<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
[ ] 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 1-5725
QUANEX CORPORATION
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1872178
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 West Loop South, Suite 1500, Houston, Texas 77027
------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 961-4600
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. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1997
- --------------------------------------- -------------------------------
Common Stock, par value $0.50 per share 14,006,398
<PAGE>
QUANEX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - July 31, 1997 and
October 31, 1996 ................................... 1
Consolidated Statements of Income - Three and Nine
Months Ended July 31, 1997 and 1996................ 2
Consolidated Statements of Cash Flow - Nine Months
Ended July 31, 1997 and 1996 ...................... 3
Notes to Consolidated Financial Statements ............ 4-7
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition .................... 8-13
Part II. Other Information
Item 6: Exhibits and Reports on Form 8-K ...................... 14
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
---------- ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ............................$ 25,672 $ 35,975
Accounts and notes receivable, net .............. 88,469 90,583
Inventories ..................................... 89,106 89,938
Deferred income taxes ........................... 10,014 10,019
Prepaid expenses ................................ 1,422 121
---------- ----------
Total current assets .................... 214,683 226,636
Property, plant and equipment ..................... 674,000 620,058
Less accumulated depreciation and amortization ....(310,561) (284,723)
---------- ----------
Property, plant and equipment, net ................ 363,439 335,335
Goodwill, net ..................................... 82,017 84,343
Net assets of discontinued operations ............. - 7,217
Other assets ...................................... 17,061 17,152
---------- ----------
$677,200 $670,683
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................... $ - $ 5,575
Accounts payable ................................ 72,091 73,958
Income taxes payable ............................ 15,540 3,807
Accrued expenses ................................ 42,147 44,286
Current maturities of long-term debt ............ 402 -
---------- ----------
Total current liabilities ............... 130,180 127,626
Long-term debt .................................... 194,273 253,513
Deferred pension credits .......................... 11,746 11,827
Deferred postretirement welfare benefits .......... 28,875 28,033
Deferred income taxes ............................. 33,951 33,743
Other liabilities ................................. 19,569 20,000
---------- ----------
Total liabilities ....................... 418,594 474,742
Stockholders' equity:
Preferred stock, no par value ................... - -
Common stock, $.50 par value .................... 7,002 6,795
Additional paid-in capital ...................... 103,574 94,251
Retained earnings ............................... 149,573 96,623
Unearned compensation ........................... - (185)
Adjustment for minimum pension liability ........ (1,543) (1,543)
---------- ----------
Total stockholders' equity .............. 258,606 195,941
---------- ----------
$677,200 $670,683
========== ==========
</TABLE>
(1)
<PAGE>
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
---------------- ----------------
1997 1996 1997 1996
------- ------- ------ -------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales............................ $225,076 $186,284 $637,068 $511,747
Cost and expenses:
Cost of sales...................... 193,368 157,836 553,832 441,923
Selling, general and
administrative expense.......... 13,436 13,920 38,254 35,919
------- ------- ------- -------
Operating income..................... 18,272 14,528 44,982 33,905
Other income (expense):
Interest expense................... (4,040) (2,313) (13,808) (7,453)
Capitalized interest............... 849 160 2,231 287
Other, net......................... (587) 988 (886) 2,151
Income from continuing operations ------- ------- ------- -------
before income taxes............... 14,494 13,363 32,519 28,890
Income tax expense................... (5,074) (5,612) (11,382) (12,134)
------- ------- ------- -------
Income from continuing operations.... 9,420 7,751 21,137 16,756
Income from discontinued operations,
net of income taxes............... - 1,394 1,699 4,568
Gain on sale of discontinued
operations, net of income taxes... - - 36,290 -
------- ------- ------- -------
Income before extraordinary charge... 9,420 9,145 59,126 21,324
Extraordinary charge - early
extinguishment of debt.......... - - - (2,522)
------- ------- ------- -------
Net income........................... $ 9,420 $ 9,145 $ 59,126 $ 18,802
======= ======= ======= =======
Earnings per common share:
Primary:
Continuing operations.......... $ 0.67 $ 0.57 $ 1.52 $ 1.23
Discontinued operations........ - 0.10 0.12 0.34
Gain on sale of discontinued
operations.................. - - 2.60 -
Extraordinary charge........... - - - (0.19)
------- ------- ------- -------
Total primary net earnings..... $ 0.67 $ 0.67 $ 4.24 $ 1.38
======= ======= ======= =======
Fully diluted:
Continuing operations.......... $ 0.62 $ 0.53 $ 1.44 $ 1.19
Discontinued operations........ - 0.08 0.10 0.28
Gain on sale of discontinued
operations.................. - - 2.17 -
Extraordinary charge........... - - - (0.15)
------- ------- ------- -------
Total assuming full dilution... $ 0.62 $ 0.61 $ 3.71 $ 1.32
======= ======= ======= =======
Weighted average shares outstanding:
Primary........................... 14,105 13,659 13,933 13,630
======= ======= ======= =======
Assuming full dilution............ 16,842 16,355 16,737 16,326
======= ======= ======= =======
</TABLE>
(2)
<PAGE>
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
--------------------
1997 1996
------ ------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income..............................................$59,126 $18,802
Adjustments to reconcile net income
to cash provided by continuing operations:
Income from discontinued operations.................. (1,699) (4,568)
Gain on sale of discontinued operations..............(36,290) -
Depreciation and amortization........................ 30,711 26,561
Deferred income taxes................................ 208 (1,815)
Deferred pension costs............................... (81) 580
Deferred postretirement welfare benefits............. 842 924
------ ------
52,817 40,484
Changes in assets and liabilities net of effects from
acquisitions and dispositions:
Decrease in accounts and notes receivable........... 2,114 12,878
Decrease (increase) in inventory.................... 832 (11,413)
Decrease in accounts payable........................ (1,867) (4,821)
Dcrease in accrued expenses......................... (2,139) (3,439)
Other, net.......................................... (3,042) 3,135
------ ------
Cash provided by continuing operations............ 48,715 36,824
Cash provided by (used in) discontinued operations (4,630) 6,225
------ ------
Cash provided by operating activities............. 44,085 43,049
Investment activities:
Proceeds from the sale of discontinued operations...... 63,900 -
Capital expenditures of continuing operations
net of retirements.................................. (55,847) (17,142)
Capital expenditures of discontinued operations........ (685) (5,573)
Other, net............................................. (6,126) (4,084)
------ ------
Cash provided by (used in) investment activities 1,242 (26,799)
Cash provided by operating and ------ ------
investment activities..................... 45,327 16,250
Financing activities:
Notes payable repayments............................... - (10,000)
Purchase of Senior Notes............................... - (44,667)
Bank borrowings (repayments)........................... (60,000) 30,000
Common dividends paid.................................. (6,176) (6,084)
Other, net............................................. 10,546 819
------ ------
Cash used by financing activities.............. (55,630) (29,932)
Decrease in cash and equivalents......................... (10,303) (13,682)
Cash and equivalents at beginning of period.............. 35,975 45,205
------ ------
Cash and equivalents at end of period.................... $25,672 $31,523
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................. $15,662 $ 9,941
Income taxes............................................. 12,105 12,651
</TABLE>
(3)
<PAGE>
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
- ----------------------
The interim consolidated financial statements of Quanex Corporation and
subsidiaries are unaudited, but include all adjustments which the Company
deems necessary for a fair presentation of its financial position and results
of operations. All such adjustments are of a normal recurring nature. Results
of operations for interim periods are not necessarily indicative of results to
be expected for the full year. All significant accounting policies conform to
those previously set forth in the Company's fiscal 1996 Annual Report on Form
10-K, which is incorporated by reference. Certain amounts for prior periods
have been reclassified in the accompanying consolidated financial statements
to conform to 1997 classifications.
2.Inventories
- -------------
<TABLE>
<CAPTION>
Inventories consist of the following: July 31, October 31,
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Raw materials ........................ $27,156 $28,426
Finished goods and work in process.... 53,514 52,768
------- -------
80,670 81,194
Other................................. 8,436 8,744
------- -------
$89,106 $89,938
======= =======
The values of inventories in the consolidated balance sheets are based on the
following accounting methods:
LIFO..................................... $65,008 $69,234
FIFO..................................... 24,098 20,704
------- -------
$89,106 $89,938
======= =======
</TABLE>
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $19 million at July 31, 1997, and $15
million at October 31, 1996.
3. Long-Term Debt and Financing Arrangements
- --------------------------------------------
On July 23, 1996, the Company replaced its $75 million Revolving Credit and
Letter of Credit Agreement with an unsecured $250 million Revolving Credit and
Term Loan Agreement ("Bank Agreement"). As of July 1997, the Bank Agreement
consisted solely of a revolving line of credit ("Revolver") as the term loan
provisions of the Bank Agreement expired as of such date. Additionally, the
maturity date of the Bank Agreement was extended by one year to July 23, 2002.
The Bank Agreement also provides for up to $25 million for letters of credit,
limited to the undrawn amount available under the Revolver. All borrowings
under the Revolver bear interest, at the option of the Company, at either (i)
the prime rate or the federal funds rate plus one percent, whichever is
higher, or (ii) a Eurodollar based rate. At July 31, 1997, the Company had
$100 million outstanding under the Revolver.
In December 1995, the Company acquired the remaining $44.7 million principal
amount of its 10.77% Senior Notes for a purchase price equal to 107.5% of the
principal amount plus accrued interest. The acquisition and related expenses
resulted in an after-tax extraordinary charge of approximately $2.5 million
($4.3 million before tax) in the first quarter of 1996.
(4)
<PAGE>
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.Discontinued Operations
- -------------------------
In April 1997, the Company completed the sale of its
LaSalle Steel Company ("LaSalle") subsidiary. LaSalle's results of operations
have been classified as discontinued operations and prior periods have been
restated. For business segment reporting purposes, LaSalle's data was
previously reported as the segment "Cold Finished Steel Bars".
Net sales and income from discontinued operations are as follows:
<TABLE>
<CAPTION>
Three
Months Nine months Ended
Ended July 31,
July 31, ----------------------
1996 1997 1996
------- ------ ------
<S> <C> <C> <C>
Net sales........................ $39,179 $66,733 $120,829
Income before income taxes....... 2,404 2,615 7,876
Income tax expense............... (1,010) (916) (3,308)
Net income....................... $ 1,394 $ 1,699 $ 4,568
</TABLE>
<TABLE>
<CAPTION>
October 31,
1996
(In thousands)
------------
<S> <C>
Net Assets of Discontinued Operations
-------------------------------------
Current assets............................ $36,702
Property, plant and equipment, net........ 16,211
Other assets.............................. 1,827
Current liabilities....................... (25,440)
Deferred pension credits.................. (5,466)
Deferred postretirement welfare benefits.. (27,595)
Deferred income taxes..................... 9,710
Adjustment for minimum pension liability.. 1,268
-------
Net assets of discontinued operations.. $ 7,217
=======
</TABLE>
(5)
<PAGE>
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Earnings Per Share
- ---------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") which
specifies the computation, presentation and disclosure requirements for Earnings
Per Share ("EPS"). SFAS 128 replaces the presentation of primary and fully
diluted EPS pursuant to Accounting Principles Board Opinion No. 15 - "Earnings
per Share"("APB 15") with the presentation of basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. The Company is required to adopt SFAS 128 with
its January 31, 1998 financial statements and restate all prior-period EPS data.
The Company will continue to account for EPS under APB 15 until that time.
Under SFAS 128, the Company's basic and diluted EPS would have been:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------- ----------------------
Basic EPS: 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Continuing operations..................... $0.68 $0.57 $1.54 $1.24
Discontinued operations................... - 0.10 0.12 0.34
Gain on sale of discontinued operations... - - 2.64 -
Extraordinary charge...................... - - - (0.19)
----- ----- ----- -----
Total Basic EPS...................... $0.68 $0.67 $4.30 $1.39
===== ===== ===== =====
Diluted EPS:
Continuing operations..................... $0.62 $0.53 $1.45 $1.19
Discontinued operations................... - 0.08 0.10 0.28
Gain on sale of discontinued operations... - - 2.18 -
Extraordinary charge...................... - - - (0.15)
----- ----- ----- -----
Total Diluted EPS.................... $0.62 $0.61 $3.73 $1.32
===== ===== ===== =====
</TABLE>
6.Subsequent Event
- ------------------
In August 1997, the Company entered into a non-binding
letter of intent to purchase Decatur Aluminum Corp., a Decatur, Alabama based
manufacturer of aluminum sheet. The transaction is subject to various
conditions, including the completion of due diligence, the negotiation and
execution of a definitive agreement, and other necessary approvals.
(6)
<PAGE>
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Industry Segment Information
- --------------------------------
Quanex is principally a specialized metals and metal products producer. The
Company's continuing operations primarily consist of three segments:
hot rolled steel bars, steel tubes and aluminum products.
<TABLE>
<CAPTION>
Corporate
Three Months Ended Hot Rolled Steel Aluminum and Consoli-
July 31, 1997 Steel Bars Tubes Products(1) Other(2) dated
------------------ ---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated companies 141.0 Tons 23.3 Tons 74,615 Lbs.
Intersegment............ 6.9 - -
------- ------- -------
Total.................... 147.9 Tons 23.3 Tons 74,615 Lbs.
======= ======= =======
Net Sales:
To unaffiliated companies $75,216 $29,625 $120,235 - $225,076
Intersegment(3)......... 4,465 - - $(4,465) -
------- ------- ------- ------- -------
Total.................... $79,681 $29,625 $120,235 $(4,465) $225,076
======= ======= ======= ======= =======
Operating income (loss).. $12,874 $ 1,612 $ 8,125 $(4,339) $ 18,272
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Corporate
Three Months Ended Hot Rolled Steel Aluminum and Consoli-
July 31, 1996 Steel Bars Tubes Products Other(2) dated
------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated companies 129.2 Tons 21.2 Tons 70,293 Lbs.
Intersegment............ 5.6 - -
------- ------- -------
Total.................... 134.8 Tons 21.2 Tons 70,293 Lbs.
======= ======= =======
Net Sales:
To unaffiliated companies $70,142 $26,704 $89,438 - $186,284
Intersegment(3)......... 3,028 - - $(3,028) -
------- ------- ------- ------- -------
Total.................... $73,170 $26,704 $89,438 $(3,028) $186,284
======= ======= ======= ======= =======
Operating income (loss).. $ 9,324 $ 597 $ 7,807 $(3,200) $ 14,528
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Corporate
Nine Months Ended Hot Rolled Steel Aluminum and Consoli-
July 31, 1997 Steel Bars Tubes Products(1) Other(2) dated
---------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated companies 411.6 Tons 73.1 Tons 211,349 Lbs.
Intersegment............ 19.4 - -
------- ------- -------
Total.................... 431.0 Tons 73.1 Tons 211,349 Lbs.
======= ======= =======
Net Sales:
To unaffiliated companies $219,192 $89,913 $327,963 - $637,068
Intersegment(3)......... 11,832 - - $(11,832) -
------- ------- ------- ------- -------
Total.................... $231,024 $89,913 $327,963 $(11,832) $637,068
======= ======= ======= ======= =======
Operating income (loss).. $ 34,815 $ 4,059 $ 16,728 $(10,620) $ 44,982
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Corporate
Nine Months Ended Hot Rolled Steel Aluminum and Consoli-
July 31, 1996 Steel Bars Tubes Products Other(2) dated
---------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated companies 360.1 Tons 68.3 Tons 179,759 Lbs.
Intersegment............ 19.7 - -
------- ------- -------
Total.................... 379.8 Tons 68.3 Tons 179,759 Lbs.
======= ======= =======
Net Sales:
To unaffiliated companies $196,625 $88,515 $226,607 - $511,747
Intersegment(3)......... 11,186 - - $(11,186) -
------- ------- ------- ------- -------
Total.................... $207,811 $88,515 $226,607 $(11,186) $511,747
======= ======= ======= ======= =======
Operating income (loss).. $ 26,999 $ 4,934 $ 13,224 $(11,252) $ 33,905
======= ======= ======= ======= =======
</TABLE>
(1) 1997 includes Piper Impact, Inc.
(2) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(3) Intersegment sales are conducted on an arm's-length basis.
(7)
<PAGE>
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition
Results of Operations
The Company classifies its operations into three business segments: hot
rolled steel bars, steel tubes and aluminum products. The Company's products are
marketed to the industrial machinery and capital equipment industries, the
transportation industry, the energy processing industry and the residential and
commercial building industries.
In April 1997, the Company completed the sale of its LaSalle Steel
Company ("LaSalle") subsidiary. LaSalle's results of operations have been
classified as discontinued operations and prior periods have been restated. For
business segment reporting purposes, LaSalle's data was previously classified as
"Cold Finished Steel Bars".
The Company's hot rolled steel business reflected improvements in net
sales and operating income for the first three quarters of fiscal 1997 as
compared to the same periods of fiscal 1996. The improved results were due
primarily to higher sales volume, but also reflect the benefits realized from
the Company's capital improvement programs, which have allowed the Company to
increase production, improve quality and manage manufacturing costs.
The Company's aluminum products business achieved higher sales and
operating income primarily due to the acquisition in August 1996 of Piper
Impact, Inc. ("Piper") and its higher margin operations. The Company's
Nichols-Homeshield Division was affected by weaker margins between selling
prices and raw material costs. These margins, referred to herein as "price
spreads", are a key financial performance indicator in the aluminum products
business.
The Company currently expects that overall business levels for the
remainder of fiscal 1997 should be similar to those experienced during 1996.
However, domestic and global market factors will impact the Company and any
slowdown in the U.S. economy could affect demand and pricing for many of the
Company's products. The acquisition of Piper in August 1996 will result in
higher fiscal 1997 sales and operating income, assuming no material declines in
the markets in which it serves. The sale of LaSalle in April 1997 will affect
income for the remainder of fiscal 1997 by the difference between the amount
LaSalle would have earned and the reduction in interest expense as a result of
the repayment of debt with the net proceeds from the sale. Improved financial
results will be dependent upon, among other things, whether the continued
strength of the economy can be sustained, improvements in the markets which the
Company serves and improvement in the price spreads of aluminum products.
(8)
<PAGE>
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
The following table sets forth selected operating data for the Company's four
businesses:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ ------------------
1997 1996 1997 1996
------ ------- ------ -------
(In thousands)
<S> <C> <C> <C> <C>
Hot Rolled Steel Bars:
Units shipped (Tons)............ 147.9 134.8 431.0 379.8
Net Sales....................... $ 79,681 $ 73,170 $231,024 $207,811
Operating income................ $ 12,874 $ 9,324 $ 34,815 $ 26,999
Depreciation and amortization... $ 3,405 $ 4,590 $ 10,215 $ 13,770
Identifiable assets............. $179,235 $164,209 $179,235 $164,209
Steel Tubes:
Units shipped (Tons)............ 23.3 21.2 73.1 68.3
Net Sales....................... $ 29,625 $ 26,704 $ 89,913 $ 88,515
Operating income................ $ 1,612 $ 597 $ 4,059 $ 4,934
Depreciation and amortization... $ 607 $ 552 $ 1,851 $ 1,730
Identifiable assets............. $ 45,996 $ 41,675 $ 45,996 $ 41,675
Aluminum Products:
Units shipped (Pounds).......... 74,615 70,293 211,349 179,759
Net Sales....................... $120,235 $ 89,438 $327,963 $226,607
Operating income................ $ 8,125 $ 7,807 $ 16,728 $ 13,224
Depreciation and amortization... $ 5,312 $ 3,621 $ 18,126 $ 10,558
Identifiable assets............. $414,179 $225,143 $414,179 $225,143
</TABLE>
Consolidated net sales for the three and nine months ended July 31,
1997, were $225.1 million and $637.1 million, respectively, representing
increases of $38.8 million, or 21%, and $125.3 million, or 24%, respectively,
when compared to the same periods last year. The improvement principally
reflects the inclusion of Piper sales and improved sales volume in the Company's
hot rolled steel bar business.
Net sales from the Company's hot rolled steel bar business for the
three and nine months ended July 31, 1997, were $79.7 million and $231.0
million, respectively, representing increases of $6.5 million, or 9%, and $23.2
million, or 11%, respectively, when compared to the same periods last year. The
improvements were primarily due to sales volume increases of 10% and 13%,
respectively, for the three and nine months ended July 31, 1997, as compared to
the same prior year periods. The hot rolled steel bar business sales volume
increase is principally due to the continued market strength in the durable
goods market, particularly transportation and capital goods, and increased
market penetration.
Net sales from the Company's steel tube business for the three and nine
months ended July 31, 1997, were $29.6 million and $89.9 million, respectively,
representing increases of $2.9 million, or 11%, and $1.4 million, or 2%,
respectively, when compared to the same periods last year. The improvements were
primarily due to sales volume increases of 10% and 7%, respectively, for the
three and nine months ended July 31, 1997, as compared to the same prior year
periods. The volume improvement reflects ongoing strength in the mechanical tube
market. Pricing pressure continued, however, despite the higher demand.
(9)
<PAGE>
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Net sales from the Company's aluminum products business for the three
and nine months ended July 31, 1997, were $120.2 million and $328.0 million,
respectively, representing increases of $30.8 million, or 34%, and $101.4
million, or 45%, respectively, when compared to the same periods last year.
These increases are principally due to the acquisition of Piper in August 1996.
Net sales were also higher for the nine months ended July 31, 1997, compared to
the same period last year, due to higher sales volume of aluminum flat roll.
Consolidated operating income for the three and nine months ended July
31, 1997, was $18.3 million and $45.0 million, respectively, representing
increases of $3.7 million, or 26%, and $11.1 million, or 33%, respectively, when
compared to the same periods last year. The improvements were primarily due to
the inclusion of Piper's results and improved operating income in the hot rolled
steel bar business.
Operating income from the Company's hot rolled steel bar business for
the three and nine months ended July 31, 1997, was $12.9 million and $34.8
million, respectively, representing increases of $3.6 million, or 38%, and $7.8
million, or 29%, respectively, when compared to the same periods last year.
These improvements were attributable to higher sales due to increased capacity
and strong demand.
Operating income from the Company's steel tube business for the three
and nine months ended July 31, 1997, was $1.6 million and $4.1 million,
respectively, representing an increase of $1.0 million and a decrease of $875
thousand, respectively, when compared to the same periods last year.
Profitability improved during the third quarter of fiscal 1997 reflecting
strength in most of this segment's product lines, but, on a year-to-date basis,
remained below fiscal 1996 primarily due to weaker selling prices and a
depressed boiler tube market.
Operating income from the Company's aluminum products business for the
three and nine months ended July 31, 1997, was $8.1 million and $16.7 million,
respectively, representing increases of $318,000, or 4%, and $3.5 million, or
26%, respectively, when compared to the same periods last year. Improvement in
this segment reflects the acquisition of Piper, partially offset by lower
margins at Nichols Aluminum.
Selling, general and administrative expenses decreased by $484,000, or
3%, and increased by $2.3 million, or 7%, respectively, for the three and nine
months ended July 31, 1997, as compared to the same periods of last year. These
changes principally reflect the inclusion of Piper in 1997, offset by higher
accruals to the allowance for doubtful accounts during the third quarter of
fiscal 1996.
Interest expense increased by $1.7 million and $6.4 million,
respectively, for the three and nine months ended July 31, 1997, as compared to
the same periods of 1996 primarily as a result of increased bank borrowings
associated with the Piper acquisition.
(10)
<PAGE>
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Income from continuing operations for the three and nine months ended
July 31, 1997, was $9.4 million and $21.1 million, respectively, as compared to
$7.8 million and $16.8 million for the same prior year periods. The improvements
were principally attributable to improved results at the Company's MacSteel
division and the inclusion of Piper. Included in "Other, net" for the nine
months ended July 31, 1996, was a $2.3 million pretax gain related to the final
recovery of a business interruption claim. Also included in "Other, net" for the
nine months ended July 31, 1996, was $1.5 million resulting from a loss on
abandonment of idle assets. Capitalized interest increased to $849,000 and $2.2
million, respectively, for the three and nine months ended July 31, 1997,
compared to $160,000 and $287,000 for the same periods last year due to ongoing
construction related to the expansion programs at MacSteel and Piper. Income
taxes were applied at the Company's expected annual effective rate. The
Company's effective income tax rate was 35% for the first three quarters of
fiscal 1997 compared to 42% in the prior year periods.
Income from discontinued operations, net of income taxes, for the nine
months ended July 31, 1997, was $1.7 million, as compared to $4.6 million for
the same period in 1996. Included in net income for the nine months ended July
31, 1997, is an after-tax gain of $36.3 million on the sale of these operations.
Liquidity and Capital Resources
The Company's principal sources of funds are cash on hand, cash flow
from operations, and borrowings under an unsecured $250 million Revolving Credit
and Term Loan Agreement ("Bank Agreement"). The Bank Agreement consists of a
revolving line of credit ("Revolver"). In July 1997, the term loan provisions of
the Bank Agreement expired. The maturity date of the Bank Agreement, however,
was extended by one year to July 23, 2002. The Bank Agreement also provides for
up to $25 million for letters of credit, limited to the undrawn amount available
under the Revolver. All borrowings under the Revolver bear interest, at the
option of the Company, at either (i) the prime rate or the federal funds rate
plus one percent, whichever is higher, or (ii) a Eurodollar based rate. In the
fourth quarter of fiscal 1996, the Company entered into interest rate swap
agreements, which effectively converted $100 million of its variable rate debt
under the Bank Agreement to fixed rate. Under these agreements, payments are
made based on a fixed rate ($50 million at 7.025%, and $50 million at 6.755%)
and payments are received on a LIBOR based variable rate (5.71875% at July 31,
1997). Differentials to be paid or received under the agreements are recognized
as interest expense. Payments under the swap agreements are tied to the interest
periods for the borrowings under the Bank Agreement. The swap agreements mature
July 29, 2003. The Bank Agreement contains customary affirmative and negative
covenants and requirements to maintain a minimum consolidated tangible net
worth, as defined. The Bank Agreement limits the payment of dividends and
certain restricted investments. Under the Bank Agreement, at July 31, 1997,
there were $100 million of Revolver borrowings outstanding.
(11)
<PAGE>
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
In December 1995, the Company acquired all of its outstanding 10.77%
Senior Notes for a purchase price equal to 107.5% of the principal amount plus
accrued interest. The acquisition and related expenses resulted in an after-tax
extraordinary charge of approximately $2.5 million in the first quarter of 1996.
The acquisition was funded with cash and bank borrowings.
On June 30, 1995, the Company exercised its right under the terms of its
Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for
an aggregate of $84,920,000 of its 6.88% Convertible Subordinated Debentures due
June 30, 2007 ("Debentures"). Interest is payable semi-annually on June 30 and
December 31 of each year. The Debentures are subject to mandatory annual sinking
fund payments sufficient to redeem 25% of the Debentures issued on each of June
30, 2005 and June 30, 2006, to retire a total of 50% of the Debentures before
maturity. The Debentures are subordinate to all senior indebtedness of the
Company and are convertible, at the option of the holder, into shares of the
Company's common stock at a conversion price of $31.50 per share.
On August 9, 1996, the Company completed the acquisition of substantially
all of the assets of Piper. Piper's assets, net of various liabilities, were
acquired for approximately $130 million in cash, cash equivalents, and notes.
This acquisition was financed with existing cash and bank borrowings. Subsequent
to the acquisition, the Company's Board of Directors approved additional capital
expenditures at Piper totaling approximately $55 million. These expenditures are
expected to provide the capacity needed to supply major new customer programs
phasing in over the next two years.
On April 18, 1997, the Company completed the sale of LaSalle for
approximately $65 million in cash. The proceeds were used to pay down the
Company's Revolver.
At July 31, 1997, the Company had commitments of $21 million for the
purchase or construction of capital assets, primarily relating to the Company's
continued expansions at MacSteel and Piper. The Company plans to fund these
capital expenditures through cash flow from operations and, if necessary,
additional borrowings.
The Company believes that it has sufficient funds and adequate financial
sources available to meet its anticipated liquidity needs. The Company also
believes that cash flow from operations, cash balances and available borrowings
will be sufficient for the foreseeable future to finance anticipated working
capital requirements, capital expenditures, debt service requirements,
environmental expenditures and dividends.
Operating Activities
Cash provided by operating activities during the nine months ended July
31, 1997, was $44.1 million as compared to $43.0 million during the nine months
ended July 31, 1996. The increase was principally due to improved income and
higher depreciation, mostly offset by increased cash used by discontinued
operations.
Investment Activities
Net cash provided by investment activities during the nine months ended
July 31, 1997, was $1.2 million as compared to cash used in investment
activities of $26.8 million for the same 1996 period. The increase in cash
provided by investment activities was principally due to proceeds from the sale
of LaSalle, and was partly offset by increased capital expenditures and payment
of the remaining notes related to the Piper acquisition. The Company estimates
that fiscal 1997 capital expenditures will be approximately $70 to $80 million.
(12)
<PAGE>
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Financing Activities
Cash used in financing activities for the nine months ended July 31,
1997, was $55.6 million, primarily consisting of $60.0 million of repayments of
bank borrowings, mostly from the proceeds of the LaSalle sale. Cash used in
financing activities for the nine months ended July 31, 1996, was $29.9 million,
principally consisting of $44.7 million for the early extinguishment of
long-term debt, a $10.0 million reduction in notes payable and the payment of
$6.2 million in common dividends and was offset by bank borrowings of $30.0
million.
Private Securities Litigation Reform Act
Certain forward looking information contained herein is being provided in
accordance with the provisions of the Private Securities Litigation Reform Act.
Such information is subject to certain assumptions and beliefs based on current
information known to the Company and is subject to factors that could result in
actual results differing materially from those anticipated in the forward
looking statements contained in this report. Such factors include domestic and
international economic activity, prevailing prices of steel and aluminum scrap
and other raw material costs, interest rates, the continuation of countervailing
import duties on certain of the Company's competitors, construction delays,
market conditions for the Company's customers, any material changes in purchases
by the principal customers of AMSCO and Piper, environmental regulations and
changes in estimates of costs for known environmental remediation projects and
situations, world-wide political stability and economic growth, the Company's
successful implementation of its internal operating plans, performance issues
with key customers, suppliers and subcontractors, and regulatory changes and
legal proceedings. Accordingly, there can be no assurance that the
forward-looking statements contained herein will occur or that objectives will
be achieved.
(13)
<PAGE>
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.
Exhibit 2.1 - Stock Purchase Agreement dated as of April 18,
1997, by and among Niagara Corporation, Niagara
Cold Drawn Corp. and Quanex Corporation filed as
Exhibit 2.1 to the Company's Current Report on
Form 8-K, dated May 5, 1997, and incorporated
herein by reference.
Exhibit 3.1 - Restated Certificate of Incorporation of
Quanex Corporation, as amended on February 27,
1997, as filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-8, Registration
No. 333-22977, and incorporated herein by
reference.
Exhibit 11 - Statement re computation of earnings per share.
Exhibit 27 - Financial Data Schedule.
A Report on Form 8-K was filed by the Company on May 5, 1997, regarding the
completion of the sale of its LaSalle Steel subsidiary and containing
certain pro forma financial statements of the Company and notes thereto
regarding the sale.
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.
QUANEX CORPORATION
/s/ Viren M. Parikh
-------------------
Viren M. Parikh
Controller (Chief Accounting Officer)
Date August 29, 1997
-----------------
(14)
<PAGE>
EXHIBIT 11
QUANEX CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Income from continuing operations................. $ 9,420 $ 7,751 $ 21,137 $ 16,756
Income from discontinued operations, net of
income taxes................................... - 1,394 1,699 4,568
Gain on sale of discontinued operations, net
of income taxes................................ - - 36,290 -
------ ------ ------ ------
Income before extraordinary charge................ 9,420 9,145 59,126 21,324
Extraordinary charge - early extinguishment of debt - - - (2,522)
------ ------ ------ ------
Net income........................................ $ 9,420 $ 9,145 $ 59,126 $ 18,802
====== ====== ====== ======
Weighted average shares
outstanding-primary............................. 14,105 13,659 13,933 13,630
====== ====== ====== ======
Earnings per common share:
Primary:
Income from continuing operations.............. $ 0.67 $ 0.57 $ 1.52 $ 1.23
Income from discontinued operations............ - 0.10 0.12 0.34
Gain on sale of discontinued operations........ - - 2.60 -
Extraordinary charge........................... - - - (0.19)
------ ------ ------ ------
Earnings per common share.................... $ 0.67 $ 0.67 $ 4.24 $ 1.38
====== ====== ====== ======
Income from continuing operations.................$ 9,420 $ 7,751 $ 21,137 $ 16,756
Income from discontinued operations, net of
income taxes................................... - 1,394 1,699 4,568
Gain on sale of discontinued operations, net
of income taxes................................ - - 36,290 -
------ ------ ------ ------
Income before extraordinary charge................ 9,420 9,145 59,126 21,324
Extraordinary charge - early extinguishment of debt - - - (2,522)
------ ------ ------ ------
Net income........................................ 9,420 9,145 59,126 18,802
Interest on 6.88% convertible subordinated
debentures and amortization of related issuance
costs, net of applicable income taxes.......... 999 892 2,997 2,676
------ ------ ------ ------
Adjusted net income...............................$ 10,419 $ 10,037 $ 62,123 $ 21,478
====== ====== ====== ======
Weighted average shares
outstanding-primary............................. 14,105 13,659 13,933 13,630
Effect of common stock equivalents
arising from stock options...................... 41 - 108 -
Subordinated debentures assumed converted
to common stock................................. 2,696 2,696 2,696 2,696
Weighted average shares ------ ------ ------ ------
outstanding-fully diluted....................... 16,842 16,355 16,737 16,326
====== ====== ====== ======
Earnings per common share:
Assuming full dilution:
Income from continuing operations.............. $ 0.62 $ 0.53 $ 1.44 $ 1.19
Income from discontinued operations............ - 0.08 0.10 0.28
Gain on sale of discontinued operations........ - - 2.17 -
Extraordinary charge........................... - - - (0.15)
------ ------ ------ ------
Earnings per common share.................... $ 0.62 $ 0.61 $ 3.71 $ 1.32
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet as of July 31, 1997 and the income statement for the
three and nine months ended July 31, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 25,672
<SECURITIES> 0
<RECEIVABLES> 88,469
<ALLOWANCES> 0
<INVENTORY> 89,106
<CURRENT-ASSETS> 214,683
<PP&E> 674,000
<DEPRECIATION> 310,561
<TOTAL-ASSETS> 677,200
<CURRENT-LIABILITIES> 130,180
<BONDS> 194,273
0
0
<COMMON> 7,002
<OTHER-SE> 251,604
<TOTAL-LIABILITY-AND-EQUITY> 677,200
<SALES> 637,068
<TOTAL-REVENUES> 637,068
<CGS> 553,832
<TOTAL-COSTS> 553,832
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,808
<INCOME-PRETAX> 32,519
<INCOME-TAX> 11,382
<INCOME-CONTINUING> 21,137
<DISCONTINUED> 1,699
<EXTRAORDINARY> 36,290
<CHANGES> 0
<NET-INCOME> 59,126
<EPS-PRIMARY> 4.240
<EPS-DILUTED> 3.710
</TABLE>
