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 September 30, 1999
( ) 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 September 30, 1999)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 2
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1999 1998
(Unaudited) *
ASSETS
Current Assets
Cash and cash equivalents (including
securities purchased under agreement
to resell of $1,775,000 in 1998) $ 44,295 $ 2,031,835
Accounts receivable - net 19,504,887 22,148,457
Inventories
Raw material and supplies 4,614,333 5,341,512
Work-in-process 15,967,134 15,177,294
Finished goods 8,208,657 8,686,552
28,790,124 29,205,358
Less reserve to state certain
inventories at LIFO cost 6,763,841 6,763,841
Total inventories 22,026,283 22,441,517
Other assets - current
Deferred income taxes 2,490,511 2,575,684
Other 1,184,783 1,325,492
Total current assets 45,250,759 50,522,985
Net Assets of Discontinued Operations 21,607,191 13,668,396
Property, Plant and Equipment
Land 1,911,631 1,911,631
Buildings 13,046,957 13,046,957
Machinery and equipment 57,383,604 55,552,823
72,342,192 70,511,411
Less accumulated depreciation 51,717,872 50,055,789
Net Property, Plant and Equipment 20,624,320 20,455,622
Other Assets
Prepaid pension asset 690,283 -
Deferred income taxes 706,526 1,087,598
Goodwill 2,725,244 2,897,972
Other 80,956 84,799
Total Other Assets 4,203,009 4,070,369
Total Assets $91,685,279 $88,717,372
* - 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.)
September 30, December 31,
1999 1998
(Unaudited) *
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 9,751,845 $11,185,587
Accrued liabilities 11,777,228 10,733,582
Accrued income taxes 837,855 707,772
Current maturities of long-term debt 279,049 306,578
Total current liabilities 22,645,977 22,933,519
Long-term Debt 2,306,746 2,506,746
Other Liabilities
Discontinued operations and environmental
remediation 15,646,000 15,646,000
Pension liabilities 84,017
Total other liabilities 15,646,000 15,730,017
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 21,747,145 21,497,145
Capital in excess of par value 316,000 -
Unamortized cost of restricted stock awards (439,553) -
Retained earnings 34,240,809 30,829,632
Other comprehensive income
Minimum pension liability (4,778,714) (4,778,714)
Foreign currency translation 869 (973)
Total other comprehensive income (4,777,845) (4,779,687)
Total Shareholder's Equity 51,086,556 47,547,090
Total Liabilities and Shareholders' Equity $91,685,279 $88,717,372
* - 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
September 30, September 30,
1999 1998
Net sales $ 34,743,999 $ 36,746,257
Costs and expenses
Cost of products sold 29,020,736 31,074,206
Selling, general and administrative 4,453,804 4,387,661
33,474,540 35,461,867
Operating income 1,269,459 1,284,390
Other income (expense)
Interest income on investments 206 113,101
Interest expense (26,562) (29,876)
Other (57,632) (33,996)
(83,988) 49,229
Income before income taxes 1,185,471 1,333,619
Income tax provision 360,000 509,000
Net income $ 825,471 $ 824,619
Weighted average number of common 8,598,858 8,598,858
shares outstanding
Basic and diluted net income per share $0.10 $0.10
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 INCOME
(UNAUDITED)
For the Nine Months Ended
September 30, September 30,
1999 1998
Net sales $110,015,590 $116,179,452
Costs and expenses
Cost of products sold 90,836,079 96,439,293
Selling, general and administrative 13,989,196 13,440,039
104,825,275 109,879,332
Operating income 5,190,315 6,300,120
Other income (expense)
Interest income on investments 14,935 405,247
Interest expense (81,688) (73,120)
Other (128,385) 30,157
(195,138) 362,284
Income before income taxes 4,995,177 6,662,404
Income tax provision 1,584,000 2,488,000
Net income $ 3,411,177 $ 4,174,404
Weighted average number of common
shares outstanding 8,598,858 8,598,858
Basic and diluted net income per share $0.40 $0.49
Dividends per common share $ - $ -
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 6
FANSTEEL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
Increase (decrease) in
cash and cash equivalents
Cash flows from operating activities:
Net income $ 3,411,177 $ 4,174,404
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,894,951 1,715,517
Amortization of unearned stock awards 126,447 -
Net pension (credit) (774,300) (242,734)
Deferred income tax charge 466,245 956,084
Gain from disposals of property, plant,
and equipment (4,847) (135,062)
Changes in assets and liabilities:
Decrease in marketable securities - 41,196
Decrease (increase) in accounts
receivable 2,643,570 (842,342)
Decrease (increase) in inventories 415,234 (3,181,883)
Decrease in other assets - current 140,709 354,664
(Decrease) increase in accounts payable
and accruals (388,254) 1,031,368
Increase (decrease) in income taxes
payable 130,083 (199,087)
Decrease (increase) in other assets 3,843 (255,115)
Net cash provided by operating activities 8,064,858 3,417,010
Cash flows from investing activities:
Payment for property, plant and equipment
for Fansteel de Mexico in 1998 - (3,779,307)
Additions to property, plant and equipment (1,897,074) (2,960,053)
Increase in net assets of discontinued
operations-design, engineering and
equipment for processing plant (7,938,795) (6,374,424)
Proceeds from disposition of marketable
securities - current - 5,000,000
Proceeds from sale of property, plant and
equipment 11,000 246,538
Net cash (used in) investing activities (9,824,869) (7,867,246)
Cash flows from financing activities:
Proceeds from long-term debt 30,000 1,225,000
Payments of long-term debt (257,529) (285,370)
Net cash (used in) provided by financing
activities (227,529) 939,630
Net (decrease) in cash and cash equivalents (1,987,540) (3,510,606)
Cash and cash equivalents at beginning of
period 2,031,835 8,038,229
Cash and cash equivalents at September 30 $ 44,295 $ 4,527,623
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 7
FANSTEEL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidated Financial Statements
The consolidated balance sheet at September 30, 1999 and the consolidated
statements of income for the three months and nine months ended September 30,
1999 and 1998, and the consolidated statements of cash flows for the nine months
ended September 30, 1999 and 1998, 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's line of credit was increased to $33 million on May 20, 1999. The
revolving line of credit expires on May 20, 2002. The credit lines are currently
being used for letters of credit needed for funding assurance related to
environmental issues, insurance policies, and development loans. Total unused
lines of credit were $24.9 million as of September 30, 1999.
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. For the nine months ended September 30, 1999 total
comprehensive income was $1,842 more than net income due to foreign currency
translation gains. For the nine months ended September 30, 1998 total
comprehensive income was equal to net income.
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which changes the way the Company reports
information about its operating segments in annual financial statements and also
requires selected segment information in interim reports to shareholders. The
information for 1998 has been restated from the prior years' presentation in
order to conform to the 1999 presentation. The Company's business units have
separate management teams and infrastructures that offer different products and
services.
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 8
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 three business segments: Industrial Tools, Advanced
Structures and Industrial Metal Components. Net sales and operating income for
the third quarter and nine months ended September 30, 1999 and 1998 for each of
the Company's business segments are summarized below:
Third Quarter Nine Months
1999 1998 1999 1998
Net Sales:
Industrial Tools
Sales $13,563,567 $14,503,674 $ 41,590,096 $ 44,959,462
Intersegment sales (4,092) (525) (8,965) (5,332)
13,559,475 14,503,149 41,581,131 44,954,130
Advanced Structures
Sales 11,413,763 12,439,296 36,500,126 40,337,561
Intersegment sales - - - -
11,413,763 12,439,296 36,500,126 40,337,561
Industrial Metal Components
Sales 9,803,671 9,804,468 31,977,500 30,901,187
Intersegment sales (32,910) (656) (43,167) (13,426)
9,770,761 9,803,812 31,934,333 30,887,761
Total Net Sales $34,743,999 $36,746,257 $110,015,590 $116,179,452
Operating Income
(Expense):
Industrial Tools $ 875,772 $ 870,940 $ 3,221,238 $ 2,973,532
Advanced Structures (110,934) 184,020 658,079 1,913,661
Industrial Metal
Components 513,162 239,065 1,837,848 1,449,792
Corporate ( 8,541) (9,635) (526,850) (36,865)
Total Operating
Income (Expense) $ 1,269,459 $ 1,284,390 $ 5,190,315 $ 6,300,120
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 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.
The following discussion should be read in conjunction with the consolidated
financial statements of the Company and the related notes to the consolidated
financial statements.
Quarter Ended September 30, 1999 Compared with Quarter Ended September 30, 1998
Fansteel's third quarter, 1999 net sales were $34,744,000, a decrease of
$2,002,000 or 5.4%, from third quarter 1998 net sales of $36,746,000. Lower
demand for tungsten carbide cutting tools used by the metal working industry and
for forgings used in the aircraft market, partially offset by increased sales of
investment castings and road construction tools, accounted for the change in
sales.
Operating income for the Company was $1,269,000 for the third quarter of 1999
compared with $1,284,000 in the third quarter of 1998. Operating income as a
percentage of sales was 3.7% in the third quarter 1999 compared with 3.5% in the
third quarter of 1998. Despite the lower sales volume, reduced operating costs,
tight control of expenses and the full production of the Fansteel de Mexico
operation allowed for the improvement to operating income as a percentage of
sales.
The Company incurred other expenses of $84,000 in the third quarter of 1999
compared with other income of $49,000 in the third quarter of 1998. Interest
income in the current quarter was lower as less cash was available for
investment due to expenditures for the start-up of Fansteel de Mexico and the
reclamation plant in Muskogee, Oklahoma.
Net income for the third quarter of 1999 was $825,000, or $.10 per share, the
same as the prior year. Net income as a percentage of sales was 2.4% for the
third quarter of 1999 compared with 2.2% for the same quarter of the prior year.
The effective tax rate was lower in the third quarter of 1999 compared with the
third quarter of 1998 due to the reduction in the valuation allowance for
deferred taxes related to environmental reserves which had a favorable impact on
third quarter, 1999 net income of $.01 per share.
Industrial Tools business segment net sales for the third quarter of 1999 were
$13,559,000 compared with $14,503,000 in the third quarter of 1998, a decrease
of $944,000, or 6.5%. Most of the decline in this segment occurred due to the
slowdown in the metal working industry which resulted in lower demand for
tungsten carbide cutting tools. Decreased sales of coal mining tools occurred as
coal production slowed considerably in the third quarter of 1999. Wear parts
used for downhole drilling products declined, but showed signs of improvement
during the latter part of the third quarter in conjunction with the recent
increase in oil prices. Third quarter 1999 construction tool sales
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
improved 70.5% over the same period of the prior year due to another quarter of
strong sales from continued demand for the new pyramid-tipped tool and the high
level of road repair activity.
Industrial Tools operating income for the third quarter of 1999 was $876,000
compared with $871,000 in the same period of 1998. As a percentage of net sales,
Industrial Tools operating income was 6.5% for the current quarter compared with
6.0% for the same period of the prior year. Despite the sales decline in this
segment, operating income benefited from lower operating costs and tight control
on expenses.
Advanced Structures business segment net sales for the third quarter of 1999
were $11,414,000, a decrease of 8.2%, from third quarter 1998 net sales of
$12,439,000. Sales of forgings and machined aircraft parts declined as a result
of the slowdown in the aircraft industry and inventory adjustments made by key
customers. While sales of sand castings are down from last year, increased sales
of tooling for the sand castings provided a positive increase overall in the
sand casting product line compared with the prior year.
Advanced Structures had an operating loss of $111,000 for the third quarter of
1999 compared with operating income of $184,000 for the third quarter of 1998.
Third quarter 1999 results were negatively impacted by losses at the sand
casting operation that resulted from an unfavorable product mix and higher than
normal scrap. Operating income also decreased due to the lower sales volume at
the forging operation.
Industrial Metal Components business segment net sales for the third quarter
of 1999 were $9,771,000 compared with third quarter 1998 net sales of
$9,804,000. Investment castings sales are up 16.1% over the third quarter of
last year due to increased volume from the truck engine and marine customers.
Sales of wire formed product sales declined with demand for lawn and garden
products lower as a result of the summer drought in the South and the East and
due to inventory adjustments by key customers. Sales of powdered metal
components were also negatively impacted by weaker demand from the lawn and
garden industry.
Operating income for the Industrial Metal Components for the third quarter of
1999 was $513,000 compared with $239,000 for the same period of 1998. As a
percentage of net sales, operating income was 5.3% for the third quarter of 1999
compared with 2.4% in the same period last year. Results for the third quarter
of 1998 reflect capacity constraints experienced at the investment casting
facility as it struggled to meet escalating demand. The addition of the Fansteel
de Mexico facility, which came into full production in 1999, relieved the
capacity situation and lowered operating costs.
Nine Months Ended September 30, 1999 Compared with the Nine Months Ended
September 30, 1998
Net sales for the first nine months of 1999 were $110,016,000 compared with
$116,179,000 for the same period in 1998, a decrease of $6,163,000, or 5.3%. The
year-to-date decline in sales is reflective of the slowdowns in the metalworking
and aircraft industries.
Operating income for Fansteel for the nine months ended September 30, 1999 was
$5,190,000 compared with $6,300,000 in the nine months of 1998, a decrease of
$1,110,000, or 17.6%. The decrease resulted from the lower sales volume and a
one-time charge in the first quarter of 1999 related to management changes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
Other expenses of $195,000 for the Company were incurred in the first nine
months of 1999 compared with other income of $362,000 for the same period of
1998. Interest income was lower in 1999 due to less cash being available for
investment due to expenditures for the start-up of Fansteel de Mexico and
continued expenditures for the reclamation plant in Muskogee, Oklahoma. Results
in 1998 included nonrecurring gains of $127,000 from the sale of excess land.
Net income for the first nine months of 1999 was $3,411,000 or $.40 per share
compared with $4,174,000 or $.49 per share for the same period of 1998. One-time
charges related to management changes in the first quarter of 1999 decreased
earnings by $.04 per share for the first nine months of 1999. The effective tax
rate was lower in the first nine months of 1999 compared with the same period of
the prior year due to the reduction in the valuation allowance for deferred
taxes related to environmental reserves, which had a favorable impact on net
income in 1999 of $.03 per share.
Net sales for the Industrial Tools business segment for the first nine months
of 1999 were $41,581,000 compared with $44,954,000 for the same period of 1998,
a decrease of $3,373,000, or 7.5%. Tungsten carbide cutting tool sales, which
have slowed since the first half of 1998, have experienced lower demand from the
metal working market. Wear part sales have also declined, particularly for
downhole drilling products as the oil industry has suffered from low oil prices
in the first nine months of 1999. Construction tool sales have more than doubled
from the same period of 1998 due to strong demand for the new pyramid-tipped
construction tool and the high level of activity in road construction programs.
Despite the decline in the third quarter of 1999, coal mining tool sales
remained nearly even with the prior nine months due to the addition of a key
distributor at the end of the third quarter of 1998.
Industrial Tools operating income for the first nine months of 1999 was
$3,221,000, an increase of $247,000, or 8.3%, compared with the $2,974,000 for
the same period of 1998. As a percentage of net sales, operating income was 7.7%
for the first nine months of 1999 compared with 6.6% in the same period of the
prior year. Despite the decline in sales, operating income improved due to
continuing efforts to reduce operating costs.
Advanced Structures business segment net sales for the first nine months of
1999 were $36,500,000, a decrease of 9.5% compared with $40,338,000 in the same
period of 1998. Sales of forgings and machined aircraft parts declined due to
the slowdown in the aircraft market. Sales of magnesium and aluminum sand
casting products have improved due to increased tooling sales.
Advanced Structures operating income for the period ended September 30, 1999
was $658,000 compared with $1,914,000 for the same period of 1998. As a
percentage of net sales, operating income for the nine months ended September
30, 1999 fell to 1.8% compared with 4.7% for the same period of the prior year.
Operating income was negatively impacted by lower sales volume and
inefficiencies related to equipment utilization at the forging location. The
sand casting operation's third quarter loss, which resulted from higher than
normal scrap and an unfavorable product mix, also negatively impacted the first
nine month's operating income for this segment.
Industrial Metal Components business segment net sales for the first nine
months of 1999 were $31,934,000, an increase of 3.4% compared with $30,888,000
in the first nine months of 1998. Additional capacity from Fansteel de Mexico
allowed for increased investment casting sales of engine components for the
medium-duty truck industry as well as the addition of parts for the marine
industry. Sales of both wire formed products and powdered metal components
declined in the first nine months of 1999, primarily due to lower demand from
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 12
the lawn and garden market and due to inventory adjustments made by key
customers.
Industrial Metal Components operating income for the period ended September
30, 1999 was $1,838,000, an increase of $388,000 compared $1,450,000 in the same
period of 1998. As a percentage of net sales, operating income for the first
nine months of 1999 improved to 5.8% from 4.7% for the same period of the prior
year. Improvement to operating income resulted from lower operating costs
associated with full production at the Fansteel de Mexico facility.
Order backlog at September 30, 1999 was $48,615,000, a decrease of $9,548,000,
or 16.4%, from September 30, 1998. Advanced Structures experienced the largest
decline in backlog, with reduced orders from aircraft manufacturers. The
Industrial Tools backlog also declined due to the slowdown in the metal working
industry. Industrial Metal Components backlog improved due to increased orders
for investment castings.
Outlook
Sales and order rates in a number of key markets including metalworking and
the commercial aircraft market experienced decreases in the last half of 1998
compared to the first half of 1998. For the first nine months of 1999, these
markets remained at a lower level. Growth will depend on opportunities from
improvements in the Company's production processes, new product development, and
investment in capital equipment. The Company is seeking increased share of
current markets, as well as new markets, through investment in current operating
units, such as the 1998 Fansteel de Mexico start-up which began full production
in 1999. Cost control programs remain active in all operating plans throughout
the Company.
Liquidity and Capital Resources
Cash and cash equivalents were $44,000 at September 30, 1999, a decrease of
$1,988,000 from December 31, 1998. In accordance with management's program to
expand the operations of the Company, investments of $1,897,000 were made in
capital equipment. Engineering, equipment and start-up costs of $7,939,000 were
incurred for the processing plant being built for reclamation and
decommissioning purposes in Muskogee, Oklahoma.
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 working capital investments, expenditures for
machinery and equipment, environmental costs and other normal operating
requirements. However, the Company's line of credit was increased to $33 million
on May 20, 1999. This agreement expires May 20, 2002. As of September 30, 1999,
there were no borrowings from the revolving line of credit, but $8.1 million was
being used for letters of credit needed for funding assurance related to
environmental issues, self-insurance policies and development loans. The Company
may further use a portion of this unused credit during 1999 to fund the start-up
of the reclamation processing plant in Muskogee.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 13
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.
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 that 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. Prior to
decommissioning, the Company expects to 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. The processing
plant will extract commercially valuable materials such as tantalum, columbium,
scandium and other rare earth and rare metal elements from the feedstock
residues. Pilot production processing began in the third quarter of 1999.
The Company, in association with outside consultants, developed a
decommissioning plan for the site involved including 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 characterization after residue
processing ceases to determine whether additional contaminated soils exist which
may require remediation , and submitted that plan and a related decommissioning
funding plan to the Nuclear Regulatory Commission ("NRC") as required by law.
The NRC requested in May 1999 that the Company change its submittal to separate
the property (approximately 100 acres) being considered for unrestricted use
from property (approximately 10 acres) being considered for the on-site
containment cell. The unrestricted use property plan was submitted in June 1999
and approved in August 1999, with the NRC license amended accordingly. The plan
dealing with the on-site containment cell was submitted in August 1999. In
September 1999, the NRC published its intent to review this submittal for the
purpose of amending the license. In response to the notice, a petition was
filed with the NRC by the Oklahoma Attorney General requesting a hearing in
order to dispute the appropriateness of constructing the on-site containment
cell. If a hearing is granted, the Company expects that it would be held no
earlier than the conclusion of the NRC's initial review of the plan, which
should require about one year.
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. The approval process for on-site containment 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, and will be approved, based on current NRC regulations
or provisions of the Nuclear Waste Policy Act of 1982. However, there is no
assurance that a plan providing for on-site containment will ultimately be
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 14
approved. Implementation of a decommissioning plan for the Company's site that
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 level of
assurance for decommissioning, including on-site containment, is currently
$4,456,000 provided through letters of credit. The amount does not include
assurance for costs of operation of the residue processing facility even though
the NRC had previously indicated that the cost of processing should be included
in the cost estimate. This 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.
At September 30, 1999 the Company had recorded liabilities of $9.3 million
for discontinued operations including the estimated net costs of reclaiming and
decommissioning the site during and after the approximate ten years of
processing the residues and the Company's estimated share of costs 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 will 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 addition to the two sites included in the discontinued operations, the
Company has a total of seven 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 Company has also been notified that it is a potentially responsible
party at six sites owned by third parties. The Company's participation at four
sites is de minimis, and at the other two sites the Company is either being
defended by its insurance carriers or has meritorious defenses to liability.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 15
At September 30, 1999 the Company had recorded liabilities of $8.0 million
for estimated environmental investigatory and 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. 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.
Year 2000 Readiness Disclosure
Many existing information technology ("IT") products and systems and non-IT
products and systems containing embedded processor technology were originally
programmed to represent any date by using six digits (e.g., 12/31/99), as
opposed to eight digits (e.g., 12/31/1999). Accordingly, such products and
systems may experience miscalculations, malfunctions, or disruptions when
attempting to process information containing dates that fall after December 31,
1999. These potential problems are collectively referred to as the "Year 2000"
problem. The following comments summarize the Company's overall approach and
status with respect to Year 2000 issues.
The Company has been engaged in an ongoing, comprehensive project to assess
and remediate the impact on its computer systems and programs of the Year 2000
problem. The assessment process began in late 1996 with the inventory of all
potentially affected hardware and software, along with a determination as to
whether or not they may be impacted by the Year 2000. This assessment has been
completed. All affected hardware has been replaced. All software developed
in-house has been reviewed and necessary modifications or replacements made with
minimal final testing to be completed before year-end. The Company has
identified software supplied by outside vendors which is not Year 2000
compliant. With respect to the critical applications, the Company has acquired
the most recent releases or purchased replacement software that is Year 2000
compliant. Implementation and testing of new releases and new software is
scheduled to be completed before year-end. Non-critical applications are being
reviewed on an ongoing basis with revision or replacement being made as needed.
The Company began an assessment in 1998 of non-IT products and systems that
may contain embedded processor technology that will not recognize the Year 2000
properly. This assessment was completed during the second quarter of 1999. No
significant issues have been identified with non-IT products and systems. All
remedial actions are expected to be completed before year-end.
The total Year 2000 costs are estimated at approximately $1.2 million,
which includes new hardware, new software and upgrades to existing computer
equipment, as well as training for these new systems. Three year or four year
operating leases have been obtained for a majority of the new IT products and
systems, most of which would have been done through normal operations of the
information systems. Approximately 20% of the total expenditures were made in
1997 with an additional 25% made in 1998, and 30% expected in 1999. The
remaining 25% will be expended in future years in relation to terms of
applicable leases.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 16
The Company initiated communications using questionnaires with key
suppliers and customers in 1998 to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 problems. Key suppliers were determined based upon the
amount of business and importance to the Company of the material or services
provided. The initial contacts were with financial institutions which provide
banking and employee benefit services. All of those financial institutions have
responded by identifying their plans to become Year 2000 compliant and now
provide periodic reports on their progress. All key suppliers and customers
have also been contacted using questionnaires. This process will be ongoing
throughout the remainder of 1999 by reviewing responses, obtaining updates,
requesting additional follow-up information, and identifying new key suppliers
and customers. To date, no negative responses have been received, but there is
no guarantee that systems of other companies on which the Company's systems rely
will be converted timely and would not have a material adverse effect on the
Company's systems.
The Year 2000 project is estimated to be completed in 1999 prior to any
anticipated impact on the Company's IT and non-IT products and systems. The
Company believes that with modifications to existing software and conversions to
new software, the Year 2000 issue will not pose significant operational problems
for its systems.
The Company continues to analyze possible scenarios as part of the Year
2000 project which could have a negative impact. An area of concern that is
considered low risk, but potentially high impact would be widespread long-term
utility failures resulting in a shutdown of the Company's operations. The
Company has little ability to correct such a utility failure. At this time, the
Company is unable to determine the impact or likelihood of such a utility
failure. Another area considered by the Company to be low risk and potentially
high impact is the foreign supply of raw materials. The Company has developed
contingency plans to address continued short-term supply of these materials, but
long-term shortages may result in price increases well into the year 2000. The
amount of these price increases and the Company's ability to pass on such
increases to our customers is not determined at this time. The Company
continues to evaluate all key components of its operations and is developing
related contingency plans as more information becomes available. The Company
has developed its contingency plans for the risks identified.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 project are based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant codes, and the level of compliance by key suppliers and
customers.
Form 10-Q
Page 17
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
September 30, 1999.
Form 10-Q
Page 18
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 -11/12/99 /s/Gary L. Tessitore
Gary L. Tessitore
Chairman, President, and Chief Executive Officer
Date -11/12/99 /s/R. Michael McEnteee
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 September 30, 1999 and the
related consolidated statement of income for the nine months ended September 30,
1999 and is qualified in its entirety by reference to the Company's Form
10Q filing for the period ended September 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 44,295
<SECURITIES> 0
<RECEIVABLES> 19,790,198
<ALLOWANCES> 285,311
<INVENTORY> 22,026,283
<CURRENT-ASSETS> 45,250,759
<PP&E> 72,342,192
<DEPRECIATION> 51,717,872
<TOTAL-ASSETS> 91,685,279
<CURRENT-LIABILITIES> 22,645,977
<BONDS> 2,306,746
0
0
<COMMON> 21,747,145
<OTHER-SE> 29,339,411
<TOTAL-LIABILITY-AND-EQUITY> 91,685,279
<SALES> 110,015,590
<TOTAL-REVENUES> 110,015,590
<CGS> 90,836,079
<TOTAL-COSTS> 104,825,275
<OTHER-EXPENSES> 195,138
<LOSS-PROVISION> 7,123
<INTEREST-EXPENSE> 81,688
<INCOME-PRETAX> 4,995,177
<INCOME-TAX> 1,584,000
<INCOME-CONTINUING> 3,411,177
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,411,177
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.40
</TABLE>
