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, 2000
( ) 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
8,698,858
(Number of shares of $2.50 par value common stock outstanding
as of September 30, 2000)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 2
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
2000 1999
(Unaudited) *
ASSETS
Current Assets
Cash and cash equivalents $ 252,659 $ 16,516
Accounts receivable - net 24,800,771 18,885,942
Inventories
Raw material and supplies 5,275,679 4,396,715
Work-in-process 16,290,441 16,096,014
Finished goods 6,814,513 7,350,692
28,380,633 27,843,421
Less reserve to state certain
inventories at LIFO cost 6,896,999 6,896,999
Total inventories 21,483,634 20,946,422
Other assets - current
Deferred income taxes 1,949,725 2,339,890
Other 1,043,509 1,030,489
Total current assets 49,530,298 43,219,259
Net Assets of Discontinued Operations 29,379,147 24,075,586
Property, Plant and Equipment
Land 1,872,631 1,911,631
Buildings 13,048,828 13,046,957
Machinery and equipment 59,002,133 57,602,970
73,923,592 72,561,558
Less accumulated depreciation 53,929,254 52,243,537
Net Property, Plant and Equipment 19,994,338 20,318,021
Other Assets
Prepaid pension asset 9,201,541 8,087,825
Goodwill 2,494,940 2,667,668
Other 66,682 69,825
Total Other Assets 11,763,163 10,825,318
Total Assets $110,666,946 $98,438,184
* - 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,
2000 1999
(Unaudited) *
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 13,120,043 $ 9,415,399
Accrued liabilities 11,999,712 11,756,110
Accrued income taxes 1,535,242 229,311
Current maturities of long-term debt 252,046 265,915
Total current liabilities 26,907,043 21,666,735
Long-term Debt 2,998,286 2,270,831
Other Liabilities
Discontinued operations and environmental
remediation 15,337,000 15,337,000
Deferred income taxes 3,932,082 2,746,682
Total other liabilities 19,269,082 18,083,682
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 8,698,858 shares 21,747,145 21,747,145
Capital in excess of par value 316,000 316,000
Unamortized cost of restricted stock awards (249,886) (392,136)
Retained earnings 39,680,298 34,745,161
Other comprehensive income
Foreign currency translation (1,022) 766
Total other comprehensive income (1,022) 766
Total Shareholder's Equity 61,492,535 56,416,936
Total Liabilities and Shareholders' Equity $110,666,946 $98,438,184
* - 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,
2000 1999
Net sales $ 38,972,286 $ 34,743,999
Costs and expenses
Cost of products sold 31,306,188 29,020,736
Selling, general and administrative 5,141,503 4,453,804
36,447,691 33,474,540
Operating income 2,524,595 1,269,459
Other income (expense)
Interest income on investments - 206
Interest expense (31,666) (26,562)
Other (61,504) (57,632)
(93,170) (83,988)
Income before income taxes 2,431,425 1,185,471
Income tax provision 822,000 360,000
Net income $ 1,609,425 $ 825,471
Weighted average number of common
shares outstanding 8,632,191 8,598,858
Basic and diluted net income per share $0.19 $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,
2000 1999
Net sales $117,025,249 $110,015,590
Costs and expenses
Cost of products sold 94,311,550 90,836,079
Selling, general and administrative 15,267,521 13,989,196
109,579,071 104,825,275
Operating income 7,446,178 5,190,315
Other income (expense)
Interest income on investments - 14,935
Interest expense (81,610) (81,688)
Other 115,569 (128,385)
33,959 (195,138)
Income before income taxes 7,480,137 4,995,177
Income tax provision 2,545,000 1,584,000
Net income $ 4,935,137 $ 3,411,177
Weighted average number of common
shares outstanding 8,629,150 8,598,858
Basic and diluted net income per share $0.57 $0.40
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, 2000 1999
Increase (decrease) in
cash and cash equivalents
Cash flows from operating activities:
Net income $ 4,935,137 $ 3,411,177
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,914,622 1,894,951
Amortization of unearned stock awards 142,250 126,447
Net pension (credit) (1,113,716) (774,300)
Deferred income tax charge 1,575,565 466,245
Gain from disposals of property, plant,
and equipment (220,000) (4,847)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (5,914,829) 2,643,570
(Increase) decrease in inventories (537,212) 415,234
(Increase) decrease in other assets -
current (13,020) 140,709
Increase (decrease) in accounts payable
and accruals 3,946,458 (388,254)
Increase in income taxes payable 1,305,931 130,083
Decrease in other assets 3,143 3,843
Net cash provided by operating activities 6,024,329 8,064,858
Cash flows from investing activities:
Additions to property, plant and equipment (1,457,211) (1,897,074)
Increase in net assets of discontinued
operations-design, engineering and
equipment for processing plant (5,303,561) (7,938,795)
Proceeds from sale of property, plant and
equipment 259,000 11,000
Net cash (used in) investing activities (6,501,772) (9,824,869)
Cash flows from financing activities:
Proceeds from long-term debt 1,000,000 30,000
Payments of long-term debt (286,414) (257,529)
Net cash provided by (used in) financing
activities 713,586 (227,529)
Net increase (decrease) in cash and cash
equivalents 236,143 (1,987,540)
Cash and cash equivalents at beginning of
period 16,516 2,031,835
Cash and cash equivalents at September 30 $ 252,659 $ 44,295
(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, 2000 and the consolidated
statements of income for the three months and nine months ended September 30,
2000 and 1999, and the consolidated statements of cash flows for the nine months
ended September 30, 2000 and 1999, 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. In the third
quarter of 2000, an additional $1 million of the line of credit was used to fund
the start-up of the Muskogee, Ok reclamation plant. Total unused lines of credit
were $24 million as of September 30, 2000.
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.
For the nine months ended September 30, 2000 total comprehensive income was
$1,788 less than net income due to foreign currency translation losses. For the
nine months ended September 30, 1999 total comprehensive income was $1,842 more
than net income due to foreign currency translation gains.
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, 2000 and 1999 for each of
the Company's business segments are summarized below:
Third Quarter Nine Months
2000 1999 2000 1999
Net Sales:
Industrial Tools
Sales $15,334,633 $13,563,567 $ 44,955,991 $ 41,590,096
Intersegment sales (281) (4,092) (2,835) (8,965)
15,334,352 13,559,475 44,953,156 41,581,131
Advanced Structures
Sales 14,213,952 11,413,763 39,649,006 36,500,126
Intersegment sales - - - -
14,213,952 11,413,763 39,649,006 36,500,126
Industrial Metal
Components
Sales 9,431,971 9,803,671 32,448,323 31,977,500
Intersegment sales (7,989) (32,910) (25,236) (43,167)
9,423,982 9,770,761 32,423,087 31,934,333
Total Net Sales $38,972,286 $34,743,999 $117,025,249 $110,015,590
Operating Income
(Expense):
Industrial Tools $ 1,308,888 $ 875,772 $ 3,688,931 $ 3,221,238
Advanced Structures 1,135,784 (110,934) 2,165,653 658,079
Industrial Metal
Components 89,631 513,162 1,626,512 1,837,848
Corporate (9,708) (8,541) (34,918) (526,850)
Total Operating
Income (Expense) $ 2,524,595 $ 1,269,459 $ 7,446,178 $ 5,190,315
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, 2000 Compared with Quarter Ended September 30, 1999
Net sales of $38,972,000 for Fansteel in the third quarter of 2000 increased
by $4,228,000, or 12.2%, compared with $34,744,000 in the third quarter of 1999.
Sales of aluminum and magnesium castings used in aircraft and helicopter engines
provided most of the improvement, with sales of magnesium castings to the oil
field industry providing further improvement for the Company. Sales of tungsten
carbide cutting tools and wear parts to the metalworking and oil industries also
contributed to the increase for the quarter.
Fansteel's operating income increased to $2,525,000 for the third quarter of
2000 compared with $1,269,000 in the third quarter of 1999. As a percentage of
sales, third quarter 2000 operating income improved to 6.4% from 3.7% in the
third quarter of 1999. The improvement was a result of the higher sales volume,
lower material costs, and manufacturing efficiencies.
For the third quarter of 2000, other expenses for the Company were $93,000
compared with other expenses of $84,000 in the third quarter of 1999.
For the quarter ended September 30, 2000, net income was $1,609,000, or $.19
per share, compared with $825,000, or $.10 per share, in the third quarter of
1999. Net income as a percentage of sales improved to 4.1% in the third quarter
of 2000 compared with 2.4% in the third quarter of 1999.
Industrial Tools business segment net sales for the third quarter of 2000 were
$15,334,000, an increase of 13.1% over sales of $13,559,000 in the third quarter
of 1999. All product lines in this business segment posted improvements over the
prior year third quarter, with sales of tungsten carbide cutting tools to the
metalworking industries providing the majority of the quarter's improvement.
Sales of tungsten carbide wear part sales also provided a significant
contribution to the third quarter increase as a result of the rebound in the
Asian markets and higher shipments of oil field products.
Operating income for the Industrial Tools business segment for the third
quarter of 2000 was $1,309,000, or 8.5% of sales, compared with $876,000, or
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
6.5% of sales, for the same period of 1999. Operating income improved based on
the higher volume and the resulting manufacturing efficiencies.
Third quarter 2000 net sales of $14,214,000 for the Advanced Structures
business segment increased $2,800,000, or 24.5%, compared with $11,414,000 in
the third quarter of 1999. The improvement was primarily the result of increased
sales of magnesium and aluminum castings to the aircraft and helicopter markets.
The addition of magnesium casting sales to the oil drilling industry also
provided notable growth for the quarter. Despite the gains made by the sand
casting product line, third quarter sales of forgings to the aircraft market
have declined as this operation continues to feel the effects of the soft order
rates in the last half of 1999.
Operating income for the Advanced Structures business segment in the third
quarter of 2000 was $1,136,000 compared with an operating loss of $111,000 in
the third quarter of 1999. The increase in sales volume at the sand casting
operation, which suffered losses in the third quarter of 1999 as the result of
an unfavorable product mix and high scrap costs, provided the majority of the
increase to income.
Industrial Metal Components business segment sales of $9,424,000 for the third
quarter of 2000 decreased $347,000, or 3.6%, compared with $9,771,000 for the
same period of 1999. The revenue decline in the current quarter was the result
of lower sales of investment castings used by the marine industry and wire
formed products used by the lawn and garden market. Third quarter 2000 sales of
powdered metal components were flat compared with the third quarter of the prior
year.
Industrial Metal Components business segment operating income for the third
quarter of 2000 was $90,000 compared with $513,000 for the same period of 1999.
Lower material costs provided some benefit to this segment, but were not enough
to offset the negative impact of lower third quarter 2000 sales at the
investment casting and wire forming operations.
Nine Months Ended September 30, 2000 Compared with the Nine Months Ended
September 30, 1999
For the first nine months of 2000, Fansteel's net sales were $117,025,000, an
increase of $7,009,000, or 6.4%, compared with net sales of $110,016,000 in
1999. Providing the majority of the improvement were sales of aluminum and
magnesium castings used in aircraft and helicopter engines. Also contributing to
the increases were higher sales of tungsten carbide cutting tools and wear parts
to the metalworking and oil field industries.
For the first nine months of 2000, the Company's operating income was
$7,446,000, an increase of $2,256,000 compared with the first nine months of
1999. Results in 1999 included a one-time charge of $490,000 for management
changes. The increased sales volume, lower material costs, and manufacturing
efficiencies accounted for the remainder of the improvement.
For the nine months ended September 30, 2000, other income for the Company was
$34,000 compared with other expenses of $195,000 for the same period of 1999.
Results in 2000 include a non-recurring gain of $220,000 from the second quarter
sale of unused land and equipment.
The Company's net income for the first nine months of 2000 was $4,935,000, or
$.57 per share, compared with net income of $3,411,000, or $.40 per share, for
the same period of 1999. For the nine months ended September 30, 2000,
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
results included a non-recurring gain of $.02 per share from the second quarter
sale of equipment and unused land. Earnings for the first nine months of 1999
were $.04 per share lower due to the one-time charges related to management
changes.
For the nine months ended September 30, 2000, sales for the Industrial Tools
business segment were $44,953,000, an increase of 8.1% over $41,581,000 for the
same period of 1999. Sales of tungsten carbide cutting tools and wear parts
accounted for most of the improvement, with growth also coming from road
construction tool sales. Sales of mining tools experienced a decline for the
nine months due to the decrease in Eastern United States coal production in the
first quarter of 2000.
For the first nine months of 2000 Industrial Tools business segment operating
income was $3,689,000, or 8.2% of sales, compared with $3,221,000, or 7.7% of
sales, for the same period of 1999. Operating income improved as a result of the
higher sales volume and lower material costs.
Advanced Structure business segment sales of $39,649,000 for the first nine
months of 2000 compared with $36,500,000 in sales for the same period of 1999
increased $3,149,000, or 8.6%. The improvement was primarily the result of
increased sales of magnesium and aluminum castings to the aircraft and
helicopter markets, with the addition of magnesium casting sales to the oil
drilling industry also providing growth. These improvements were partially
offset by lower forging sales to the aircraft market.
For the first nine months of 2000, operating income for the Advanced
Structures segment was $2,166,000 compared with $658,000 for the same period of
1999. Operating income as a percentage of sales in 2000 also improved to 5.5%
compared with 1.8% in 1999 for the nine-month period. Results in 1999 were
negatively impacted by unfavorable product mixes and scrap costs incurred at the
sand casting operation and by production inefficiencies at the forging facility
that resulted during an upgrade of a new steam delivery system.
For the nine months ended September 30, 2000, sales of $32,423,000 for the
Industrial Metal Components business segment increased by 1.5% compared with
$31,934,000 in the same period of 1999. Strong first quarter 2000 sales of
powdered metal components provided the year-to-date improvement in this segment
over the first nine months of 1999. Partially offsetting the revenue gains from
the powdered metals product line were lower investment casting sales, which were
impacted by inventory adjustments by the truck and marine industries. Due to
lower demand from the lawn and garden industry in the third quarter 2000, wire
formed product sales have remained flat on a year-over-year basis.
Operating income for the first nine months of 2000 for the Industrial Metal
Components business segment was $1,627,000, or 5.0% of sales, compared with
$1,838,000, or 5.8% of sales in 1999. The higher sales volume at the powdered
metal plant was offset by the lower production levels at the investment casting
facilities as well as by increased manufacturing costs at both the wire forming
and powdered metal operations.
Fansteel's backlog of orders at September 30, 2000 was $47,827,000 compared
with $48,614,000 at September 30, 1999, a decrease of $787,000, or 1.6%. The
Industrial Tools business segment backlog increased as orders for tungsten
carbide cutting tools from the metalworking markets continue to be strong. The
Industrial Metal Components backlog improved with increases in the powdered
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 12
metal products and investment castings backlogs. The Advanced Structures backlog
decreased, but order rates from the aircraft manufacturers have improved in the
second and third quarters of 2000 compared with the same quarters of the prior
year.
Outlook
Many challenges are ahead for the Company as we accelerate the changes
necessary to deliver improved performance. While we anticipate modest industry
growth in 2000 in many of our businesses, we expect increased competition and
continual pressure on prices to customers. Improvements in Fansteel's
performance will have to come from increasing our level of business with new and
existing customers, reducing costs and improving the management of working
capital.
Liquidity and Capital Resources
Cash and cash equivalents were $253,000 at September 30, 2000, an increase of
$236,000 from December 31, 1999. For the nine months ended September 30, 2000,
engineering, equipment, and start-up costs of $5,304,000 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 and cash equivalents 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,
due to the start-up of the reclamation plant in Muskogee, OK, the Company
increased its line of credit to $33 million on May 20, 1999. During the third
quarter of 2000, it became necessary to borrow $1,000,000 from the revolving
line of credit to continue funding the reclamation plant. As of September 30,
2000, $7.8 million was being used for letters of credit needed for funding
assurance related to environmental issues, self-insurance policies and
development loans.
Funding assistance by states and municipalities is investigated when any
significant expenditures are proposed. The Company's debt other than the $1
million from the revolving line of credit 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 located in Muskogee, Oklahoma that processed certain ores 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 at
least ten years a commercial plant to complete the processing of residues
currently contained in storage ponds at the site, which will materially
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 13
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.
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 that lie beneath
and surround the storage ponds; 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. A hearing was granted, but the
Company expects that it would be held no earlier than the conclusion of the
NRC's initial review of the plan. The Company cannot at this time predict when a
hearing would be held.
On-site containment of the contaminated soils may require preparation of an
Environmental Impact Statement and, 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 would be
expected to extend over a number of years. Management believes that a
decommissioning plan including on-site containment would ultimately be
acceptable to the appropriate regulatory authorities, and would be approved,
based on current NRC regulations or provisions of the Nuclear Waste Policy Act
of 1982. However, there can be no assurance that a plan providing for on-site
containment would ultimately receive approval. Based on recent decreases in the
cost of off-site disposal, the Company currently is exploring the possibility of
off-site disposal of the contaminated soils as an alternative to on-site
containment. There can be no assurance that off-site disposal would be a
cost-effective alternative, particularly considering the lengthy period required
to complete processing of the residues and the limited number of licensed
disposal sites. The implementation of a decommissioning plan for the Company's
site that includes off-site disposal of contaminated soils and residues 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 14
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.
Pilot production processing at the plant began in the third quarter of 1999.
Start-up problems have been encountered, causing delays and increased costs.
Further production complications and cost increases could arise as additional
processing is brought into the pilot production late in 2000. Full production is
not anticipated until mid-2001. For the first nine months of 2000, $5,304,000
was spent for engineering, equipment, and start-up costs with an additional
$563,000 spent for decommissioning costs.
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 may result from the increased quantities of certain of these materials
made available for sale. Market prices for some of the materials have
fluctuated significantly during plant construction. 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 Company continues to
believe that aggregate revenues for the sale of materials to be extracted in the
processing operation at the site will approximate the operating costs, including
depreciation, related to residue processing over the processing period. The
Company is continuing to evaluate the economics of the production facility as
additional information about production capacity and product quality becomes
available.
At September 30, 2000 the Company had recorded liabilities of $9.2 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.
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 eight sites owned by third parties. The Company's participation at five
sites is de minimis, and at the other three sites the Company is either being
defended by its insurance carriers or has meritorious defenses to liability.
At September 30, 2000, the Company had recorded liabilities of $7.7 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,
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 15
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.
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
September 30, 2000.
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 - 11/14/2000 /s/Gary L. Tessitore
Gary L. Tessitore
Chairman, President and Chief Executive Officer
Date - 11/14/2000 /s/R. Michael McEntee
R. Michael McEntee
Vice President and Chief Financial Officer
