FORM 10Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 1996
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 1-8676
FANSTEEL INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1058780
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Number One Tantalum Place, North Chicago, IL 60064
(Address of principal executive offices) (Zip Code)
(847) 689-4900
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
(X) Yes ( ) No
8,598,858
(Number of shares of $2.50 par value common stock outstanding
as of July 30, 1996)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 2
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1996 1995
ASSETS (Unaudited) *
Current Assets
Cash and cash equivalents (including securities
purchased under agreement to resell of
$2,509,000 in 1996 and $4,796,000 in 1995) $ 4,950,384 $ 6,838,960
Marketable securities 3,209,606 2,072,902
Accounts receivable - net 18,378,521 14,305,629
Inventories
Raw material and supplies 3,915,284 3,850,864
Work-in-process 12,480,682 11,610,410
Finished goods 5,734,660 5,942,269
22,130,626 21,403,543
Less reserve to state certain
inventories at LIFO cost 6,888,236 6,888,236
15,242,390 14,515,307
Other assets - current
Deferred income taxes 1,149,535 1,452,160
Other 1,519,411 1,002,076
Total current assets 44,449,847 40,187,034
Net Assets of Discontinued Operations 2,180,664 1,344,591
Property, Plant and Equipment
Land 1,337,641 1,337,641
Buildings 9,740,322 9,396,838
Machinery and equipment 45,571,730 45,019,335
56,649,693 55,753,814
Less accumulated depreciation 46,403,737 45,533,604
10,245,956 10,220,210
Other Assets
Marketable securities 12,589,322 13,608,993
Prepaid pension asset 7,703,808 7,709,808
Deferred income taxes 20,182 227,317
Property held for sale 1,128,851 1,200,837
Other 53,063 31,063
21,495,226 22,778,018
Total Assets $78,371,693 $74,529,853
* - Derived from audited financial statements
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 3
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET (Contd.)
June 30, December 31,
1996 1995
(Unaudited) *
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $10,693,539 $ 9,162,757
Accrued liabilities 8,756,334 8,391,200
Accrued income taxes 304,764 694,247
Current maturities of long-term debt 77,207 77,207
Total current liabilities 19,831,844 18,325,411
Long-term Debt 252,078 297,906
Other Liabilities
Discontinued operations 3,500,000 3,500,000
Deferred income taxes 1,621,097 1,374,911
Obligations under capital leases - 8,638
Total other liabilities 5,121,097 4,883,549
Shareholders' Equity
Preferred stock without par value
Authorized and unissued 1,000,000 shares - -
Common stock, par value $2.50
Authorized 12,000,000 shares
Issued and outstanding 8,598,858 shares 21,497,145 21,497,145
Unrealized gain on marketable securities 1,332 16,398
Retained earnings 31,668,197 29,509,444
Total shareholders' equity 53,166,674 51,022,987
Total Liabilities and Shareholders' Equity $78,371,693 $74,529,853
* - Derived from audited financial statements
(See Notes to Consolidated Financial Statements)
FANSTEEL INC. Form 10-Q
CONSOLIDATED STATEMENT OF INCOME Page 4
(UNAUDITED)
For the Three Months Ended
June 30, June 30,
1996 1995
Net sales $ 30,637,797 $ 25,732,165
Costs and expenses
Cost of products sold 25,293,842 21,446,447
Selling, general and administrative 3,622,364 3,356,949
28,916,206 24,803,396
Operating income 1,721,591 928,769
Other income (expense)
Interest income on investments 242,175 310,934
Other (40,305) (25,175)
201,870 285,759
Income before income taxes 1,923,461 1,214,528
Income tax provision 765,000 494,000
Net income $ 1,158,461 $ 720,528
Weighted average number of common
shares outstanding 8,598,858 8,598,858
Net income per share
(on average shares outstanding) $0.13 $0.08
Dividends per common share $ - $0.10
(See Notes to Consolidated Financial Statements)
FANSTEEL INC. Form 10-Q
CONSOLIDATED STATEMENT OF INCOME Page 5
(UNAUDITED)
For the Six Months Ended
June 30, June 30,
1996 1995
Net sales $ 59,576,908 $ 51,381,169
Costs and expenses
Cost of products sold 49,328,206 42,200,387
Selling, general and administrative 7,119,165 6,758,312
56,447,371 48,958,699
Operating income 3,129,537 2,422,470
Other income (expense)
Interest income on investments 495,634 614,818
Other (49,418) (58,040)
446,216 556,778
Income before income taxes 3,575,753 2,979,248
Income tax provision 1,417,000 1,183,000
Net income $ 2,158,753 $ 1,796,248
Weighted average number of common
shares outstanding 8,598,858 8,598,858
Net income per share
(on average shares outstanding) $0.25 $0.21
Dividends per common share $ - $0.20
(See Notes to Consolidated Financial Statements)
FANSTEEL INC. Form 10-Q
CONSOLIDATED STATEMENT OF CASH FLOWS Page 6
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
1996 1995
Increase (decrease) in
cash and cash equivalents
Cash flows from operating activities:
Net income $ 2,158,753 $ 1,796,248
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation 872,257 1,030,931
Net pension charge (credit) 6,000 (12,000)
Deferred income tax charge 755,946 366,393
Changes in assets and liabilities:
(Increase) in marketable securities (132,099) (104,760)
(Increase) in accounts receivable (4,072,892) (1,842,193)
Decrease in income tax refunds receivable - 2,288
(Increase) decrease in inventories (727,083) 517,885
(Increase) in other assets - current (517,335) (20,570)
Increase (decrease) in accounts payable
and accruals 1,722,248 (58,040)
(Decrease) increase in income taxes payable (389,483) 396,305
Decrease in other assets 49,986 -
Net cash (used in) provided by operating
activities (273,702) 2,072,487
Cash flows from investing activities:
Additions to property, plant and equipment (898,003) (2,168,316)
Design and engineering for processing plant (616,657) -
Proceeds from sale of marketable
securities 9,100,000 -
Investment in marketable securities (9,100,000) -
Net cash (used in) investing activities (1,514,660) (2,168,316)
Cash flows from financing activities:
Proceeds from long-term debt - 295,310
Payments of long-term debt (45,828) (5,669)
Principal payments for capital leases (54,386) (51,145)
Dividends paid - (1,719,772)
Net cash (used in) financing activities (100,214) (1,481,276)
Net (decrease) in cash and cash equivalents (1,888,576) (1,577,105)
Cash and cash equivalents at beginning of period 6,838,960 9,429,031
Cash and cash equivalents at June 30 $ 4,950,384 $ 7,851,926
(See Notes to Consolidated Financial Statements)
FANSTEEL INC. Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 7
(UNAUDITED)
Consolidated Financial Statements
The consolidated balance sheet at June 30, 1996, the consolidated statements
of income for the three months and six months ended June 30, 1996 and 1995, and
the consolidated statements of cash flows for the six months ended June 30, 1996
and 1995, are unaudited, but include all adjustments (consisting only of normal
and recurring accruals) which the Company considers necessary for fair
presentation.
The accompanying consolidated financial statements do not include all
disclosures normally provided in annual financial statements and, therefore,
should be read in conjunction with the year-end financial statements.
Effective, January 1, 1994, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company has determined its securities to be "held-to-
maturity" or "available-for-sale" securities, depending upon the applicable
security. Marketable securities with a maturity date of one year or less at
time of purchase are classified as current, and over one year maturity date at
time of purchase are classified as non-current on the balance sheet.
Securities classified as available-for-sale at June 30, 1996 include U.S.
government securities, municipal bonds and commercial paper with maturity dates
from July 1, 1996 to September 30, 1998. Net unrealized holding gains included
in shareholders' equity at June 30, 1996 are $1,000, consisting of gross
unrealized gains of $2,000 net of deferred income taxes. The aggregate fair
value of these securities at June 30, 1996 is $5,585,000. Amortized cost of
U.S. government securities, municipal bonds and commercial paper available-for-
sale at June 30, 1996 is $2,832,000, $1,754,000 and $997,000, respectively.
Securities classified as held-to-maturity at June 30, 1996 represent U.S.
Treasury Notes with maturity dates of January 31, 1997 and April 30, 1998.
Amortized cost and fair value of these securities at June 30, 1996 are
$9,985,000 and $9,934,000, respectively. There was a gross unrealized loss on
these securities of $51,000 at June 30, 1996.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
FANSTEEL INC. Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) Page 8
(UNAUDITED)
Business Segment Information
The Company is engaged in the manufacture of specialty metal products, which
it classifies into two business segments: Industrial Tools and Metal
Fabrications. Net sales and operating income for the second quarter and six
months ended June 30, 1996 and 1995 for each of the Company's business segments
are summarized below:
Second Quarter Six Months
1996 1995 1996 1995
Net Sales:
Industrial Tools -
Sales $14,429,118 $12,811,150 $28,489,949 $25,312,282
Intersegment sales - (35) (239) (35)
14,429,118 12,811,115 28,489,710 25,312,247
Metal Fabrications -
Sales 16,214,775 12,923,948 31,101,748 26,079,891
Intersegment sales (6,096) (2,898) (14,550) (10,969)
16,208,679 12,921,050 31,087,198 26,068,922
$30,637,797 $25,732,165 $59,576,908 $51,381,169
Operating Income:
Industrial Tools $ 841,294 $ 763,593 $ 1,619,098 $ 1,642,700
Metal Fabrications 892,262 174,616 1,537,488 791,968
Corporate (11,965) (9,440) (27,049) (12,198)
$ 1,721,591 $ 928,769 $ 3,129,537 $ 2,422,470
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 9
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations may contain various "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
the Company's expectations or beliefs concerning future events. The Company
cautions that such statements are qualified by important factors that could
cause actual results to differ materially from those in the forward looking
statements. Results actually achieved thus may differ materially from expected
results included in these statements.
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995
Net sales for the second quarter of 1996 were $30,638,000, an increase of
$4,906,000 or 19.1% from same quarter last year net sales of $25,732,000.
Industrial Tools business segment net sales for the second quarter of 1996
totaled $14,429,000 compared to $12,811,000 for the same period of 1995, an
increase of $1,618,000 or 12.6%. Tungsten carbide cutting tools product line,
and more specifically tungsten carbide rod, accounted for the majority of this
increase. Competitive pricing, combined with superior quality and customer
service, has increased market share for tungsten carbide rod. Construction
tools product line net sales also improved in the current quarter. Improvements
in product quality, along with price competitiveness, have made inroads in the
road planing markets. A new distributorship which services Mexico also had a
beneficial effect on sales of this product line. Mining tools product line
sales, however, continued a downward trend. Flat cutter bits sales have lagged
as customers have discovered that current stocks can be reground, thus
prolonging the life of these tools.
Metal Fabrications business segment net sales for the second quarter of 1996
were $16,209,000, an increase of $3,288,000 or 25.4% from second quarter, 1995
net sales of $12,921,000. Forgings product line sales have risen dramatically
over the last twelve months, including a 48% improvement in the current quarter
from the same quarter of last year. Coinciding with a stronger general economy
and a resurgence specific to the aircraft industry, a comprehensive material
supply program and shorter lead times have had a positive effect on the
attractiveness of the Company's forgings product line to customers. Substantial
sales have been recorded for the McDonnell Douglas MD-90 program, along with the
Boeing 727 and F-22 programs. Forgings sales have also benefitted from price
increases averaging around 15%. Sand mold casting sales increased in the
current quarter due to commercial shipments of cylinder heads and engine blocks,
and military sales of engine parts and air frame structures. Sales of patterns
for sand mold castings rose on releases for new programs from Boeing. Sales to
outdoor product and vending machine customers spurred improvements in sales
performance in the wire forming product line. Investment castings product
lines, however, experienced a dip in sales in the current quarter. The demand
for investment castings declined as a light truck manufacturer reduced
requirements for our products. In addition, this significant customer will be
switching a high volume part from the investing casting process to the powdered
metal process.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
(CONT'D.)
Cost of sales for the quarter ended June 30, 1996 was $25,294,000, an increase
of $3,847,000 from the same quarter of 1995. Cost of sales as a percent of net
sales, however, declined in the current quarter, from 83.3% in 1995 to 82.6% in
1996. The cost of sales dollar increase is related to the increase in sales
volume and raw material price hikes, yet improved efficiencies and cost controls
have combined to improve margins. Additionally, the relationship of fixed costs
in a period of rising sales assisted the more favorable margin performance.
Also, a large workers compensation charge is reflected in the 1995 margins.
Selling, general and administrative expenses for the current quarter were
$3,622,000 compared to $3,357,000 for the second quarter of 1995, an increase of
$265,000. Selling, general and administrative expenses as a percent of net
sales were 11.8%, an improvement from second quarter, 1995 of 13.0%. The
increase in sales volume has resulted in increased variable selling expenses,
including commissions, but this has been offset by the effect of improved sales
volume.
Other income for the second quarter of 1996 totaled $202,000, a decrease of
$84,000 from the same quarter of last year. Lower short term interest rates,
combined with less cash available for investment, reduced interest income on
investments. Interest earned on investments in the current quarter was $242,000
compared to $311,000 for the same period in 1995.
Net income for the three months ended June 30, 1996 was $1,158,000 or $.13 per
share, compared to $721,000 or $.08 per share for the same period of 1995, an
increase of $437,000 or 60.6%.
Six Months Ended June 30, 1996 Compared to the Six Months Ended June 30, 1995
Net sales for the first six months of 1996 were $59,577,000 compared to
$51,381,000 for the first six months of 1995, an increase of $8,196,000 or
16.0%.
Net sales for the Industrial Tools business segment for year-to-date 1996 were
$28,490,000, an increase of $3,178,000 or 12.6% from 1995 net sales of
$25,312,000. Tungsten carbide cutting tools product line net sales increased
13.9% in the current year, primarily due to tungsten carbide rod. The Company's
tungsten carbide rod products sales continue to rise as customers have
recognized our quality and service delivered at a competitive price. The
increase in sales of tungsten carbide rod was partially offset by a decrease in
sales of inserts. The introduction of diamond tipped inserts in early 1995, and
the promotional offers which coincided with the introduction of this product,
boosted the 1995 insert sales. The promotional offers were discontinued in
1996, and the sales of inserts have declined. Construction tools product line
net sales are up 40.1% from last year as new distributorships serving the
Mexican and Japanese markets, along with increasing recognition of quality and
price, have expanded market penetration. Other wear parts product lines
improved due to aggressive merchandising of pre-formed products.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
(CONT'D.)
Metal Fabrications business segment net sales for the first half of 1996
amounted to $31,087,000 compared to $26,069,000 for the first half of 1995, an
increase of $5,018,000 or 19.2%. Forgings product line sales have improved
45.2% compared to last year with the aircraft industry showing increased demand.
Commercial aircraft sales, such as for the Boeing 727 and McDonnell Douglas MD-
90, and military fighter sales, such as for the F-22, have improved
substantially. But the current improvement of this product line, and prospects
of continued success, has as its roots a comprehensive material supply program
which offers customers shorter lead times than competitors. Sand mold casting
sales increased 34.5% over last year due to both commercial and military
contracts. Commercial sales included cylinder heads and engine blocks; military
sales included engine parts for the CH-53 helicopter program, and air frame
structures. Sales of patterns for sand mold castings have improved due to new
business from Boeing and Sikorsky. Wire forming product line net sales are up
10% from last year as the outdoor products industry is in a strong business
cycle. Investment castings product line, however, experienced a 21.3% decline
in net sales from the prior year. Strong price competition resulted in the loss
of several contracts, and reduced production requirements from a light truck
manufacturer caused a loss of revenue.
Backlog of orders at June 30, 1996 totaled $38,723,000, an increase of
$7,299,000 from June 30, 1995. Industrial Tools business segment backlog at
June 30, 1996 was $7,519,000, an improvement of 31.5% from one year ago.
Tungsten carbide cutting tools backlog improved as backlog of tungsten carbide
rod increased dramatically due to expanded market share. Receipt of orders with
late 1996 release dates resulted in an increase in backlog of tungsten carbide
inserts. Construction tools product line backlog is also up substantially from
June 30, 1995. Quality improvements, price competitiveness, and new
distributorships, in a recovering economic environment for the road construction
industry, have had a beneficial effect on sales orders. Construction tools
product line should continue this positive trend into the near future, as
additional road planing contracts are expected to be awarded in the next several
months. Mining tools product line backlog is down 53.2% from last year,
continuing a disappointing trend of the last several quarters. Price
competition in the mining tool market is very keen, and as a result customers
are now placing orders on an as needed basis. Metal Fabrications business
segment backlog at June 30, 1996 was $31,204,000, an increase of $5,499,000 or
21.4% from the same date of last year. This increase is almost entirely due to
the forgings product line, which is up 55.8% from last year. The increased
demand in the aircraft industry, combined with better material availability
which has made the Company's product more attractive, are the main reasons for
the backlog improvement. Forgings are expected to continue to expand market
share, but at a slower pace than in the past year. Sand mold castings backlog
was down at June 30, 1996 compared to the prior year as the 1995 backlog
included a large order for thorium aircraft engine parts which shipped in 1996.
Patterns for sand mold castings backlog has risen in the past year as new orders
for commercial aircraft and helicopter programs have been received. Wire
forming backlog remains strong, up 22% from June 30, 1995. Investment castings
backlog has lost 28.9% of its value since June 30th of last year due to the loss
of certain major contracts. A significant customer for injector clamps has
announced that it will now purchase these clamps made by the powder metal
process rather than investment casting. The market has become very competitive
for available business. Talks have been initiated with several prospective new
clients to rebuild the sales base. Unless new orders are received to replace
business lost in the last six months, revenue and profit performance in this
product line will suffer for the near term.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 12
(CONT'D.)
Cost of sales for the six months ended June 30, 1996 totaled $49,328,000, an
increase of $7,128,000 or 16.9% from the same period of 1995. Cost of sales as
a percent of net sales for the first half of 1996 was 82.8% compared to 82.1%
for the like period of 1995. High scrap costs in the production of our sand
mold castings product line in the first quarter of 1996, along with price
increases for certain raw materials, had a negative effect on gross margins.
Improved production efficiencies in the second quarter of 1996, and a large
workers compensation charge in the second quarter of 1995, narrowed the
difference between cost of sales as a percent of sales from 1995 to 1996.
Selling, general and administrative expenses were $7,119,000 for year-to-date
1996 compared to $6,758,000 for the same period of 1995, an increase of $361,000
or 5.3%. Variable selling expenses, including commissions, had the major impact
on the dollar increase in selling, general and administrative expenses.
Selling, general and administrative expenses as a percent of net sales for the
first six months of 1996 were 12.0% compared to 13.2% for the first half of
1995. Increased sales volume, and the relationship to fixed expenses, was the
primary reason for the decrease in expenses as a percent of net sales.
Other income for 1996 of $446,000 decreased $111,000 from 1995 other income of
$557,000. Interest earned on investments was down in 1996 due to lower short
term interest rates in 1996, and lower cash balances available for investment in
marketable securities and overnight repurchase agreements, reflecting
management's intentions to invest in our various operating units. Interest
earned on investments totaled $496,000 for the first six months of 1996.
Net income for the six months ended June 30, 1996 was $2,159,000 or $.25 per
share. Net income for the same period of 1995 was $1,796,000 or $.21 per share.
Outlook
Improvements in the Company's production processes, new product development,
and investment in capital equipment have increased opportunities for growth,
directed primarily at commercial markets. The Company is seeking increased
share of current markets, as well as new markets, through investment in
operating facilities and new acquisitions. The Company has utilized, and is
constantly seeking, funding assistance on favorable terms from states and
municipalities for expansion of production capabilities. Cost control programs
remain active in all operating plans throughout the Company.
The formerly defense-dependent operating units are continuing to place primary
focus on becoming a diversified supplier to both military and commercial
markets. Capital equipment investment has been initiated and new production
techniques employed to facilitate this transition. The Company is beginning to
realize the benefits from these efforts as increased sales and orders have
materialized.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 13
(CONT'D.)
Liquidity and Capital Resources
Cash and cash equivalents amounted to $4,950,000 at June 30, 1996, a decrease
of $1,889,000 from December 31, 1995. Net income and depreciation provided
$2,159,000 and $872,000, respectively. Operations used $54,000 due primarily to
an increase in accounts receivable. Capital expenditures totaled $898,000,
including building expansions at our Gulfport, MS and Washington, IA operations
to service increased business volume.
It is expected that sufficient cash will be generated from operations to cover
normal operating requirements. If the need arises, the Company has strong,
long-term relationships with several large banking institutions.
Funding assistance by states and municipalities is investigated when any
significant expenditures are proposed. Loans were received in 1995 from State
of Iowa Development Programs for production improvements at our sand mold
casting and wire forming operations. In 1996, the State of Mississippi Business
Finance Corporation will provide development loans for expansion of one of the
Company's tungsten carbide rod producing facilities.
At June 30, 1996, the Company had $3,210,000 of current marketable securities
and $2,604,000 of non-current marketable securities, classified as available-
for-sale, invested in U.S. government securities, municipal bonds and commercial
paper. These securities are readily liquid. The non-current marketable
securities classified as held-to-maturity, with a book value of $9,985,000 and a
fair value of $9,934,000, are U.S. Treasury Notes. The intent of the Company is
to hold these notes to maturity.
At June 30, 1996, the Company had established reserves of $3,927,000 for
environmental clean-up costs for discontinued operations. The Company, in
association with outside consultants, has developed a decommissioning plan for
the site involved, and has submitted that plan and a related decommissioning
funding plan to the Nuclear Regulatory Commission ("NRC") as required by law.
Prior to decommissioning, the Company proposes to construct and operate for
approximately eight to ten years a commercial plant to complete the processing
of residues currently contained in storage ponds at the site, which would
materially reduce the amount of radioactive materials to be disposed of during
decommissioning. In conjunction with construction of the processing plant, the
Company would modify the wastewater treatment plant at the site and install a
drainage system. Decommissioning would be comprised of construction of an
engineered on-site cell for containment of contaminated soils; consolidation and
stabilization of the contaminated soils in the containment cell; and the
performance of required plant surveys and characterizations after residue
processing ceases to determine whether additional contaminated soils exist which
may require remediation.
The Company has applied for an amendment to its current NRC license and for a
revision to its current wastewater discharge permit to allow construction and
operation of the proposed processing plant, and believes that these regulatory
authorizations will be issued in the near future. Preliminary engineering,
design and feasibility studies have been completed for the proposed processing
plant, which would extract commercially valuable materials such as tantalum,
columbium, scandium and other rare earth and rare metal elements from the
feedstock residues. The Company engaged a process design expert to confirm the
viability of the proposed plant. The estimated cost of construction is
approximately $10 million. The estimated value of materials to be extracted
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 14
(CONT'D.)
is based on analysis of samples taken from the residues and a valuation of such
materials using current market prices discounted to reflect possible price
decreases, including those which could result from the increased quantities of
certain of these materials made available for sale. The estimated costs of
residue processing were developed by Company personnel and independent
consultants using evaluations based on the pilot testing performed. Residue
processing is expected to start approximately a year after licensing approval is
received. The provisions for discontinued operations reflect management's
belief that the current value of the extracted materials will at least equal the
estimated cost of construction and costs of processing, including estimated
costs for disposal of waste generated by the process. The annual recovery
revenues are estimated to be in a range of $2,000,000 to $3,000,000. However,
there can be no assurance as to the level of demand for certain of the extracted
materials or the actual prices which may be obtained for them, which could vary
over time.
In October 1995, the NRC advised the Company that a decommissioning funding
plan cost estimate based on construction of an on-site containment cell for
contaminated soils at the site is appropriate to consider at this time. The NRC
cautioned the Company, however, that an on-site containment cell may require
preparation of an Environmental Impact Statement and that, in addition to the
required NRC approval, local and other federal agencies may have to be satisfied
that the Company's plan is sound. Such approval process can be expected to
extend over a number of years. Management believes that a decommissioning plan
including on-site containment will ultimately be acceptable to the appropriate
regulatory authorities, based on current and proposed NRC regulations and a
provision of the Nuclear Waste Policy Act of 1982 requiring the Department of
Energy to take title to certain "special sites" which may include the Company's
site; however, there is no assurance that a plan providing for on-site
containment will ultimately be approved. Implementation of a decommissioning
plan for the Company's site which includes off-site disposal may not be
financially feasible.
The NRC's decommissioning regulations require licensees to estimate the cost
for decommissioning and to assure in advance that adequate funds will be
available to cover those costs. NRC regulations identify a number of acceptable
methods for assuring funds for decommissioning, including surety instruments
such as letters of credit, cash deposits and combinations thereof. The NRC's
October letter requested the Company to submit a decommissioning funding plan
contemplating on-site containment and stated that the cost of residue processing
should be included in the Company's cost estimate. In March 1996, the Company
submitted a revised decommissioning plan and related decommissioning funding
plan. The level of assurance for decommissioning and construction is estimated
to be at least $15 million. This estimate assumes that the Company will not be
required to assure the operating costs of residue processing. In May, 1996, the
NRC notified the Company that the current financial assurance letter of credit
of $750,000 must be increased by $3,706,460 based upon the revised
decommissioning plan submitted. This initial level of assurance may be changed
upon further review by the NRC. The Company's available cash and/or borrowing
capacity will be reduced by the amount of funding assurance as required at any
particular time. As the decommissioning plan is implemented, deposited funds or
the amount of any surety instruments may be reduced, provided the Company can
demonstrate the sufficiency of the remaining funds or surety to assure the
completion of decommissioning.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 15
(CONT'D.)
Expenditures for environmental reclamation and decommissioning were $217,000
for the first six months of 1996. In addition, the Company expended $617,000
for design and engineering costs for the proposed processing plant.
Based upon continuing assessment of the proposed decommissioning plan, taking
into consideration the most current information, existing technology and
regulations in effect, management believes that the amounts reserved at June 30,
1996 are adequate to cover the costs of environmental clean-up for discontinued
operations and that the Company has the ability to meet the NRC's
decommissioning funding assurance requirements.
The remaining land and buildings of the Company's former PSM operation within
the Metal Fabrications business segment are carried as Other Assets - Property
held for sale. The cost of preparing the property for sale, principally
environmental clean-up, will be capitalized. Management believes that proceeds
from the sale of the property will be adequate to recover all costs, including
expenditures to prepare the property for sale. The Company believes the
reserves established for other costs associated with the close-down of PSM are
adequate.
The Company's Escast operation, located in Addison, IL, included in the Metal
Fabrications business segment, has been named as a responsible party for the
clean-up costs of certain hazardous wastes located on-site. A cost sharing
agreement with the former owner of Escast is in place for any future clean-up
expenditures. At this time, the amount of the clean-up costs is not fixed and
determinable. However, the Company believes the established reserves are
adequate to cover its share of the clean-up.
Environmental matters arising at other operating units are routinely reviewed
and handled through operations. The Company believes that the ultimate
disposition of any other pending environmental matters will not have a material
adverse effect upon the consolidated financial position of the Company.
Form 10-Q
Page 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
b) No reports on Form 8-K were filed during the quarter ended
June 30, 1996.
Form 10-Q
Page 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fansteel Inc.
(Registrant)
Date - 7/30/96 /s/ William D. Jarosz
William D. Jarosz
Chairman, President and Chief Executive Officer
Date - 7/30/96 /s/ R. Michael McEntee
R. Michael McEntee
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Fansteel Inc. as of June 30, 1996 and the related
consolidated statement of operations for the six months ended June 30, 1996 and
is qualified in its entirety by reference to the Company's Form 10Q filing for
the period ended June 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,950,384
<SECURITIES> 3,209,606
<RECEIVABLES> 18,654,961
<ALLOWANCES> 276,440
<INVENTORY> 15,242,390
<CURRENT-ASSETS> 44,449,847
<PP&E> 56,649,693
<DEPRECIATION> 46,403,737
<TOTAL-ASSETS> 78,371,693
<CURRENT-LIABILITIES> 19,831,844
<BONDS> 252,078
<COMMON> 21,497,145
0
0
<OTHER-SE> 31,669,529
<TOTAL-LIABILITY-AND-EQUITY> 78,371,693
<SALES> 59,576,908
<TOTAL-REVENUES> 59,576,908
<CGS> 49,328,206
<TOTAL-COSTS> 56,447,371
<OTHER-EXPENSES> (446,216)
<LOSS-PROVISION> (15,695)
<INTEREST-EXPENSE> 5,842
<INCOME-PRETAX> 3,575,753
<INCOME-TAX> 1,417,000
<INCOME-CONTINUING> 2,158,753
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<NET-INCOME> 2,158,753
<EPS-PRIMARY> .25
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