead.
Property, Plant and Equipment
Acquisitions of properties and additions to existing facilities and equipment are recorded at cost. For financial reporting purposes, straight-line depreciation is used. The estimated useful lives for machinery and equipment range from 3 years to 15 years while the estimated useful lives of buildings are 39 years. Accelerated depreciation is used for income tax purposes.
Reorganization Items
Excess reorganization value represents the excess of the Successor Company’s enterprise value over the aggregate fair value of the Company's tangible and identifiable intangible assets and liabilities at January 23, 2004. Although excess reorganization value is not amortized, it is evaluated annually or when events or changes occur that suggest an impairment in carrying value.
Long-lived Assets
The Company periodically re-evaluates carrying values and estimated useful lives of long-lived assets to determine if adjustments are warranted. The Company uses estimates of undiscounted cash flows from long-lived assets to determine whether the book value of such assets is recoverable over the assets' remaining useful lives.
Revenue Recognition
The Company recognizes sales when the risks and rewards of ownership have transferred to the customer, which is generally considered to have occurred as products are shipped. Revenues from sales of tooling, patterns and dies are recognized upon acceptance by the customer.
Shipping and Handling Costs
The Company classifies distribution costs, including shipping and handling costs, in cost of products sold. Shipping and handling revenues are included in sales.
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Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with Statement of Accounting Financial Standard (“SFAS”) No. 109, “Accounting for Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company provides valuation allowances against the deferred tax asset for amounts which are not considered “more likely than not” to be realized. In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109”. The Company adopted the provision of FIN 48 on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109. FIN 48 also prescribes a recognition threshold and measurement model for the financial statement recognition of a tax position taken, or expected to be taken, and provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition. The adoption of FIN 48 did not have a material effect on the Company’s financial position or results of operation. Should the Company need to record interest and penalties related to the application of FIN 48, these will be recognized within interest expense.
Foreign Currency
The functional currency for the Company's foreign operation is the applicable local currency. The translation from the applicable foreign currency to U.S. Dollars is performed for the balance sheet accounts using current exchange rates in effect at the balance sheet date and for the profit and loss accounts using the average exchange rate for the year. The resulting translation adjustments are recorded as a component of shareholders' deficit. Gains or losses which are not material resulting from foreign currency transactions are included in other income.
Reclassifications
Certain reclassifications have been made to prior years’ financial statements to conform with the 2008 presentation.
Recent Accounting Pronouncements
In October 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-3 (“SFAS 157-3”), “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” which clarifies the application of SFAS 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. FSP SFAS 157-3 is effective immediately and applies to prior periods for which financial statements have been issued, including interim or annual periods ending on or before September 30, 2008. The adoption of FSP SFAS 157-3 did not have a material impact on the Company’s consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This FSP provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company does not currently have any share-based awards. Therefore, application of this FSP is not expected to have an effect on the Company’s financial reporting.
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In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This Standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. The Standard is effective 60 days following SEC approval of the Public Company Accounting Oversight Board amendments to remove the hierarchy of generally accepted accounting principles from the auditing standards. SFAS 162 is not expected to have an impact on the Company’s financial condition, results of operations or cash flows.
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Application of this FSP is not expected to have a significant impact on the Company’s financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of Statement 133 to provide a better understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and their effect on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS 161 will have on the consolidated financial statements.
In February 2008, FASB issued Staff Position No. SFAS 157-2 which provides for a one-year deferral of the effective date of SFAS No. 157, “Fair Value Measurements,” for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company is evaluating the impact of this standard as it relates to the Company’s financial position and results of operations.
In December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS 141 (revised 2007), Business Combinations. SFAS 160 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which the statement is adopted, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The effect of adopting SFAS 160 is not expected to be material.
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In December 2007 the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets and liabilities assumed and any non-controlling interest at their fair values as of the acquisition date. SFAS 141R requires, among other things, that the acquisition related costs be recognized separately from the acquisition. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The effect of adopting SFAS 141R will be dependent on the nature and the size of the acquisition completed after the adoption of SFAS 141R.
In February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits an entity to elect to measure eligible items at fair value (“fair value option”) including many financial instruments. The provisions of SFAS 159 are effective for the Company as of January 1, 2008. If the fair value option is elected, the Company will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to an item for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. The fair value option may be applied for a single eligible item without electing it for other identical items, with certain exceptions, and must be applied to the entire eligible item and not to a portion of the eligible item. The Company did not elect to adopt the fair value option pursuant to SFAS 159.
In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is partially effective for the Company beginning on January 1, 2008. The requirements of SFAS 157 will be applied prospectively except for certain derivative instruments that would be adjusted through the opening balance of retained earnings in the period of adoption. In February 2008, FASB issued Staff Position No. FAS 157-2 which provides for a one-year deferral of the effective date of SFAS 157 for non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The Company has adopted SFAS 157, and has included the effect of its adoption in the 2008 financial statements and notes within the 2008 Form 10-K.
In September 2006 the FASB also issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an Amendment of FASB Statements No. 87, 88, 106, and 132(R)” and was effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. SFAS No. 158 requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The Company adopted SFAS No. 158 effective December 31, 2006. The non-cash effect of the adoption resulted in an increase in total liabilities of $343,000 and a reduction in total shareholders’ equity of $343,000, net of tax. The adoption of SFAS No. 158 did not affect the Company’s results of operations.
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Note 3 - Earnings (Loss) per Share
SFAS No. 128, "Earnings per Share" requires a dual presentation of earnings per share, basic and diluted. Basic earnings per share are computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, calculated using the treasury stock method, if dilutive.
The following table sets forth the computation of basic and diluted earnings per share:
Note 4 - Discontinued Operations including Certain Environmental Remediation
Muskogee Facility
The Company prior to the Effective Date (“Predecessor Company”) had been licensed by the Nuclear Regulatory Commission (the “NRC”) to possess and use source material at the Muskogee Facility since 1967. Under the Predecessor Company's NRC permit, it was authorized to process ore concentrates and tin slags in the production of refined tantalum products. Licensable quantities of natural uranium and thorium are present in the slags, ores, concentrates and process residues.
The Predecessor Company discontinued its Metal Products business segment in 1989. In 1990, the NRC included the Muskogee Facility in the NRC's Site Decommissioning Management Plan. The Predecessor Company completed a remedial assessment in 1993 to determine what areas of the Muskogee Facility were required to undergo decommissioning.
During 2002, the Predecessor Company, with the assistance of its third party environmental consultants, prepared a revised Decommissioning Plan, which was submitted to the NRC on January 15, 2003. The revised Decommissioning Plan assumed offsite disposal of all contaminated residues and soils as well as groundwater treatment and monitoring using current criteria for acceptable decommissioning under NRC regulations. Based on then available information, with assistance from third party environmental consultants, the Predecessor Company estimated the total future costs of the revised Decommissioning Plan based upon current costs of decommissioning activities to be $41,600,000. The estimated decommissioning costs consisted of $20,400,000 for excavating, hauling, and offsite disposal of residues and soils, $15,600,000 for site plans, maintenance, safety, security and consulting costs, and $5,600,000 for groundwater treatment and monitoring.
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During 2003, the Predecessor Company continued to maintain the safety and security of the Muskogee Facility. Pursuant to the Reorganization Plan, the Company negotiated with the NRC to develop acceptable mechanisms for providing financial assurance for the decommissioning of the Muskogee Facility. In December 2003, the NRC approved the issuance and transfer of an amended NRC License and related Decommissioning Plan to FMRI. At January 23, 2004, the liability for the environmental remediation was $38,700,000, and the recorded discounted liability using a discount rate of 11.3% as part of fresh-start accounting, which was required to be applied upon reemergence from Chapter 11 bankruptcy, was $19,200,000. In 2005, FMRI began removal of the residues under Phase 1 of the decommissioning plan, which is expected to remove over 80% of the radioactive contaminated residues. Phase 1 is behind schedule, but continued in 2008, with $3,052,000 expended, and into 2009. At December 31, 2008 and December 31, 2007, the gross estimated liability was $26,325,000 and $27,654,000, respectively, and the recorded discounted liability, using a discount rate of 11.3%, was $18,120,000 and $17,111,000, respectively.
FMRI can draw up to $4,500,000 from an existing decommissioning trust owned by Fansteel established in accordance with the Amended Decommissioning Trust Agreement with the NRC. The draws against the decommissioning trust may be made on a revolving basis as long as the aggregate amounts outstanding under such draws shall not exceed $2,000,000 and provided certain terms and conditions are satisfied. Consistent with the NRC License, FMRI in April 2004 drew $525,000 from the Trust. On April 13, 2005, the decommissioning trust was amended, with the consent of the NRC, to allow additional draws of up to $2,500,000 to be drawn by FMRI to complete Phase 1 of the decommissioning plan. The amounts of these additional draws are dependent upon, among other things, the weight of material disposed of offsite at the approved disposal site. In the second quarter of 2005, FMRI drew an additional $500,000 from the Trust. In the third quarter of 2005, FMRI drew an additional $1,160,000 from the Trust. In 2005, Fansteel prepaid $768,000 to FMRI from net insurance proceeds, which FMRI used to reduce amounts owing to the Trust. In 2006, FMRI drew an additional $652,000 and Fansteel prepaid $70,000 to FMRI from insurance proceeds. The net draws at December 31, 2006 were $2,000,000. In 2007, FMRI drew an additional $776,000 from the Trust. In 2008, FMRI drew an additional $1,700,000 from the Trust, bringing total net draws from the Trust to $4,400,000 at December 31, 2008. There was an insurance settlement of $50,000 made to FMRI in 2008, which was deposited into the Trust.
Lexington Facility
The Lexington Facility was constructed in 1954 and ceased operations in 2003. Investigations performed in 1997 as part of a company-wide environmental audit revealed the presence of volatile organic compounds ("VOCs") and PCBs in soils and groundwater in excess of state cleanup levels. The contaminants are believed to have been discharged through a former drainage field. While VOCs were detected at the down gradient boundary of the facility, no VOCs were detected in an unnamed stream that is located down gradient of the facility. To Fansteel's knowledge, the contamination at this site does not pose an imminent threat to health, safety or welfare. In May 2003, the Kentucky Natural Resources and Environmental Protection Cabinet ("KNREPC") requested that the Predecessor Company submit a plan for further characterization of the facility. The Predecessor Company submitted a letter to the KNREPC in September 2003 setting forth a conceptual characterization plan and advising the agency that a detailed Site Characterization Plan will be submitted by FLRI, a special purpose subsidiary, which pursuant to the Reorganization Plan now owns the Lexington facility. On September 12, 2007, FLRI received notice that the Kentucky Department for Environmental Protection had accepted the site characterization report that had been submitted and that FLRI should prepare the Corrective Action Plan for the site. An estimated $1,780,000 to perform the remedial activities was determined and a liability in that amount was recorded at January 23, 2004. In September 2005, the Company received insurance recoveries from its insurers of which $111,000 of net insurance recoveries were allocated to FLRI as a prepayment of the inter-company FLRI $1,780,000 note. During 2007, new estimates of costs to complete the remediation reduced the gross liability by $324,000. At December 31, 2008 and December 31, 2007, the gross estimated liability was $848,000 and $875,000, respectively, and the recorded discounted liability, using a discount rate of 11.3%, was $834,000 and $857,000, respectively.
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The land and building of the Lexington Facility are included on the balance sheet as property held for sale at $720,000, which includes a reduction of $608,000 made in September 2007 based on the latest appraisal of its current market value. A number of third parties had expressed interest in purchasing this facility. In the second quarter of 2007, FLRI entered into a right of first refusal agreement to purchase the property with a third party for their maintenance of the site. On November 1, 2007, FLRI executed a lease with an option to purchase at fair market value with this third party. On March 6, 2009, the Company sold the Lexington Facility to this third party.
Actual costs to be incurred in future periods to decommission the Muskogee Facility and the Lexington facility may vary, which could result in adjustment to future accruals, from the estimates, due to, among other things, assumptions related to the quantities of soils to be remediated and inherent uncertainties in costs over time of actual disposal. No anticipated insurance recoveries are included in the recorded environmental liabilities.
North Chicago Facility
In September 2000, the EPA issued a unilateral administrative order under Section 106 of CERCLA requiring the Predecessor Company to investigate and abate releases of hazardous substances from the North Chicago Facility that were contributing to contamination at an adjacent vacant lot (the "Vacant Lot Site"). The Predecessor Company completed an engineering evaluation/cost analysis and submitted it to EPA for review in 2003. The proposed remedial actions at the North Chicago Facility were estimated to cost $2,170,000, for which a liability was recorded at January 23, 2004 as part of the bankruptcy reorganization for a newly formed special purpose subsidiary, North Chicago, Inc (“NCI”). On March 7, 2005, NCI sold the real property to the City of North Chicago (the “City”), transferred the proceeds of $1,400,000 received from the City to the EPA and the Company delivered to the EPA an unsecured, non-interest bearing promissory note in the principal amount of $677,232, payable in equal semi-annual payments to be made over a three-year period beginning six months after issuance. In July 2005, the Company received insurance recoveries from its insurers of which $147,000 of net insurance recoveries were remitted as a prepayment of the note delivered to the EPA. The Company has made all the payments due under the promissory note as of December 31, 2007, and therefore, there is no further liability.
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Washington Manufacturing
On December 31, 2004, the Company sold substantially all of the assets (including, but not limited to, machinery and equipment, raw material items, work-in-process items, finished goods items, receivables, machinery and equipment contracts, customer contracts and supplier contracts, but excluding real estate, fixtures and certain other assets) of the division of the Company known as "Washington Manufacturing" (the "Washington Division") to Whitesell Corporation (“Whitesell”), a customer of the Washington Division, for consideration consisting of a combination of (i) cash (in the initial amount of approximately $2,000,000 subject to post-closing adjustment) and (ii) the assumption by Whitesell of certain liabilities of the Washington Division (in the initial amount of approximately $1,000,000, determined in accordance with U.S. generally accepted accounting principles consistently applied, subject to post-closing adjustment) (collectively, the “Washington Sale”).
Whitesell had been leasing the buildings of Washington Manufacturing until it vacated in December 2006 at which time the Company began to actively try to sell the Washington Manufacturing property and has classified it as property held for sale in the accompanying balance sheet. In December 2006, the value of the property was reduced by $738,000 to reflect current market value, less selling costs. On January 22, 2008, the Company entered into an agreement with a buyer for the purchase of the remaining assets at the Washington Manufacturing facility for $475,000, which is approximately equal to the book value. The Company closed on the sale of this property on March 13, 2008.
Results of Discontinued Operations
The operations described above are classified as discontinued operations for all periods presented.
Discontinued operations reported losses of $1,906,000, $3,755,000, and $4,688,000 for the years ended December 31, 2008, December 31, 2007 and December 31, 2006 respectively. In the third quarter 2007, the Company wrote down the value of property held for sale at the FLRI facility by $608,000 based on an updated appraisal. Results in 2006 also include a charge of $258,000 to write-down the receivable from Whitesell for the settlement of the purchase price for the December 2004 sale of Washington Manufacturing and a charge of $738,000 to write down the Washington property to current market value. The remaining losses for each time period relate in part to the accretion of discounted environmental liabilities arising from the Company's unsecured note obligations to its special purpose subsidiaries and the pension note for the terminated pension plan.
Results for discontinued operations were as follows:
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Summarized financial information for discontinued operations is as follows:
The net liabilities of discontinued operations, which are included on the Consolidated Balance Sheet, consist of the following at December 31, 2008 and December 31, 2007:
Long-term debt includes $750,000 in current maturities of long-term debt at December 31, 2008 and December 31, 2007.
Note 5 - Property Held for Sale
The Company has pursued the sale of its Lexington Facility, which is owned by its special purpose subsidiary FLRI. The land and building of the Lexington facility are included on the balance sheet as property held for sale. A $608,000 reduction was made to the carrying value in September 2007 based on the latest appraisal of its current market value, less costs to dispose. A number of third parties had expressed interest in purchasing this facility. In the second quarter of 2007, FLRI entered into a right of first refusal agreement to purchase the property with a third party for their maintenance of the site. On November 1, 2007, FLRI executed a lease with an option to purchase at fair market value with this third party. The Lexington Facility was sold on March 6, 2009. A gain of $101,000 was realized on the sale of this property.
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The Company has pursued the sale of its Washington Manufacturing facility, which is owned by Fansteel. The land and building of the Washington Manufacturing facility are included on the balance sheet as property held for sale. A $738,000 reduction was made to the carrying value in December 2006 to reflect its current market value, less selling costs. On January 22, 2008, the Company entered into an agreement with a buyer for the purchase of the remaining assets at the Washington Manufacturing facility for $475,000, which is approximately equal to the book value. The Company closed on the sale of this property on March 13, 2008.
The carrying values of the property held for sale as of December 31, 2008 and December 31, 2007 are detailed below:
Note 6 - Accrued Liabilities
Accrued liabilities include the following at:
Note 7 - Other Environmental Remediation
Wellman Dynamics Corporation ("Wellman"), a subsidiary of Fansteel Inc., entered into an Administrative Order on Consent with the EPA to perform a RCRA Facility Investigation ("RFI") for the purpose of determining the extent of releases of hazardous wastes and/or hazardous constituents, and, if appropriate, a Corrective Measures Study ("CMS") to evaluate possible corrective action measures that may be necessary at the Iowa Facility owned and operated by Wellman. At January 23, 2004, Wellman had estimated that the cost for conducting the RFI/CMS would be $2,166,000 through 2009. At December 31, 2008 and December 31, 2007 the gross estimated liability was $1,798,000 and $1,877,000, respectively, and the recorded discounted liability, using a discount rate of 11.3%, was $1,784,000 and $1,834,000, respectively.
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Wellman is permitted to operate a sanitary landfill for the disposal of its foundry sand. It is anticipated that, based upon current regulation and projections by third-party consultants, Wellman is likely to be required to close the landfill in 2037 at a future cost approximating $1,297,000. Changes in regulations for non-public landfills may result in closure at an earlier date, which cannot be determined from current information known. The recorded discounted liability, using a discount rate of 11.3%, at December 31, 2008 and December 31, 2007 was $814,000 and $613,000, respectively.
In October 2000, Wellman provided the Iowa Department of Health (the "IDPH") with a "Historical Site Assessment" that identified uranium and thorium concentrations at the site. The IDPH required Wellman to perform a Risk Assessment ("RA") to determine whether the thorium-containing materials are a threat to human health or the environment. Wellman is awaiting the final report, but to its knowledge, the existing data forming the basis for the RA indicates that there is no imminent threat to health, safety or the environment. Wellman anticipates that the IDPH will allow it to address the thorium issue when it closes the sanitary landfill. However, there is a risk that the IDPH will require Wellman to remove or remediate the thorium prior to that time. The current estimated cost to remediate the thorium is $1,075,000. The recorded discounted liability, using a discount rate of 11.3%, at December 31, 2008 and December 31, 2007 was $637,000 and $575,000, respectively.
The liabilities were recorded for estimated environmental investigatory and remediation costs based upon an evaluation of currently available facts, including the results of environmental studies and testing conducted for all Predecessor Company-owned sites in 1997 and since, and considering existing technology, presently enacted laws and regulations and prior experience in remediation of contaminated sites. Actual costs to be incurred in future periods at identified sites may vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. Future information and developments will require the Company to continually reassess the expected impact of these environmental matters. These liabilities could be reduced by potential net insurance recoveries that the Company is seeking from its insurers, but there is no assurance any additional net recoveries will be received. No anticipated insurance recoveries are included in the recorded environmental liabilities.
Note 8 - Debt
Short-term borrowings consisted of the following:
In order to increase the Company’s liquidity and ability to meet operational and strategic needs, Fansteel Inc. and its subsidiary, Wellman Dynamics Corporation, as borrowers, entered into a Loan and Security Agreement with Fifth Third Bank (Chicago), as lender, on July 15, 2005 with an original principal amount of $15,000,000. As the Company’s businesses have grown, so have the Company’s needs for funding working capital, capital expenditures and other requirements. With the corresponding increase in its borrowing base, consisting of accounts receivable, inventories and machinery and equipment, the Company sought to increase its revolving line of credit above the $15,000,000 level. Accordingly, this loan agreement with Fifth Third Bank was amended on December 4, 2006.
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Under the December 4, 2006 amended loan facility, subject to certain borrowing conditions, the Company could incur revolving loans, credit card charges and letter of credit issuances in an amount up to $21,500,000 from a borrowing base comprised of a percentage of eligible accounts receivable and inventories and $2,000,000 for machinery and equipment. Revolving loans included $1,500,000 for borrowing under credit cards issued by the Lender, not subject to the borrowing base. The term was extended with revolving loans due and payable in full on January 5, 2009. As borrowers under this Loan and Security Agreement, the Company is required to meet certain covenants, including those that require minimum EBITDA levels, limit leverage and establish debt service requirements. The interest rate on the line is at prime (3.25% at December 31, 2008) and there is a 0.25% unused line fee. Substantially all of the assets of the borrowers are pledged as security for this financing.
On June 5, 2007, the Company and Fifth Third Bank again amended the loan facility, increasing the maximum revolving loan amount to $22,500,000. Revolving loans were amended to include $1,500,000 for borrowing that is not subject to the borrowing base limits. Amounts borrowed as part of the $1,500,000 were charged interest at prime rate plus one percentage point. The $1,500,000 borrowing revolving note was scheduled to terminate on September 30, 2007.
On September 12, 2007, the Company amended its Loan and Security Agreement with Fifth Third Bank for the third time. Under this amended loan facility, subject to certain borrowing conditions, the Company may incur revolving loans in an amount up to $21,500,000 from a borrowing base comprised of a percentage of eligible accounts receivable and inventories and $2,000,000 for machinery and equipment until March 2, 2009. Revolving loans were amended to eliminate $1,500,000 for borrowing that is not subject to the borrowing base limits. A term loan for a maximum of $3,000,000 was added to the loan facility. Draws on the term loan could be made until February 29, 2008. Interest on the term loan is at 13%. The term loan includes a success fee of 3% to 7% of principal amount repaid before March 2, 2009 depending on when the repayment occurs. This fee was paid on September 3, 2008 in conjunction with the execution of the Fifth Amendment. Fansteel Inc. pledged its 1,000 shares of Wellman stock as security for the term loan.
On August 29, 2008, the Company and Fifth Third amended its Loan and Security Agreement for the fourth time. The Fourth Amendment established the maximum revolving loan limit of $19,500,000 base, comprised of a percentage of eligible accounts receivable and inventories, as well as the orderly liquidation value of certain machinery and equipment. The term of the loan was extended until September 5, 2010, with a borrowing base of $1,500,000 or the outstanding amounts of the Company’s credit cards issued by Fifth Third Bank.
On September 3, 2008, the Company amended its Loan and Security Agreement with Fifth Third Bank for the fifth time. The term loan for a maximum of $3,000,000 was revised. Interest only was payable from January 1, 2008 through January 4, 2009. Beginning on January 5, 2009, principal and interest is payable each month for the amortization period of three years. An excess cash flow covenant was added to the term loan, which required the Company to reclassify $300,000 of the term loan as short term at December 31, 2008. The excess cash flow sweep is eliminated once the balance of the term loan is $2,000,000 or below. The Company is in compliance with all loan covenants at December 31, 2008.
At December 31, 2008 the Company had letters of credit of $748,000 under its Loan and Security Agreement with Fifth Third Bank for casualty insurance collateral with an interest rate of 1.5%. The Company’s credit availability was $3,335,000 at December 31, 2008. Borrowing under the revolving line of credit is included as short-term borrowings, while the term loan under the credit facility is included in long-term debt.
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Long-term debt consisted of the following:
The Pension Benefit Guarantee Corporation (“PBGC”) note is collateralized by land, building and equipment located in Mexico with a book value of $2,153,000 at December 31, 2008. The Pennsylvania long-term debt is collateralized by machinery and equipment with a net book value of $315,000 at December 31, 2008.
In accordance with SOP 90-7, the above debt, other than the term loan and the capital leases, has been discounted for December 31, 2008 and December 31, 2007 using an imputed interest rate of 11.3%.
The aggregate maturities for long-term debt, excluding discounts, for the five years after December 31, 2008 are $2,100,000, $2,186,000, $1,867,000, $1,150,000 and $1,150,000, respectively, and $1,150,000 thereafter. Interest paid for 2008, 2007, and 2006 was $1,502,000, $1,705,000, and $1,574,000 respectively.
Note 9 - 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.
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Valuation allowances are established in accordance with provisions of FASB Statement No. 109 “Accounting for Income Taxes”. The valuation allowances are attributable to federal and state deferred tax assets.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
At December 31, 2008 and December 31, 2007, the Company had potential federal and state income tax benefits from net operating loss carry-forwards of $280,000 and $22,300,000, respectively. The decrease in the net operating loss was due to the Section 382 limitation as a result in the change of control in 2008. The reduction in the valuation allowance was a result of the reduction in the net operating loss carry-forward due to the change in control. There was no profit and loss impact. Valuation allowances have been recorded for the full amount of all net operating loss carry-forwards and the other deferred tax assets as the net operating loss carry-forwards and other deferred tax assets are not anticipated to be realized before expiration.
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Details of the provision (benefit) for income taxes related to continuing operations in the consolidated statement of operations are as follows:
$1,126,000 of the above deferred tax provision is offset by an equal deferred tax benefit from discontinued operations.
A reconciliation of the total provision for income taxes (benefit) with amounts determined by applying the statutory U.S. Federal income tax rate to continuing operations net income (loss) before income tax provision (benefit) is as follows:
Income taxes paid for each of the three years in the period ended December 31, 2008 amounted to $2,000, $2,000, and $2,000, respectively. Income tax refunds in the three-year period ended December 31, 2008 amounted to $0, $0, and $1,000, respectively.
The Company does not expect a significant increase or decrease in unrecognized tax benefits within the next twelve months and none are recorded as of December 31, 2008 and 2007. The Company and its subsidiaries file income tax returns in various tax jurisdictions, including the United States and several states The Company has substantially concluded all U.S. Federal and State income tax matters up to and including 2002.
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Note 10 - 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 non-cancelable leases at December 31, 2008 were $578,000, including $177,000 in 2009, $116,000 in 2010, $87,000 in 2011, $86,000 in 2012 and $112,000 in 2013 and thereafter. Rental expense was $503,000 in 2008, $496,000 in 2007 and $362,000 in 2006.
Note 11 - Retirement Plans
The Company has one non-contributory defined benefit plan covering salaried employees at the Company’s Wellman Dynamics subsidiary, which approximates 9% of the Company’s employees. Benefits for the salaried plan are generally based on salary and years of service. The Company's funding of the plan is equal to the minimum contribution required by ERISA. No contributions were made in 2006. An employer contribution of $43,000 was made in 2007. No contributions were made in 2008. The measurement date used to measure plan assets and obligations was December 31, of each year shown below.
A minimum pension liability adjustment is required when the actuarial present value of projected benefits exceeds plan assets and accrued pension liabilities.
Following is actuarial information relating to the defined benefit plans for:
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The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are as follows:
The expected long-term rate of return for the pension plans was developed using historical rates of return while factoring in current market conditions such as inflation, interest rates and equity performance. The investment policies and strategies are directed at a blend of equity and income investments that ranges from 65% to 35% of each asset classification.
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The Company’s pension plan weighted-average asset allocation by asset category is as follows:
Based on the current data and assumptions, the following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next 10 calendar years:
The Company has several defined contribution plans covering approximately 100% of its employees. Almost all of the defined contribution plans have funding provisions that, 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 2008, 2007 and 2006 were $807,000, $729,000, and $614,000, 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, 2008 were $50,000, $46,000, and $50,000 respectively.
Note 12 - Business Segments
The Company is a manufacturer of engineered metal components used in a variety of markets including military and commercial aerospace automotive, energy, agricultural and construction machinery, lawn and garden equipment, marine, plumbing and electrical hardware, flow control, valve and pump and general industrial. For financial reporting purposes, the Company classifies its products into the following two business segments: Advanced Structures, which produces aluminum and magnesium sand castings, and Industrial Metal Components, which produces powdered metal components and investment castings. The Company's business segments offer different products and services and have separate management teams and infrastructures.
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Financial information concerning the Company's segments is as follows:
The percentages of net sales for classes of similar products that exceeded ten percent of the Company's consolidated net sales, for the periods indicated, are set forth below:
Companies controlled by United Technologies Corporation (“UTC”) represent a significant customer for the Company, whose sales were 22%, 23%, and 19% of total Company sales in 2008, 2007, and 2006, respectively. International Truck and Engine Corporation (“International Engine”), a subsidiary of Navistar International Corporation, is another significant customer for the Company, whose sales represented 7%, 10%, and 10% of total Company sales in 2008, 2007, and 2006.
In addition to UTC and International Engine, the Company sells to several other customers that make up a significant portion of the Company’s total sales. While none of these other customers individually represent more than 10% of sales, as a group they make up a considerable portion of the Company’s total sales. Although it is not anticipated, the loss of UTC, International Engine or one or more of these other significant customers would have a substantial impact on the Company’s operations and profitability. While the Company has long-term relationships with these companies, there is no guarantee that these relationships will continue. In addition, these customers are in the aerospace and automotive industries, which tend to be volatile. In particular, the United States automotive industry has been unstable in recent years, with several large automotive companies struggling financially and some filing Chapter 11 bankruptcy.
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The identifiable assets by business segment for the years ended December 31, 2008 and December 31, 2007 are as follows:
Depreciation and capital expenditures by business segment, for the periods indicated, are set forth below:
Note 13 - Foreign Currency Contracts
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; and accordingly, the standard does not require any new fair value measurements of reported balances.
SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The fair value hierarchy, as defined by SFAS No. 157, contains three levels of inputs that may be used to measure fair value as follows:
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§
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
§
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
§
Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Beginning August 5, 2008, the Company entered into foreign currency forward purchase contracts with Fifth Third Bank for calendar years 2008 and 2009. At December 31, 2008, the unrealized loss associated with these contracts was $827,000, which was recorded within the Industrial Metal Components segment. Contracts not utilized during 2008 will be utilized during the normal course of business in 2009. The Company has determined that the majority of the inputs used to value these contracts fall within Level 2 of the fair value hierarchy. The foreign exchange contracts expire between January and August 2009 and require the Company to purchase MXN $42,800,000 in that time period.
The table below presents the Company’s liabilities measured at fair value on a recurring basis as of December 31, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.
The Company does not have any fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2008.
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Note 14 - Stock-Based Compensation Plan
On the Effective Date, as part of the Plan, all common stock and options for the Predecessor Company's common stock were canceled. Subsequent to that date no options or non-vested stock have been granted.
Note 15 - Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss) consists of the following as of December 31:
Note 16 - Summary Of Quarterly Results Of Operations (Unaudited)
(a)
Basic earnings per share and diluted earnings per share are the same.
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During the fourth quarter of 2008, the Company determined that it had inadvertently understated the third quarter ended September 30, 2008 loss by approximately $250,000. The Company had not properly marked to market foreign exchange contracts at September 30, 2008. The additional expense increases the loss for the three months ended September 30, 2008 by $250,000 to $(1,575,000) from $(1,325,000) and increases the loss per share from the previously reported $(0.39) to $(0.46).
SCHEDULE II - VALUATION AND QUALIFIYING ACCOUNTS
(1)
Amounts written off, net of recoveries
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Fansteel Inc.
Creston, Iowa
We have audited the accompanying consolidated balance sheets of Fansteel Inc. as of December 31, 2008 and 2007 and the related consolidated statements of operations, shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2008. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in Item 15(a). These financial statements and schedule are the responsibility of the Company’s 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. 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 financial position of Fansteel Inc. at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company adopted FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and 132(R) as of December 31, 2006 and thus changed its method of accounting for its accumulated pension benefit obligations in 2006.
/s/ BDO Seidman, LLP
Chicago, Illinois
May 13, 2009
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ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A(T)
ITEM 9A(T) - CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company has carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report on Form 10-K. Based upon that evaluation, the Chief Operating Officer and Chief Financial Officer were required to conclude that the Company‘s disclosure controls and procedures were not effective due to the two material weaknesses identified as part of their evaluation of internal control over financial reporting discussed below.
Disclosure controls and procedures are the Company’s control and other procedures that are designed to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in reports that file under the Exchange Act is accumulated and communicated to Company management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
The Company is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with Exchange Act Rule 12a-15. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of the Company’s financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect the Company’s transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the Company’s financial statements; providing reasonable assurance that receipts and expenditures are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition use or disposition of Company assets that could have a material effect on the Company’s financial statements would be prevented or detected on a timely basis. Because of the limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework and criteria established in Internal Control- Integrated Framework; issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion of this evaluation. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2008.
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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
(a) As of December 31, 2008, management identified a material weakness in the Company’s reconciliation procedures with regard to several accounts. Bank account and balance sheet accounts were not being reconciled in a timely manner. This material weakness could have resulted in misstatement of accounts, which would not have been detected in a timely manner.
(b) As of December 31, 2008, management identified a material weakness in the Company’s procedures for purchasing and recording foreign currency for its Mexico operation. The Company failed to recognize foreign currency losses in a timely manner. This material weakness did result in a misstatement of the Company’s third quarter financial statements and could have resulted in other misstatements, which would not have been detected in a timely manner.
This annual report does not include an attestation of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Remedial Actions and Changes in Internal Control over Financial Reporting
Management has developed and is in the process of implementing remediation plans to address the material weaknesses and otherwise enhance the Company’s internal control over financial reporting.
(a) The Company has implemented procedures to ensure bank reconciliations and balance sheet account reconciliations are being performed in a timely manner. These reconciliations are reviewed and approved by appropriate Company personnel prior to the month end reporting process.
(b) The Company has implemented procedures for the purchasing and recording of foreign currency. All purchases of foreign currency require advanced written authorization of two of three of the Company’s officers. This requirement has been communicated with the Bank and is evidenced by appropriate documentation.
ITEM 9B
ITEM 9B - OTHER INFORMATION
Not applicable.
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PART III.
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Governance Of Fansteel Inc.
Board Of Directors
The Company’s Board of Directors currently has three members, one of whom meets the standard for independence. In 2008, the Company’s Board of Directors held four meetings. All of the Directors attended all of the Board meetings and the respective committee meetings in 2008.
Committees Of Board Of Directors
In 2008, the entire Board of Directors operated in place of committees for the audit committee and the compensation committee.
Audit Committee
In 2008, the Board acted as the Company’s audit committee. The Board of Directors has determined that one Board member met the standard for independence. The Board of Directors has extensive financial, management and operational experience.
The Company’s Board members operate pursuant to a charter, which can be viewed at the Company’s website at www.fansteel.com. The charter gives the audit committee the authority and responsibility for the appointment, retention, compensation and oversight of the independent auditors, including pre-approval of all audit and non-audit services to be performed by the independent auditors. The audit committee charter gives this committee broad authority to fulfill its obligations under SEC rules and regulations.
Report of the Audit Committee
Management represented to the Committee that the Company’s financial statements were prepared in accordance with generally accepted accounting principles. The Committee has reviewed and discussed the financial statements with management and the independent auditor. The Committee discussed with the independent auditor matters required to be discussed by Statement on Auditing Standards No. 114 (The Auditor’s Communications with Those Charged with Governance).
The Company’s independent auditor provided to the Committee the written disclosures and the letter from the independent auditors required by Rule 3526 of the Public Company Accounting Oversight Board (Communication with Audit Committees Concerning Independence) and the Committee discussed with the independent auditor that firm’s independence.
Based upon the Committee’s discussions and reviews with management and the independent auditor, the Committee recommended that the Board of Directors include the audited financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission. The Board has approved this inclusion.
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Compensation Committee
In 2008, the Board operated as the compensation committee. The Board of Directors determined that one Board member has met the standard for independence. The compensation committee develops and makes recommendations to the Board of Directors with respect to compensation policies; recommends to the Board of Directors the compensation to be paid to executive officers; administers the Fansteel Bonus Plan and 401(K) Savings Plan; and performs such other duties as may be assigned to it by the Board of Directors. The compensation committee report is set forth in Item 11.
ITEM 11 -EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview of Compensation Program
The Compensation Committee of the Board has responsibility for establishing, implementing and monitoring adherence with the Company’s compensation philosophy. The Compensation Committee reviews all matters relating to executive compensation and reports its actions and recommendations to the Board of Directors.
Compensation Philosophy and Objectives
The Company’s philosophy on executive officer compensation is to provide compensation that enables the Company to attract and retain a highly qualified complement of executive officers. The Compensation Committee believes the most effective executive compensation program is one designed to reward the achievement of specific annual and strategic goals by the Company.
Components of Executive Compensation
The Company’s compensation package consisted of three key parts: base salary, a potential annual bonus, and equity-related compensation.
Base Salary. Base salaries had been set near the median for similarly sized businesses competing in the same or similar industries as the Company. The sources of comparisons were publications dealing with executive compensation. The information reported in those publications does not usually reveal the identity of the companies, which were the subject of the reports. The companies that were the basis of that information, accordingly, were not necessarily those that comprise the peer group for comparison of shareholder returns. By setting salaries at a median level, the Company believed that it could attract and retain the caliber of executive officer desired.
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Incentive Compensation. The executive officers are eligible to participate in a bonus plan. For 2006, 2007 and 2008, a bonus plan was established based on factors to generate cash, which is key in the achievement of viability, growth, and meeting requirements for environmental remediation. Based on attainment of budgeted EBITDA and cash flow, a bonus can be earned as a percentage of salary ranging from 5% to 50% of base salary.
Equity-Related Compensation. As part of the Plan of Reorganization, the Company reserved 5% of the authorized common stock or 180,000 shares for stock options. The executive officers are entitled to participate in the stock option plan. No stock option plan has been implemented.
Chief Operating Officer Compensation. Curtis J. Zamec, II was appointed Chief Operating Officer (Principle Executive Officer) on September 2, 2008 with an annual salary of $1.00.
Principal Financial Officer Compensation. Robert R. Compernolle was appointed interim vice President and Chief Financial Officer effective November 1, with annual salary of $130,000.
Other Matters. The Company does not anticipate that it will be affected in the future by Section 162(m) of the Internal Revenue Code, which imposes an annual limit of $1,000,000 per person on the federal income tax deduction for executive compensation. If the Company should determine that this limitation might impact the Company, the Company would likely take the necessary steps to bring its compensation programs into compliance with Section 162(m) so that non-deductibility would be avoided.
Compensation Committee Interlocks And Insider Participation In Compensation Decisions
There were no "Compensation Committee Interlocks" during fiscal year 2008.
Report of the Compensation Committee On Executive Compensation
The Board acting as Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended that the Compensation Discussion and Analysis be included in this Form 10-K.
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Summary Compensation Table
The following tables set forth compensation received by our Chief Executive Officer and each of our Executive Officers for the last three fiscal years:
(1)
All stock options granted in years prior to the Company’s emergence from bankruptcy on January 23, 2004 were canceled as part of the plan of reorganization. No stock options have been granted since the emergence from bankruptcy.
(2)
The Company’s Pension Plan covering Executive Officers was terminated on December 15, 2003, and the Pension Benefit Guarantee Corporation (“PBGC”) is now the statutory trustee and controls the Plan. The Company has no pension plan that covers Executive Officers.
(3)
All Other Compensation includes amounts contributed or accrued for fiscal years 2006, 2007 and 2008 under the Company’s Savings and Profit Sharing Plan and amounts received for car allowance in 2006, 2007 and 2008.
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Compensation Of Directors
Fansteel’s directors each receive annual compensation of $22,500, paid in equal installments over 12 months, for their services as members of the Company’s Board of Directors.
The table below summarizes the compensation paid by the Company to Directors for the year ended December 31, 2008.
2008 Director Summary Compensation Table
(a)
Fees paid directly to JP Morgan Asset Management to March 31, 2008 and directly to Mr. Groshoff from April 1, 2008 to June 30, 2008.
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ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The persons owning beneficially 5% or more of the Company’s outstanding Common Stock, the stock ownership of all the Executive Officers and Directors of the Company as a group, and the stock ownership of the named Executive Officers and Directors as of March 31, 2009 are as follows:
(1)
According to the Schedule 13D and amendments thereto filed with the Securities and Exchange Commission on April 11, 2008 and various subsequent dates, L.M. Levie expended an aggregate $103,916.30 of Company funds (Greenwich Investment Company LLC, a Company controlled by L.M. Levie) to acquire 1,039,163 shares (the "Levie Shares"). 1,039,163 Levie Shares were acquired in one or more privately negotiated transactions.
(2)
According to the Schedule 13D and amendments thereto filed with the Securities and Exchange Commission on February 19, 2008 and various subsequent dates, Brian F. Cassady expended an aggregate $83,694.08 of his personal funds to acquire 995,978 shares (the "Cassady Shares"). 945,706 Cassady Shares were acquired in one or more privately negotiated transactions and 50,272 Cassady Shares were acquired in one or more open market purchases.
(3)
According to the Schedule 13D and amendments thereto filed with the Securities and Exchange Commission on April 22, 2008 and various subsequent dates, Curtis J. Zamec, II expended an aggregate $268,532.98 of his personal funds to acquire 353,589 shares (the "Zamec Shares"). 84,528 Zamec Shares were acquired in one or more privately negotiated transactions and 269,061 Zamec Shares were acquired in one or more open market purchases.
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ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Messrs. Levie, Cassady and Zamec are parties to the Control Group (via the Cooperation Agreement dated June 10, 2008) and collectively control approximately 70% of the Company’s issued and outstanding equity. See Item 10 regarding director independence.
Item 404(b) of Regulation S-K requires companies to disclose their policies and procedures for the review, approval, or ratification of transactions with related persons that are reportable under paragraph (a) of Item 404. The Company is in the process of developing policies and procedures identifying, approving and disclosing such transactions. The Company had no Item 404(a) reportable transactions for 2008.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit and Non-Audit Fees
The Company engaged the firm of BDO Seidman, LLP for the quarterly 2008 and 2007 reviews and the audit of the annual financial statements for the years ending December 31, 2008 and December 31, 2007, and the reviews of the financial statements included in the Company’s Form 10-K for the years ending December 31, 2008 and December 31, 2007.
The following table presents fees for professional audit services rendered by BDO Seidman, LLP for the audit of the Company’s annual financial statements for the years ended December 31, 2008 and December 31, 2007 and fees billed for other services, if any, rendered by BDO Seidman, LLP during those periods.
Audit fees consisted principally of audit work performed on the consolidated financial statements, reviews of the quarterly financial statements, as well as work generally only the independent registered public accounting firm can reasonably be expected to provide, such as statutory audits.
The Company did not engage BDO Seidman, LLP for other audit related services.
The Company did not engage BDO Seidman, LLP for tax services.
In 2007, a special committee of the board of directors engaged BDO Seidman, LLP to review inter-company transactions with the Company’s special purpose subsidiary, FMRI Inc. This engagement was not with the same office that does the audit work.
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Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
Consistent with Securities and Exchange Commission policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. In 2008, the Board of Directors acted as the Audit Committee.
Prior to engagement of the independent registered public accounting firm for the next year’s audit, management will submit a list of services and related fees expected to be rendered during that year within each of four categories of services to the Audit Committee for approval.
(1) Audit services include audit work performed on the financial statements, reviews of the quarterly financial statements, as well as work that generally only the independent registered public accounting firm can reasonably be expected to provide, including comfort letters, statutory audits, and discussions surrounding the proper application of financial accounting and/or reporting standards.
(2) Audit related services are for assurance and related services that are traditionally performed by the independent registered public accounting firm, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.
(3) Tax services include all services, except those services specifically related to the audit of the financial statements, performed by the independent registered public accounting firm’s tax personnel, including tax analysis; assisting with coordination of execution of tax-related activities, primarily in the area of corporate development, supporting other tax-related regulatory requirements; and tax compliance and reporting.
(4) All other services are those services not captured in the audit, audit-related or tax categories. The Company generally does not request such services from the independent registered public accounting firm.
Prior to the engagement, the Audit Committee pre-approves independent registered public accounting firm services within each category. The fees are budgeted and the Audit Committee requires the independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval categories. In those instances, the Audit Committee requires specific pre-approval before engaging the independent registered public accounting firm.
The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decision to the Audit Committee at its next scheduled meeting.
(5) The Audit Committee approved 100% of the fees for services performed by the independent registered accounting firm.
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PART IV.
ITEM 15
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(1)
Financial Statements
Financial statements filed as part of this Form 10-K are listed under Part II, Item 8.
(2)
Financial Statement Schedules
Financial statement schedule filed as part of this Form 10-K is listed under Part II, Item 8.
(3)
Exhibits
The following documents are filed as part of this report or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.
Exhibit No.
Description
2.1
Second Amended Joint Reorganization Plan of Fansteel Inc. and Subsidiaries (previously filed as Exhibit 99.1 to the Company’s Form 8-K filed on February 4, 2004, and incorporated herein by reference).
2.2
Confirmation Order of Bankruptcy Court entered on December 23, 2003 and November 17, 2003 (previously filed as Exhibit 99.2 to the Company’s Form 8-K filed on February 4, 2004, and incorporated herein by reference).
3.1
Amended and Restated Certificate of Incorporation of Fansteel Inc (previously filed as Exhibit 1 to the Company's Form 8-A filed on February 2, 2004, and incorporated herein by reference).
3.2
Amended and Restated By-Laws of Fansteel Inc (previously filed as Exhibit 2 to the Company's Form 8-A filed on February 2, 2004, and incorporated herein by reference).
10.3
Loan and Security Agreement dated as of January 23, 2004 among the Company, Wellman Dynamics Corporation and Congress Financial Corporation, as amended by that certain first amendment dated as of January 19, 2005, among such parties and as amended by that second certain amendment dated as of March 31, 2005, between such parties (previously filed as Exhibit 10.3 to the Company’s Form 10-K filed on April 14, 2005, and incorporated herein by reference).
10.4
Asset Purchase Agreement, dated as of December 30, 2004, between the Company and Whitesell Corporation (previously filed as Exhibit 99.1 to the Company’s Form 8-K filed on January 1, 2005, and incorporated herein by reference).
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10.5
Settlement Agreement, dated December 19, 2003, between the Company and Pension Benefit Guaranty Corporation (previously filed as Exhibit 10.5 to the Company’s Form 10-K filed on April 14, 2005, and incorporated herein by reference).
10.6
Promissory Note, dated September 13, 2003, between the Company and Pension Benefit Guaranty Corporation (previously filed as Exhibit 10.6 to the Company’s Form 10-K filed on April 14, 2005, and incorporated herein by reference).
10.7
Option to Purchase, dated November 13, 2003, between the Company and the City of North Chicago (previously filed as Exhibit 10.7 to the Company’s Form 10-K filed on April 14, 2005, and incorporated herein by reference).
10.8
Stipulation And Order Clarifying And/Or Modifying Consent Decree, dated March 3, 2005, between the Company, North Chicago, Inc. ("NCI"), the City of North Chicago (the "City") and the United States, on behalf of the Environmental Protection Agency ("EPA"), the Department of the Navy ("Navy"), the United States Department of the Interior ("DOI"), and the National Oceanic and Atmospheric Administration of the United States Department of Commerce ("NOAA") (previously filed as Exhibit 10.8 to the Company’s Form 10-K filed on April 14, 2005, and incorporated herein by reference).
10.9
Real Estate Vacant Land Sales Contract, dated June 3, 2004, between Waukegan, Inc. and Ampsky & Associates, LLC and Waukegan, Inc., including exhibits A and B thereto (previously filed as Exhibit 10.9 to the Company’s Form 10-K filed on April 14, 2005, and incorporated herein by reference).
10.10
Environmental Indemnity Agreement, dated June 29, 2004, between Waukegan, Inc. and Ampsky & Associates, LLC and Waukegan, Inc. (previously filed as Exhibit 10.10 to the Company’s Form 10-K filed on April 14, 2005, and incorporated herein by reference).
10.11
Settlement Agreement, dated June 21, 2004, by and among the United States, Fansteel Inc. and Waukegan Inc. (previously filed as Exhibit 10.11 to the Company’s Form 10-K filed on April 14, 2005, and incorporated herein by reference).
10.12
Loan and Security Agreement dated as of July 15, 2005 among Fifth Third Bank (Chicago), Fansteel Inc. and Wellman Dynamics Corporation, as amended by that certain first amendment dated as of December 4, 2006, between such parties (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on December 4, 2006, and incorporated herein by reference), as amended by that certain second amendment dated as of June 5, 2007, between such parties (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on June 8, 2007, and incorporated herein by reference), as amended by that certain third amendment dated as of September 12, 2007, between such parties (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on September 18, 2007, and incorporated herein by reference).
21.1
Fansteel Inc. List of Subsidiaries (previously filed as Exhibit 99.1 to the Company’s Form 8-K filed on February 4, 2004, and incorporated herein by reference).
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31.1*
Certification by COO pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 203 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 203 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification by COO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
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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 on May 13, 2009, thereunto duly authorized.
Fansteel Inc.
/s/ Curtis J. Zamec, II
Curtis J. Zamec, II, Chief Operating Officer
(Principal 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 indicated, on May 13, 2009.
/s/ Curtis J. Zamec, II
Curtis J. Zamec, II, Chief Operating Officer
(Principal Executive Officer)
/s/ Earl F. White
Earl F. White
Vice President Finance and Administration, Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Brian F. Cassady
Brian F. Cassady, Director
/s/ Todd M. Hymel
Todd M. Hymel, Director