FORM 10Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 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 June 30, 2000)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 2
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2000 1999
(Unaudited) *
ASSETS
Current Assets
Cash and cash equivalents $ 133,634 $ 16,516
Accounts receivable - net 22,128,216 18,885,942
Inventories
Raw material and supplies 4,881,061 4,396,715
Work-in-process 16,767,170 16,096,014
Finished goods 6,779,652 7,350,692
28,427,883 27,843,421
Less reserve to state certain
inventories at LIFO cost 6,896,999 6,896,999
Total inventories 21,530,884 20,946,422
Other assets - current
Deferred income taxes 2,079,780 2,339,890
Other 958,603 1,030,489
Total current assets 46,831,117 43,219,259
Net Assets of Discontinued Operations 28,028,687 24,075,586
Property, Plant and Equipment
Land 1,872,631 1,911,631
Buildings 13,046,957 13,046,957
Machinery and equipment 58,148,334 57,602,970
73,067,922 72,561,558
Less accumulated depreciation 53,340,490 52,243,537
Net Property, Plant and Equipment 19,727,432 20,318,021
Other Assets
Prepaid pension asset 8,615,683 8,087,825
Goodwill 2,552,516 2,667,668
Other 67,813 69,825
Total Other Assets 11,236,012 10,825,318
Total Assets $105,823,248 $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.)
June 30, December 31,
2000 1999
(Unaudited) *
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 11,656,418 $ 9,415,399
Accrued liabilities 11,857,350 11,756,110
Accrued income taxes 1,230,731 229,311
Current maturities of long-term debt 302,319 265,915
Total current liabilities 25,046,818 21,666,735
Long-term Debt 2,042,753 2,270,831
Other Liabilities
Discontinued operations and environmental
remediation 15,337,000 15,337,000
Deferred income taxes 3,561,281 2,746,682
Total other liabilities 18,898,281 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 (297,303) (392,136)
Retained earnings 38,070,873 34,745,161
Other comprehensive income
Foreign currency translation (1,319) 766
Total other comprehensive income (1,319) 766
Total Shareholder's Equity 59,835,396 56,416,936
Total Liabilities and Shareholders' Equity $105,823,248 $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
June 30, June 30,
2000 1999
Net sales $ 38,555,259 $ 38,226,431
Costs and expenses
Cost of products sold 31,137,286 31,222,580
Selling, general and administrative 5,137,079 4,606,228
36,274,365 35,828,808
Operating income 2,280,894 2,397,623
Other income (expense)
Interest income on investments - 717
Interest expense (23,626) (27,627)
Other 209,838 (34,217)
186,212 (61,127)
Income before income taxes 2,467,106 2,336,496
Income tax provision 853,000 763,000
Net income $ 1,614,106 $ 1,573,496
Weighted average number of common
shares outstanding 8,632,191 8,598,858
Basic and diluted net income per share $ .19 $ .18
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 Six Months Ended
June 30, June 30,
2000 1999
Net sales $ 78,052,963 $ 75,271,591
Costs and expenses
Cost of products sold 63,005,362 61,815,343
Selling, general and administrative 10,126,018 9,535,392
73,131,380 71,350,735
Operating income 4,921,583 3,920,856
Other income (expense)
Interest income on investments - 14,729
Interest expense (49,944) (55,126)
Other 177,073 (70,753)
127,129 (111,150)
Income before income taxes 5,048,712 3,809,706
Income tax provision 1,723,000 1,224,000
Net income $ 3,325,712 $ 2,585,706
Weighted average number of common
shares outstanding 8,627,612 8,598,858
Basic and diluted net income per share $0.39 $0.30
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 SIX MONTHS ENDED JUNE 30,
2000 1999
Increase (decrease) in
cash and cash equivalents
Cash flows from operating activities:
Net income $ 3,325,712 $ 2,585,706
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,268,282 1,276,805
Amortization of unearned stock awards 94,833 79,029
Net pension (credit) (527,858) (427,644)
Deferred income tax charge 1,074,709 56,782
Gain from disposals of property, plant,
and equipment (220,000) (4,847)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (3,242,274) 773,130
(Increase) decrease in inventories (584,462) 182,381
Decrease in other assets-current 71,886 31,835
Increase in accounts payable and accruals 2,340,174 448,720
Increase in income taxes payable 1,001,420 214,243
Decrease in other assets 2,012 203,852
Net cash provided by operating activities 4,604,434 5,419,992
Cash flows from investing activities:
Additions to property, plant and equipment (601,541) (1,363,447)
Increase in net assets of discontinued
operations-design, engineering and
equipment for processing plant (3,953,101) (5,718,326)
Proceeds from sale of property, plant and
equipment 259,000 11,000
Net cash (used in) investing activities (4,295,642) (7,070,773)
Cash flows from financing activities:
Payments of long-term debt (191,674) (187,948)
Net cash (used in) financing activities (191,674) (187,948)
Net increase (decrease) in cash and cash
equivalents 117,118 (1,838,729)
Cash and cash equivalents at beginning of
period 16,516 2,031,835
Cash and cash equivalents at June 30 $ 133,634 $ 193,106
(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 June 30, 2000 and the consolidated
statements of income for the three months and six months ended June 30, 2000 and
1999, and the consolidated statements of cash flows for the six months ended
June 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. Total unused
lines of credit were $24.9 million as of June 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 six months ended June 30, 2000 total comprehensive income was $2,085
less than net income due to foreign currency translation losses. For the six
months ended June 30, 1999 total comprehensive income was $1,595 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 second quarter and six months ended June 30, 2000 and 1999 for each of the
Company's business segments are summarized below:
Second Quarter Six Months
2000 1999 2000 1999
Net Sales:
Industrial Tools
Sales $15,317,428 $14,366,298 $29,621,358 $28,026,529
Intersegment sales (1,302) (4,686) (2,554) (4,873)
15,316,126 14,361,612 29,618,804 28,021,656
Advanced Structures
Sales 12,184,612 12,819,222 25,435,054 25,086,363
Intersegment sales - - - -
12,184,612 12,819,222 25,435,054 25,086,363
Industrial Metal
Components
Sales 11,057,350 11,052,641 23,016,352 22,173,829
Intersegment sales (2,829) (7,044) (17,247) (10,257)
11,054,521 11,045,597 22,999,105 22,163,572
Total Net Sales $38,555,259 $38,226,431 $78,052,963 $75,271,591
Operating Income
(Expense):
Industrial Tools $ 1,159,641 $ 1,175,101 $ 2,380,043 $ 2,345,466
Advanced Structures 510,988 437,288 1,029,869 769,013
Industrial Metal
Components 618,816 798,087 1,536,881 1,324,686
Corporate (8,551) (12,853) (25,210) (518,309)
Total Operating
Income (Expense) $ 2,280,894 $ 2,397,623 $ 4,921,583 $ 3,920,856
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 June 30, 2000 Compared to Quarter Ended June 30, 1999
Fansteel's net sales for the second quarter of 2000 were $38,555,000
compared with $38,226,000 for the second quarter of 1999. Sales of tungsten
carbide cutting tools and wear parts accounted for more than the total increase
in sales for the quarter.
Second quarter 2000 operating income for the Company was $2,281,000
compared with $2,398,000 in the second quarter of 1999. The decline was due
primarily to the lower sales volume at the investment casting facilities in the
second quarter of 2000.
Other income for the Company in the second quarter of 2000 was $186,000
compared with other expenses of $61,000 in the second quarter of 1999. Other
income in the second quarter of 2000 included a non-recurring gain of $220,000
from the sale of unused land and equipment.
Fansteel's net income for the quarter ended June 30, 2000 was $1,614,000,
or $.19 per share, compared with $1,573,000, or $.18 per share, in the second
quarter of 1999. Net income as a percentage of sales was 4.2% for the second
quarter of 2000 compared with 4.1% for the second quarter of 1999.
Second quarter 2000 net sales for the Industrial Tools business segment
improved by 6.6% to $15,316,000, compared with $14,362,000 in the second quarter
of 1999. Increased sales of tungsten carbide cutting tools to the metalworking
industries provided most of the improvement. Also providing significant
improvement to the segment were increased sales of wear parts used in downhole
drilling products due to higher oil prices. Second quarter 2000 construction
tool sales remained even with the second quarter of 1999, which was the highest
quarterly sales of the decade for construction tools. Coal mining tool revenues
for the second quarter of 2000 also remained even with the second quarter of
1999.
Industrial Tools business segment operating income for the second quarter
of 2000 was $1,160,000 compared with $1,175,000 for the same period of 1999. As
a percentage of sales, operating income for the second quarters of 2000 and 1999
was 7.6% and 8.2%, respectively. Costs associated with the reorganization of the
business segment, increased allowances for slow moving inventory, and
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
higher selling expenses negatively impacted the improvements from the higher
sales volume and lower material costs.
Advanced Structures business segment second quarter sales in 2000 were
$12,185,000, a decrease of 5.0% from second quarter 1999 sales of $12,819,000.
Sand casting sales for the quarter were flat compared with the second quarter of
1999. Forging sales for the second quarter of 2000 declined as a result of soft
order rates from the commercial aircraft manufacturers in the second half of
1999.
Advanced Structures business segment operating income for the second
quarter of 2000 was $511,000 compared with $437,000 for the same period of 1999.
Despite the decline in forging sales, operating income improved as a percentage
of sales to 4.2% for the current quarter, compared with 3.4% in the second
quarter of 1999. Production inefficiencies experienced in 1999 at both the sand
casting operation and the forging operation have been reduced, although the sand
casting operation is still experiencing some production bottlenecks and high
scrap. Management is focused on correcting these problems.
For the second quarter of 2000, sales of $11,055,000 in the Industrial
Metal Components business segment remained even with the same period of the
prior year. Improvements in the second quarter were seen in sales of powdered
metal components and wire formed products, while sales of investment castings
declined. Second quarter 2000 sales of powdered metal components were strong,
with increased sales to nearly all markets served. Wire formed products
recorded solid quarterly sales as efforts to obtain new business are becoming
effective. Investment casting sales for the second quarter have fallen as key
customers in the truck and marine industries have made inventory adjustments.
Production for these customers is expected to increase in the ensuing months.
Operating income for the Industrial Metal Components business segment in
the second quarter of 2000 was $619,000 compared with $798,000 for the same
period of 1999. As a percentage of sales, operating income was 5.6% for the
second quarter of 2000 and 7.2% for the second quarter of 1999. Higher volumes
at the powdered metal and the wire forming operations were offset by the lower
production levels at the investment castings facilities.
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
For the first half of 2000, Fansteel's net sales increased 3.7% to
$78,053,000 from $75,272,000 in the first half of 1999. Higher sales of tungsten
carbide wear parts and powdered metal components provided most of the
improvement for the Company.
The Company's operating income for the first six months of 2000 was
$4,922,000, an increase of $1,001,000 compared with $3,921,000 in the first six
months of 1999. Results in the first half of 1999 included a one-time charge of
$490,000 for management changes. The remainder of the improvement was a result
of the increased sales volume and lower material costs.
Other income for the Company was $127,000 for the first six months of 2000
compared with other expenses of $111,000 for the first half of 1999. Other
income in 2000 included $220,000 for a non-recurring gain from the sale of
unused land and equipment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
Net income for the first half of 2000 was $3,326,000, or $.39 per share, an
improvement over net income of $2,586,000, or $.30 per share, for the first half
of 1999. Results for the six months ended June 30, 2000 included a non-recurring
gain of $.02 per share from the second quarter sale of unused land and
equipment. Earnings in the first half of 1999 were $.04 per share lower due to
the one-time charges related to management changes.
Industrial Tools business segment net sales for the first half of 2000 were
$29,619,000, an increase of $1,597,000 or 5.7%, compared to net sales of
$28,022,000 for the first half of 1999. Tungsten carbide wear parts provided
most of the improvement, benefiting from strong die blank shipments as a result
of the rebound in the Asian market and also from improved shipments of oil field
products due to the increase in the price of oil. Construction tool sales have
improved in the first half of 2000 due to ongoing road construction projects.
Tungsten carbide cutting tools also improved, with higher sales to the
metalworking industry. Sales of coal mining tools for the first six months of
2000 declined as a result of low ordering activity by the major mines in the
first quarter of 2000.
Industrial Tools business segment operating income for the first six months
of 2000 was $2,380,000, or 8.0% of sales, compared with $2,345,000, or 8.4% of
sales, in the first half of 1999. The benefits of the higher sales volume and
lower material costs were partially offset by higher labor costs, increased
manufacturing overhead, business segment reorganization costs and increased
allowances for slow moving inventory.
Net sales of $25,435,000 for the first half of 2000 for the Advanced
Structures segment represent a 1.4% increase over sales of $25,086,000 for the
same period of 1999. Sales of sand casting products used in commercial aircraft
and helicopters were higher than the first six months of 1999. For the six
months ended June 30, 2000, the forging operation experienced a sales decline
due to soft order rates experienced in the second half of 1999.
Advanced Structures' operating income for the first half of 2000 was
$1,030,000 compared with $769,000 for the first half of 1999. Despite the
decline in forging sales, operating income as a percentage of sales improved for
the first six months of 2000. Lower material and outside processing costs were
partially offset by scrap expenses and production inefficiencies at the sand
casting operation.
Industrial Metal Components net sales of $22,999,000 for the first half of
2000 represents a 3.8% increase over sales of $22,164,000 in the first half of
1999. Strong first quarter sales of powdered metal components to major markets
served accounted for most of the year-to-date improvement in this segment over
the first half of 1999. Strong second quarter sales, resulting from the
addition of new customers in both the lawn and garden market and the metal
products market, provided most of the year-to-date improvement for wire formed
products. Sales of investment castings, which have experienced inventory
adjustments by its major truck and marine customers, have declined for the first
half of 2000.
Operating income for the Industrial Metal Components business segment for
the first six months of 2000 was $1,537,000, or 6.7% of sales, compared with
$1,325,000, or 6.0% of sales, in 1999. The improvement in operating income was
the result of higher volume at the powdered metal components facility. Partially
offsetting the improvement for the first six months of 2000 was the lower
production level at the investment casting operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 12
Order backlog at June 30, 2000 was $45,430,000 compared with $51,431,000 at
June 30, 1999, a decrease of $6,001,000, or 11.7%. While the Advanced
Structures' backlog has decreased, order rates from the aircraft manufacturers
did improve in the second quarter of 2000 compared with the second quarter of
1999. The Industrial Tools business segment backlog improved due to increased
demand for tungsten carbide cutting tools from the metalworking markets. The
Industrial Metal Components' backlog also improved as a result of higher order
rates in 2000 for wire formed products and powdered metal components.
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 $134,000 at June 30, 2000, an increase of
$117,000 from December 31, 1999. For the six months ended June 30, 2000,
engineering, equipment and start-up costs of $3,953,000 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,
the Company's line of credit was increased to $33 million on May 20, 1999. As of
June 30, 2000, 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 line of credit during 2000
to fund the start-up of the reclamation processing plant in Muskogee.
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 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 13
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 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, which should require at least one year.
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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 14
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.
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. 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 increased significantly during plant
construction. 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 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 June 30, 2000 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.
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 June 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.
PART II - OTHER INFORMATION
Form 10-Q
Page 16
Item 6. Exhibits and Reports on Form 8-K
b) No reports on Form 8-K were filed during the quarter ended June 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 - 8/15/00 /s/Gary L. Tessitore
Gary L. Tessitore
Chairman, President and Chief Executive Officer
Date - 8/15/00 /s/R. Michael McEntee
R. Michael McEntee
Vice President and Chief Financial Officer
