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 March 31, 1998
( ) 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 April 30, 1998)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 2
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET
March 31, December 31,
1998 1997
ASSETS (Unaudited) *
Current Assets
Cash and cash equivalents (including
securities purchased under agreement
to resell of $6,175,000 in 1998
and $7,146,000 in 1997) $ 7,490,943 $ 8,038,229
Marketable securities 5,106,393 5,041,196
Accounts receivable - net 23,252,051 21,782,872
Inventories
Raw material and supplies 4,443,264 3,815,376
Work-in-process 15,716,671 15,306,393
Finished goods 7,834,420 7,273,625
27,994,355 26,395,394
Less reserve to state certain
inventories at LIFO cost 6,931,677 6,931,677
21,062,678 19,463,717
Other assets - current
Deferred income taxes 2,274,148 2,279,162
Other 1,481,389 1,576,333
Total current assets 60,667,602 58,181,509
Net Assets of Discontinued Operations 5,401,083 4,073,442
Property, Plant and Equipment
Land 1,421,641 1,421,641
Buildings 10,831,249 10,802,718
Machinery and equipment 51,764,832 51,293,733
64,017,722 63,518,092
Less accumulated depreciation 49,355,570 48,853,529
14,662,152 14,664,563
Other Assets
Prepaid pension asset 7,919,500 7,493,212
Property held for sale 1,334,065 1,249,692
Goodwill 3,070,700 3,128,276
Other 41,355 41,721
12,365,620 11,912,901
Total Assets $93,096,457 $88,832,415
* - 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.)
March 31, December 31,
1998 1997
(Unaudited) *
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $12,218,014 $10,678,303
Accrued liabilities 11,198,332 11,553,266
Accrued income taxes 1,469,818 501,745
Current maturities of long-term debt 335,828 322,499
Total current liabilities 25,221,992 23,055,813
Long-term Debt 1,654,736 1,599,962
Other Liabilities
Discontinued operations and environmental
remediation 16,900,000 16,900,000
Deferred income taxes 670,621 356,220
Total other liabilities 17,570,621 17,256,220
Shareholders' Equity
Preferred stock without par value
Authorized and unissued 1,000,000 shares - -
Common stock, par value $2.50
Authorized 12,000,000 shares
Issued and outstanding 8,598,858 shares 21,497,145 21,497,145
Retained earnings 27,151,963 25,423,275
48,649,108 46,920,420
Total Liabilities and Shareholders' Equity $93,096,457 $88,832,415
* - Derived from audited financial statements
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 4
FANSTEEL INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the Three Months Ended
March 31, March 31,
1998 1997
Net sales $ 39,789,485 $ 33,714,242
Costs and expenses
Cost of products sold 32,603,487 27,687,334
Selling, general and administrative 4,520,923 3,948,602
37,124,410 31,635,936
Operating income 2,665,075 2,078,306
Other income (expense)
Interest income on investments 156,318 157,590
Interest expense (21,025) (23,222)
Other (34,680) (17,748)
100,613 116,620
Income before income taxes 2,765,688 2,194,926
Income tax provision 1,037,000 860,000
Net income $ 1,728,688 $ 1,334,926
Weighted average number of common
shares outstanding 8,598,858 8,598,858
Net income per share
(on average shares outstanding) $0.20 $0.16
Dividends per common share $ - $ -
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 5
FANSTEEL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
1998 1997
Increase (decrease) in
cash and cash equivalents
Cash flows from operating activities:
Net income $ 1,728,688 $ 1,334,926
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 559,617 553,702
Net pension (credit) charge (426,288) 22,425
Deferred income tax charge 319,415 91,572
Changes in assets and liabilities:
(Increase) decrease in marketable securities (65,197) 64,729
(Increase) in accounts receivable (1,469,179) (1,567,741)
(Increase) in inventories (1,598,961) (723,304)
Decrease (increase) in other assets-current 94,944 (66,944)
Increase (decrease) in accounts payable
and accruals 1,184,777 (291,388)
Increase in income taxes payable 968,073 906,803
(Increase) decrease in other assets (84,007) 244
Net cash provided by operating activities 1,211,882 325,024
Cash flows from investing activities:
Additions to property, plant and equipment (499,630) (224,698)
Increase in net assets of discontinued
operations-design, engineering and
equipment for processing plant (1,327,641) (72,919)
Proceeds from disposition of marketable
securities - current - 5,000,000
Net cash (used in) provided by investing
activities (1,827,271) 4,702,383
Cash flows from financing activities:
Proceeds from long-term debt 125,000 143,404
Payments of long-term debt (56,897) (62,237)
Principal payments for capital leases - (8,638)
Net cash provided by financing activities 68,103 72,529
Net (decrease) increase in cash and cash
equivalents (547,286) 5,099,936
Cash and cash equivalents at beginning of
period 8,038,229 3,588,290
Cash and cash equivalents at March 31 $ 7,490,943 $ 8,688,226
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 6
FANSTEEL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidated Financial Statements
The consolidated balance sheet at March 31, 1998, and the consolidated
statements of income and cash flows for the three months ended March 31, 1998
and 1997, 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.
The Company determines 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 are classified as current,
and over one year maturity date are classified as non-current on the balance
sheet.
Securities classified as held-to-maturity at March 31, 1998 represent a U.S.
Treasury Note with a maturity date of April 30, 1998. Amortized cost and fair
value of this security at March 31, 1998 are $4,999,000 and $4,997,000,
respectively.
The Company increased its line of credit in the first quarter of 1997 by adding
a $17 million revolving credit agreement, which expires in January, 2000, to its
existing lines of credit. The credit lines are currently being used for letters
of credit needed for funding assurance related to environmental issues and
insurance policies. Total unused lines of credit, including the revolving credit
agreement, were $13.2 million as of March 31, 1998.
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.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, adoption of this Statement has no impact on net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on available-for-sale
securities and foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive income. During the first quarters of 1998 and 1997, total
comprehensive income was equal to net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information, which
changes the reporting requirements for segment information in annual financial
statements and also requires selected segment information in interim reports to
shareholders. The statement is effective for financial statements for years
beginning after December 15, 1997. The Company has not determined the impact,
if any, on its statements.
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 7
FANSTEEL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(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 quarter ended March 31,
1998 and 1997 for each of the Company's business segments are summarized below:
1998 1997
Net Sales:
Industrial Tools -
Sales $ 15,353,030 $ 13,350,830
Intersegment sales (4,228) -
15,348,802 13,350,830
Metal Fabrications
Sales 24,449,672 20,388,922
Intersegment sales (8,989) (25,510)
24,440,683 20,363,412
$ 39,789,485 $ 33,714,242
Operating Income:
Industrial Tools $ 1,144,369 $ 825,385
Metal Fabrications 1,536,476 1,263,931
Corporate (15,770) (11,010)
$ 2,665,075 $ 2,078,306
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 8
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 can be
identified by the use of forward-looking terminology such as "believes",
"expects", "prospects", "estimated", "should", "may" or the negative thereof or
other variations thereon or comparable terminology indicating 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, a
number of which are identified in the discussion which follows. Other factors
could also cause actual results to differ materially from expected results
included in these statements.
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
Net sales for the quarter ended March 31, 1998 of $39,789,000 increased
$6,075,000 or 18.0% from first quarter, 1997 net sales of $33,714,000.
Industrial Tools business segment net sales for the first quarter of 1998 were
$15,349,000 compared to $13,351,000 for the same period of 1997, an increase of
$1,998,000 or 15.0%. Sales of rotary tools, classified within the tungsten
carbide cutting tools product line, were the primary reason for this increase.
Equipment investments in made in 1997 increased production capacity for this
product line, which allowed for the improvement in sales in the current quarter.
Insert sales, also classified under the cutting tools product line, increased
due to higher customer demand for special orders. First quarter, 1998
construction tools sales increased over the same period of the prior year, as
shipments were made to a municipality for a contract that began in the second
quarter of 1997. Coal mining tool sales increased only slightly over last
year's first quarter as demand was adversely affected by inclement weather in
the eastern United States. Sales of wear parts were flat compared to 1997 first
quarter sales.
Metal Fabrications business segment net sales for the quarter ended March 31,
1998 were $24,441,000 an increase of $4,078,000 or 20.0% from first quarter,
1997 net sales of $20,363,000. Forging sales increased 36% over the first
quarter of 1997 based on the continued strength of the commercial aircraft
market. Machining sales for aircraft parts, added to our product offerings with
the September 30, 1997 acquisition of Schulz Products Inc., contributed to the
increase, although these sales were less than 5% of the total segment sales.
Sales of sand casting products increased 7.1% in the first quarter of 1998, due
to strong demand from commercial aircraft manufacturers. Investment castings
revenues remained unchanged from the first quarter of 1997, as customer demand
for castings has been flat. Wire formed products posted its highest ever
quarterly sales, after achieving the same milestone in the first quarter of
1997, with strong shipments to the lawn and garden equipment industry. Sales of
powdered metal components improved due to the increased production capacity
provided from equipment investments made in 1997.
The Company's operating income for the quarter ended March 31, 1998 of
$2,665,000 increased $587,000 or 28.2% from first quarter, 1997 operating income
of $2,078,000. As a percentage of net sales, operating income in the first
quarter of 1998 improved to 6.7% from 6.2% in the first quarter of 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 9
Industrial Tools business segment operating income for the first quarter of
1998 was $1,144,000 compared to $825,000 for the same period of 1997, an
increase of $319,000 or 38.7%. As a percentage of net sales, operating income
was 7.5% for the first quarter of 1998 compared to 6.2% in the same period last
year. Operating income increased in relation to the higher sales volume. As a
percentage of net sales, operating income was positively impacted by lower
burden and reduced outside processing costs, offset by higher material and labor
costs. As a percentage of net sales, operating income was not impacted by
selling, general and administrative expenses which remained the same as a
percent of net sales compared to the first quarter of 1997.
Metal Fabrications business segment operating income for the first quarter
of 1998 was $1,536,000, compared to $1,264,000 for the same period of 1997, an
increase of $272,000 or 21.5%. As a percentage of net sales, operating income
was 6.3% for the first quarter of 1998 compared to 6.2% in the same period last
year. Operating income increased in relation to the higher sales volume.
Operating income as a percentage of sales was negatively impacted by higher
material and labor costs, but these higher costs were offset by reduced selling,
general and administrative expenses in the first quarter of 1998 compared to the
prior year first quarter.
Other income for the first quarter of 1998 was $101,000, a decrease of $16,000
from 1997 other income of $117,000. Interest earned of $156,000 on marketable
securities for the first quarter of 1998 was nearly unchanged from 1997.
Net income for the quarter ended March 31, 1998 was $1,729,000 or $.20 per
share compared to $1,335,000 or $.16 per share for the same period of 1997, an
increase of $394,000, or 29.5%. Net income as a percentage of net sales for the
first quarter of 1998 was 4.3% compared to 4.0% for the first quarter of 1997.
Order backlog at March 31, 1998 was $59,973,000 compared to $47,988,000 at
March 31, 1997, an increase of $11,985,000 or 25.0%, with most of the increase
coming from the aircraft market within the Metal Fabrications business segment.
Industrial Tools business segment backlog was $7,674,000 at March 31, 1998, an
increase of $347,000 or 4.7% from the same period last year. Tungsten carbide
cutting tools backlog increased due to continued strong customer demand for
rotary tools. Wear parts product line backlog decreased, due to a decline in
orders for other die parts and drilling compacts. The construction tools backlog
decreased in the first quarter of 1998, but the change in the backlog is not a
key indicator of construction tool business levels as the majority of sales are
from finished stock. Coal mining tools backlog decreased from the first quarter
of 1997 as activity from mining customers has been generally slow in the first
quarter of 1998 due partially to the inclement weather in the eastern part of
the United States. Metal Fabrications business segment backlog at the end of
the current quarter was $52,299,000, an increase of $11,638,000, or 28.6% from
March 31,1997. The forgings backlog increased $4,584,000 from March 31, 1997, as
orders in the current quarter were 44% higher that the first quarter of 1997,
with orders being received from both commercial and military aircraft
manufacturers. Orders received for forgings in the first quarter of 1998 were
44% higher than the first quarter of 1997. Machining orders for aircraft parts,
added with the September 30, 1997 acquisition of Schulz Products Inc., increased
the March 31, 1998 backlog by $1,759,000. Based on the strength of the aerospace
market, the backlog for sand casting products increased $3,488,000 over the
first quarter of last year. Order entry for
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
investment castings was flat during the current quarter in comparison to prior
quarters, with little change in the overall backlog. The wire forming backlog
improved by $1,148,000 as order activity in the quarter was strong for all
customers, with the heaviest activity being generated from the lawn and garden
industry. The powdered metal backlog decreased from last year's first quarter,
as orders were down 11% compared to the first quarter of 1997.
Inflation factors did not, and generally do not, significantly affect the
overall operations of the Company.
Outlook
A continued high level of activity in the commercial aircraft market, combined
with steady demand from other markets served such as automotive, lawn and
garden, metalworking, oil drilling and military ordnance, is key in continuing
operating profitability. Improvements in the Company's production processes, new
product development, and investment in capital equipment, directed primarily at
commercial markets, should increase opportunities for
growth. The Company is seeking increased share of current markets, as well as
new markets, through investment in current operating units and 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.
Liquidity and Capital Resources
Cash and cash equivalents amounted to $7,491,000 at March 31, 1998, a decrease
of $547,000 from December 31, 1997. Investments in plant and equipment at
operating locations totaled $500,000, in accordance with management's program to
expand the operations of the Company. Design, engineering, and equipment costs
of $1,328,000 were incurred for the processing plant being built for reclamation
and decommissioning purposes in Muskogee, Oklahoma. Working capital needs were
greater due to higher sales and production volumes resulting in increases in
accounts receivable and inventories of $1,469,000 and $1,599,000, respectively,
reduced by increases in current liabilities of $1,185,000. Days outstanding and
inventory turns have remained consistent with prior periods. Cash flows from
financing activities provided $68,000, with $125,000 received from the state of
Pennsylvania for a low-interest loan for expansion at the powdered metal
components manufacturer. Debt payments were $57,000.
In the fourth quarter of 1995, the Company announced the suspension of the
quarterly shareholder dividend for the purpose of conserving cash for capital
reinvestment, possible future acquisitions, and due to potential changes in
funding requirements for decommissioning at the Company's discontinued operation
in Muskogee, Oklahoma.
Cash, cash equivalents and marketable securities on hand have been sufficient
to date to meet the demands of increased working capital investments,
expenditures for machinery and equipment, environmental costs and other normal
operating requirements. However, in anticipation of Company programs to expand
current operations, possible future acquisitions, and reclamation and
decommissioning costs for the Muskogee, Oklahoma plant, the Company increased
its line of credit in the first quarter of 1997 by adding a $17 million
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
revolving credit agreement, which expires in January, 2000, to its existing
lines of credit. The credit lines are currently being used for letters of credit
needed for funding assurance related to environmental issues and insurance
policies. Total unused lines of credit, including the revolving credit
agreement, were $13.2 million as of March 31, 1998.
Funding assistance by states and municipalities is investigated when any
significant expenditures are proposed. All of the Company's debt is related to
development loans obtained from various states. In February 1998, the Company
received proceeds from the state of Pennsylvania for the expansion of the
powdered metal components facility. In April 1998, the Company will close on a
development loan of $1,100,000 from the state of Pennsylvania to fund expansion
of an Industrial Tools facility.
At March 31, 1998, the Company had $4,999,000 of current marketable securities,
classified as held-to-maturity, invested in a U.S. Treasury Note. The current
marketable securities had a fair value of $4,997,000 at March 31, 1998, and
mature April 30, 1998.
Environmental Remediation and Discontinued Operations
The Company discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning is required for the segment's
primary plant that processed certain ores which are subject to regulations of
several government agencies. The residues from these processed ores were stored
on site. Remaining assets were written down to estimated realizable value, and
provisions were made for the estimated costs for decommissioning. 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 will construct and operate for
approximately ten years a commercial plant to complete the processing of
residues currently contained in storage ponds at the site, which will materially
reduce the amount of radioactive materials to be disposed of during
decommissioning. In conjunction with construction of the processing plant, the
Company will modify the wastewater treatment plant at the site and install a
drainage system. Decommissioning would include construction of an engineered
on-site cell for containment of contaminated soils; consolidation and
stabilization of the contaminated soils in the containment cell; and the
performance of required plant surveys and characterizations after residue
processing ceases to determine whether additional contaminated soils exist which
may require remediation.
The Company has received an amendment to its current NRC license and a
revision to its current wastewater discharge permit to allow for the
construction and operation of the processing plant. Construction has begun on
the processing plant which, when completed, will extract commercially valuable
materials such as tantalum, columbium, scandium and other rare earth and rare
metal elements from the feedstock residues. The estimated cost of construction
is approximately $12 million. Residue processing is expected to start in the
first quarter of 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 12
At March 31, 1998 and 1997, the Company had recorded liabilities of $10.7
million and $3.9 million, respectively, for discontinued operations including
the estimated net costs of reclaiming and decommissioning the site during and
after approximately ten years of processing the residues described above. An
additional provision for discontinued operations of $7,100,000 was recorded in
the fourth quarter of 1997 to increase the established liabilities for the
estimated cost of additional studies which may be required by regulatory
agencies, higher start-up costs, and potentially greater disposal costs after
completion of the residue processing period, as well as for cost estimates
related to probable future environmental remediation at a second site which had
been part of the Metal Products business segment. The second site is regulated
under the Resource Conservation and Recovery Act and, as a result of alleged
migration of contaminants from this second site, the Company also has been
identified as a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at a neighboring
third-party site.
The estimated net costs of reclaiming and decommissioning the first site
during the residue processing period include estimated annual revenues of
approximately $8 million per year over the ten year processing period and
estimated annual operating costs, including depreciation, of approximately the
same amount, related to residue processing. The estimated value of materials to
be extracted is based on analysis of samples taken from the residues and a
valuation of such materials using current market prices discounted to reflect
possible price decreases, including those which could result from the increased
quantities of certain of these materials made available for sale. However, there
can be no assurance as to the level of demand for the extracted materials or the
actual prices which may be obtained for them, which could vary over time. The
estimated costs of residue processing were developed by Company personnel and
independent consultants using third-party evaluations based on the pilot testing
performed. Unforeseen production complications could cause processing costs to
increase from current estimates.
In October 1995 the NRC advised the Company that a decommissioning funding
plan cost estimate based upon on-site disposal of most of the radioactive wastes
at the site was appropriate to consider. The NRC cautioned the Company,
however, that on-site disposal may require preparation of an Environmental
Impact Statement and that, in addition to the required NRC approval, local and
other federal agencies may have to be satisfied that the Company's disposal plan
is sound. Such approval process can be expected to extend over a number of
years. Management believes that a decommissioning plan including on-site
containment will ultimately be acceptable to the appropriate regulatory
authorities, based on current and proposed NRC regulations and a provision of
the Nuclear Waste Policy Act of 1982 requiring the Department of Energy to take
title to certain "special sites" which may include the Company's site; however,
there is no assurance that a plan providing for on-site containment will
ultimately be approved. Implementation of a decommissioning plan for the
Company's site which includes off-site disposal may not be financially feasible.
The NRC decommissioning regulations require licensees to estimate the cost for
decommissioning and to assure in advance that adequate funds will be available
to cover those costs. NRC regulations identify a number of acceptable methods
for assuring funds for decommissioning, including surety instruments such as
letters of credit, cash deposits and combinations thereof. The NRC October 1995
letter requested that the Company submit a decommissioning
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 13
funding plan contemplating on-site containment and stated that the cost of
residue processing should be included in the Company's cost estimate. In March
1996, the Company submitted a revised decommissioning plan and related
decommissioning funding plan. The initial level of assurance for
decommissioning is $4,456,000 provided through letters of credit. The amount
does not include assurance for costs of construction or operation of the residue
processing facility. This initial level of assurance, however, may be changed
upon further review by the NRC. The Company's available cash and/or borrowing
capacity will be reduced by the amount of funding assurance as required at any
particular time. As the decommissioning plan is implemented, deposited funds or
the amount of any surety instruments may be reduced, provided the Company can
demonstrate the sufficiency of the remaining funds or surety to assure the
completion of decommissioning.
In addition to the two sites included in the discontinued operations, the
Company has a total of eight sites at other Company facilities where
environmental remediation is ongoing or will be undertaken. Certain of these
sites were identified as a result of environmental studies conducted by the
Company during 1997 at all of its owned sites, including testing of soil and
groundwater at selected sites as indicated by the environmental studies.
The remaining land and buildings of the Company's former Precision Sheet Metal
(PSM) operation within the Metal Fabrications business segment are carried as
Other Assets - Property held for sale at a cost of $1,334,000 at March 31, 1998.
The cost of preparing the property for sale, principally environmental clean-up,
will be capitalized. Management believes that proceeds from the sale of the
property will be adequate to recover its costs, including costs of preparing the
property for sale. The Company believes the liabilities established for other
costs associated with the close-down of PSM are adequate to cover such costs. A
significant decline in real estate values in Los Angeles and/or identification
of additional contamination on-site could require the liabilities to be
adjusted.
The Company has also been notified that it is a potentially responsible party
at five sites owned by third parties. The Company's participation at three
sites is de minimis, and at two other sites the Company is being defended by its
insurance carriers.
The Company has accrued for estimated environmental investigatory and
noncapital remediation costs based upon an evaluation of currently available
facts with respect to each individual site, including the results of
environmental studies and testing conducted in 1997, and considering existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. An additional provision of $6,900,000 was
recorded in the fourth quarter of 1997 for the estimated potential exposure for
such costs expected to be incurred in the future. 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. The Company does not expect
that any sums it may have to pay in connection with these environmental
liabilities would have a materially adverse effect on its consolidated financial
position.
Form 10-Q
Page 14
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
March 31, 1998.
Form 10-Q
Page 15
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 - 05/15/98 /s/William D. Jarosz
William D. Jarosz
Chairman, Chief Executive Officer
and President
Date - 05/15/98 /s/R. Michael McEntee
R. Michael McEntee
Vice President and Chief Financial Officer
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF FANSTEEL INC. AS OF MARCH 31, 1998 AND THE RELATED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S FORM 10-Q FILING
FOR THE PERIOD ENDED MARCH 31, 1998.
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