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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 1-5725
QUANEX CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 38-1872178
State or other jurisdiction of incorporation or (I.R.S. Employer
organization Identification No.)
1900 WEST LOOP SOUTH, SUITE 1500 77027
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code (713) 961-4600
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.50 Par Value New York Stock Exchange, Inc.
Rights to Purchase Series A Junior Participating
Preferred Stock New York Stock Exchange, Inc.
6.88% Convertible Subordinated Debentures New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates as of December 31, 1997, computed by reference to the closing
price for the Common Stock on the New York Stock Exchange, Inc. on that date,
was $396,630,084. Such calculation assumes only the registrant's officers and
directors were affiliates of the registrant.
At December 31, 1997, there were outstanding 14,102,403 shares of the
registrant's Common Stock, $.50 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement, to be filed with
the Commission within 120 days of October 31, 1997, for its Annual Meeting of
Stockholders to be held on February 26, 1998, are incorporated herein by
reference in Items 10, 11, 12, and 13 of Part III of this Annual Report.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 2
General..................................................... 2
Markets and Product Sales by Business Segment............... 2
Manufacturing............................................... 5
Raw Materials and Supplies.................................. 6
Backlog..................................................... 6
Competition................................................. 6
Sales and Distribution...................................... 6
Seasonal Nature of Business................................. 7
Trademarks, Trade Names and Patents......................... 7
Research and Development.................................... 7
Environmental Matters....................................... 7
Employees................................................... 8
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
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PART II
Item 5. Market for Registrant's Common Equity and Related Security
Holder Matters.............................................. 9
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operation........................................ 12
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Disagreements on Accounting and Financial Disclosure........ 40
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PART III
Item 10. Directors and Executive Officers of the Registrant.......... 40
Item 11. Executive Compensation...................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
Item 13. Certain Relationships and Related Transactions.............. 40
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 41
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PART I
ITEM 1. BUSINESS
GENERAL
The Company was organized in 1927 as a Michigan corporation under the name of
Michigan Seamless Tube Company. The Company reincorporated in Delaware in 1968
under the same name and then changed its name to Quanex Corporation in 1977. The
Company's executive offices are located at 1900 West Loop South, Suite 1500,
Houston, Texas 77027. References made to the "Company" or "Quanex" include
Quanex Corporation and its subsidiaries unless the context otherwise requires.
Quanex Corporation is a technological leader in the manufacture of value-added
metal products made from carbon and alloy steel and aluminum. The Company's
products include engineered carbon and alloy steel bars, aluminum flat-rolled
products, and fabricated aluminum and steel products. Quanex's products include
various high quality specialized products designed for specific markets. The
Company believes that its use of state-of-the-art process technology, low cost
production and engineering to meet specific customer applications provides the
Company with competitive advantages over many of its competitors. The Company
has also sought to reduce the impact of cyclical economic downturns on its
operations through diversification of the markets served. The markets served by
the Company include the industrial machinery and capital equipment industries,
the transportation industry, energy processing and the commercial and
residential building and remodeling industries.
Since the mid-1980s Quanex has refocused its strategy from being a
manufacturer principally of steel products with a heavy dependence on energy
markets to a diversified, value-added specialized metals products company
serving a broad range of markets. The Company's future growth strategy is
focused on the continued penetration of higher margin markets, continued
expansion of its aluminum and steel manufacturing operations, rapid expansion of
formed value-added products, and niche acquisitions.
In April 1997, the Company completed the sale of its LaSalle Steel Company
("LaSalle") subsidiary, a manufacturer of cold finished steel bars, for
approximately $65 million. For business segment purposes, LaSalle previously
comprised the Company's "Cold Finished Steel Bars" segment.
In October 1997, the Company, through its Dutch subsidiary, Piper Impact
Europe B.V. ("Piper Europe"), acquired the net assets of Advanced Metal Forming
C.V., a Dutch Limited Partnership, for approximately $30 million. Located in
Zwolle, The Netherlands, Piper Europe produces high-quality aluminum impact
extrusions and precision steel stampings for the automotive and electronics
industries in Europe and North America. This acquisition will complement the
Company's 1996 strategic acquisition of Piper Impact, Inc. ("Piper Impact"), a
manufacturer of custom designed, impact extruded aluminum and steel parts for
the transportation industry. The acquisition of Advanced Metal Forming C.V.
provides the Company with its first non-U.S. operations and, as such, presents
new challenges and opportunities for the Company.
In December 1997, the Company completed the sale of its tubing operations
("Tubing Operations"), comprised of Michigan Seamless Tube Company, Gulf States
Tube Division, and the Tube Group Administrative Office. For business segment
purposes, the Tubing Operations were previously classified as "Steel Tubes". Two
small divisions, Heat Treat Division and NitroSteel Division, which were
previously included with the Steel Tubes segment, were retained by the Company
and are now included in the "Engineered Steel Bar" segment.
The Company has also invested significantly in technologically advanced
continuous manufacturing processes to meet demanding quality specifications and
to achieve cost efficiencies. In its MacSteel operations, rotary centrifugal
continuous casters are used with an in-line manufacturing process to produce
bearing grade and aircraft quality, seam-free, specialty engineered carbon and
alloy steel bars that enable Quanex to participate in higher margin markets.
Since 1992, the Company has invested over $82 million to enhance the steel
refining processes, to improve rolling and finishing capacity and to expand
manufacturing capacity at its MacSteel operations by approximately 100,000 tons
per year. The Company currently is engaged in an additional $60 million
expansion and improvement program at MacSteel designed to increase caster
productivity and productive capacity by approximately 70,000 tons, or 13%, to
620,000 tons per year when completed in fiscal 1998.
The Company's business is managed on a decentralized basis. Each operating
group has administrative, operating and marketing functions. Financial reporting
systems measure each plant's return on investment, and the Company seeks to
reward superior performance with incentive compensation, which is a significant
portion of total employee compensation. Intercompany sales are conducted on an
arms-length basis. Operational activities and policy are managed by corporate
officers and key executives. Also, a small staff provides corporate accounting,
financial and treasury management, tax, and human resource services to operating
divisions.
MARKETS AND PRODUCT SALES BY BUSINESS SEGMENT
As a result of the Company's dispositions of LaSalle and the Tubing Operations,
the Company's operations are now grouped into two business segments, consisting
of (i) engineered steel bars and (ii) aluminum products. General corporate
expenses are classified as other operations.
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Information with respect to major markets for the Company's products,
expressed as a percentage of consolidated net sales, is shown under the heading
"Sales by Major Markets" as set forth below. For financial information regarding
each of Quanex's business segments, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein and Note 11 to the
Consolidated Financial Statements. Although Quanex has attempted to estimate its
sales by product and market categories, many products have multiple end uses for
several industries and sales are not recorded on the basis of product or market
categories. A significant portion of sales is made to distributors who sell to
different industries. Net sales by principal market are based upon the total
dollar volume of customer invoices. For the year ended October 31, 1997, one
customer, Autoliv Inc., accounted for approximately 13% of the Company's sales.
SALES BY MAJOR MARKETS
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Market Sales ($ millions)
Markets Description Quanex Products 1997 1996 1995 1994 1993
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INDUSTRIAL General Industrial Specialty forgings, impact- $ 24.9 $ 47.4 $ 59.9 $ 72.0 $ 70.9
MACHINERY AND Machinery (including extruded products, steel bars 3.3% 7.6% 9.9% 16.5% 19.1%
CAPITAL mining, agriculture
EQUIPMENT and construction)
Capital Equipment Steel bars, treated bars and $ 17.5 $ 22.0 $ 13.1 $ 10.5 $ 4.9
(including material tubes, partition products, 2.4% 3.6% 2.2% 2.4% 1.3%
handling, machine tools, impact-extruded products
and office/household)
TOTAL INDUSTRIAL MACHINERY $ 42.4 $ 69.4 $ 73.0 $ 82.5 $ 75.8
AND CAPITAL EQUIPMENT 5.7% 11.2% 12.1% 18.9% 20.4%
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TRANSPORTATION Aerospace Seamless contoured rolled $ -- $ -- $ -- $ -- $ 6.2
rings -- -- -- -- 1.6%
Auto/Truck Steel bars, impact-extruded $ 322.3 $ 207.2 $ 170.9 $ 131.4 $ 103.5
components 43.2% 33.4% 28.3% 30.2% 27.9%
Other Transportation Steel bars and treated tubes $ 32.8 $ 22.0 $ 23.1 $ 16.6 $ 16.6
(including ship/ and bars 4.4% 3.6% 3.8% 3.8% 4.5%
railroad, recreational
vehicles and military
transportation)
TOTAL TRANSPORTATION $ 355.1 $ 229.2 $ 194.0 $ 148.0 $ 126.3
47.6% 37.0% 32.1% 34.0% 34.0%
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ENERGY Exploration/ Steel bars and treated tubes $ 4.6 $ 4.2 $ 4.4 $ 3.7 $ 6.3
Production and bars 0.6% 0.7% 0.7% 0.8% 1.7%
Processing/Conversion Steel bars and treated tubes $ 1.2 $ 0.9 $ 1.0 $ 0.8 $ 19.9
(refining, and bars 0.2% 0.1% 0.2% 0.2% 5.4%
petrochemical, power
generation)
TOTAL ENERGY $ 5.8 $ 5.1 $ 5.4 $ 4.5 $ 26.2
0.8% 0.8% 0.9% 1.0% 7.1%
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ALUMINUM Residential and Aluminum sheet, fabricated $ 327.5 $ 313.1 $ 331.6 $ 200.9 $ 143.0
PRODUCTS Commercial Building aluminum products, 43.9% 50.5% 54.9% 46.1% 38.5%
Materials, Other aluminum coil and coated
aluminum coil
OTHER $ 15.3 $ 3.3 $ -- $ -- $ --
2.0% 0.5% -- -- --
TOTAL SALES $ 746.1 $ 620.1 $ 604.0 $ 435.9 $ 371.3
100.0% 100.0% 100.0% 100.0% 100.0%
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Engineered Steel Bars
The Company's engineered steel bars segment consists of engineered steel bar
operations, steel bar and tube heat treating services, and steel bar and tube
wear and corrosion resistant finishing services.
The Company's engineered steel bar operations are conducted through its
MacSteel division, consisting of two plants located in Ft. Smith, Arkansas and
Jackson, Michigan. These plants manufacture hot finished precision engineered
carbon and alloy steel bars. The Company believes that MacSteel has the only two
plants in North America using continuous rotary centrifugal casting technology.
This casting process produces inherently seam-free bars, without surface defects
and inclusions, thereby reducing the need for subsequent surface conditioning.
The continuous casting and automated in-line manufacturing operations at the
MacSteel plants substantially
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reduce labor and energy costs by eliminating the intermittent steps that
characterize manufacturing operations at most larger integrated steel mills. The
Company typically sells only complete heat lots, or batches, which are made to
specific customer requirements. Heat lots average 45 tons at Jackson and 50 tons
at Ft. Smith.
Over time, MacSteel has focused its capital improvement programs on production
of high quality specialty steel bars. Since 1992, the Company has invested
significantly in the improvement of operations and expansion of annual
manufacturing capacity at its MacSteel operations by a total of approximately
100,000 tons. These investments (i) resulted in improved metallurgical, melting
and casting operations, (ii) provided ultrasonic testing facilities at both
MacSteel facilities and (iii) upgraded and modernized MacSteel's rolling and
finishing capacity and increased caster productivity. These improvements also
allowed the Company to produce bearing grade and aircraft quality steel bars and
to participate in the higher margin segments of the steel bar market. The
Company currently is engaged in an additional $60 million expansion and
improvement program to increase capacity by approximately 70,000 tons per year.
Of the total $60 million MacSteel project, $20 million is related to a
significant upgrade to pollution control systems to ensure compliance with EPA
standards under the Clean Air Act.
MacSteel products are manufactured for customers in the automotive, light
truck, heavy truck, anti-friction bearing, off-road and farm equipment, defense,
capital equipment and seamless tubular industries. These industries use
engineered steel bars in critical applications such as camshafts, crankshafts,
transmission gears, wheel spindles and hubs, bearing cages and rollers, steering
components, hydraulic mechanisms and seamless tube production. Piper Impact uses
MacSteel engineered steel bars for the manufacture of components for safety
critical steel air bag inflators at its plant in New Albany, Mississippi.
Also included in the Engineered Steel Bars segment is a heat treating plant in
Huntington, Indiana ("Heat Treat"), and a plant in Kenosha, Wisconsin which
improves the wear and corrosion resistance properties of steel bars and tubes
("NitroSteel").
Heat Treat provides tube and bar heat treating and related services, such as
quench and temper, stress relieving, normalizing and "cut-to-length".
Metallurgical testing services are also provided. This plant serves customers in
the energy, automotive, ordnance, mining and fluid power markets.
NitroSteel was acquired in January 1995, and began commercial operations in
November 1995. NitroSteel's products are produced to specific customer
applications and sold into fluid power markets.
Aluminum Products
The Company's Aluminum Products segment is comprised of the Nichols Aluminum
Division, manufacturing finished aluminum sheet, and the Engineered Products
Group, engaged in producing aluminum and steel impact extrusions and fabricated
products. The Nichols Aluminum division consists of three plants, a thin-slab
casting and hot rolling mill ("N-A Casting") located in Davenport, Iowa, and two
cold rolling and finishing plants located in Davenport, Iowa and Lincolnshire,
Illinois. The Engineered Products Group consists of Piper Impact, with plants in
New Albany, Mississippi and Park City, Utah, Piper Europe with a plant in
Zwolle, The Netherlands, and the Fabricated Products Division with manufacturing
facilities in Rice Lake, Wisconsin and Chatsworth, Illinois.
Nichols Aluminum manufactures mill finished and coated, aluminum sheet, for
the home improvement, new construction, light commercial construction,
transportation and service center markets.
N-A Casting operates an aluminum mini-mill, equipped with a state-of-the-art
52-inch wide Hazelett thin slab caster, a three stand hot rolling mill, and
scrap processing and melting equipment. This facility has an annual capacity to
produce in excess of 350 million pounds of hot rolled coiled aluminum sheet. The
three stand rolling mill is able to reduce the cast aluminum slab from a
thickness of approximately .75 inches to a coiled aluminum sheet with thickness
of .045 inches. This hot rolling mill process substantially reduces subsequent
cold rolling requirements. The Company believes that the advent of aluminum
mini-mills, like the more developed steel mini-mills, offers competitive
advantages over large integrated producers, including labor and energy savings
and reduced capital and as-cast material costs.
Nichols Aluminum finishes the aluminum sheet produced at N-A Casting and
markets both coated and mill finished aluminum sheet through its Nichols
Aluminum Davenport ("NAD") plant and Nichols Aluminum Lincolnshire ("NAL")
plant. Operations include cold rolling to specific gauge, annealing, leveling,
slitting to specific width and custom coating. Nichols Aluminum currently has
annual capacity of cold rolling approximately 300 million pounds depending upon
product mix. In December 1997, the Company renewed a non-binding letter of
intent to acquire, subject to due diligence and negotiation of a definitive
agreement, a cold rolling, finishing and coating facility operated by Decatur
Aluminum, in Decatur, Alabama to bring its casting and cold rolling capacities
into closer balance.
Piper Impact, which was acquired in August 1996, and Piper Europe, acquired in
October 1997, are technological leaders in the manufacture of custom designed,
impact extruded aluminum and steel parts for the transportation,
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electronics and defense markets. The majority of Piper Impact's sales are to one
customer, Autoliv (formerly Morton International), in the form of airbag
components for the automotive industry.
Piper Impact completed during fiscal 1997 most of the construction and
installation of equipment at its new manufacturing facility in New Albany,
Mississippi for the production of highly engineered impact extruded steel
products. Piper Impact's steel products plant is part of a two-year, $55 million
capital project to provide capacity for new customer programs primarily for the
automotive air bag systems market. This includes passenger and side-impact air
bags, "smart" bags with adjustable inflation speed and those with alternative
inflation technologies. The Company believes that these projects will provide
Piper Impact with the technology and additional capacity for advanced
applications, improved customer service, and cost effective manufacturing
processes thereby improving competitiveness and growth opportunities.
The Fabricated Products Division, consisting of the AMSCO plant in Rice Lake,
Wisconsin and two Homeshield Fabricated Products ("HFP") plants in Chatsworth,
Illinois, manufactures aluminum window and patio door screens, window frames,
and a broad line of custom designed, roll formed products and stamped shapes for
manufacturers of premium wood windows and vinyl windows for the home
improvement, new residential and commercial construction markets. AMSCO combines
a strong product design and development with reliable, just-in-time delivery.
HFP also coats and fabricates aluminum coil in many colors, sizes and finishes
into rain carrying systems, soffit, exterior housing trim and painted coil sheet
and roofing products.
MANUFACTURING
Quanex operates 13 manufacturing facilities in eight states in the United States
and one plant in Zwolle, The Netherlands. These facilities feature efficient
plant design and flexibility in manufacturing processes, enabling the Company to
produce a wide variety of products for various industries and applications. The
Company is generally able to maintain minimal levels of finished goods
inventories at most locations because it typically manufactures products to
customer specifications upon order.
Engineered Steel Bars. The Company's MacSteel facilities produce various
grades of specialty engineered steel bars by melting high quality steel scrap
and casting it in a rotary centrifugal continuous caster. MacSteel's molten
steel goes through secondary refining consisting of argon stirring, ladle
injection and vacuum arc degassing prior to casting. This enables MacSteel to
produce higher quality, "cleaner" steels. Precision engineered products are
produced through a continuous in-line process by which scrap steel is converted
into hot rolled steel bars without interruption.
As a result of its state-of-the-art continuous manufacturing technology, which
reduces labor, energy and process yield loss, the Company believes that MacSteel
is one of the lowest cost producers of precision engineered carbon and alloy
steel bars. The Company believes that energy costs at MacSteel are significantly
lower than those of its competitors because its bars are moved directly from the
caster to the rolling mill before cooling, eliminating the need for costly
reheating. MacSteel's unit labor costs are achieved with its highly automated
manufacturing process enabling it to produce finished high quality steel bars
using approximately two man-hours of labor per ton compared to an estimated
average of five man-hours per ton for U.S. integrated steel producers.
The Heat Treat facility uses custom designed, in-line, equipment to provide
steel tube and bar heat treating services, such as quench-and-temper, case
hardening, stress relieving and normalizing. The NitroSteel plant processes
steel bars and tubes using the patented Nitrotec treatment to improve corrosion
and wear resistance while providing an environmentally friendly, non-toxic
alternative to chrome plating.
Aluminum Products. Manufacturing at the Company's various Aluminum Products
facilities ranges from the production of coiled aluminum sheet to the production
and fabrication of finished aluminum and steel products, such as air bag
components, window screens, window frames and related accessories.
The Company's aluminum casting operations are conducted at N-A Casting's
mini-mill in Davenport, Iowa. The single in-line manufacturing process at the
facility has over 350 million pounds of annual hot rolled aluminum sheet
capacity. The mini-mill converts scrap to aluminum sheet through melting,
continuous casting and in-line hot rolling. N-A Casting also has the ability to
shred scrap to broaden the diversity and sources of its scrap raw material.
Delacquering equipment improves the quality of the raw material before it
reaches the melting furnaces by burning off impurities within the scrap. The
scrap is blended using computer programs to achieve the desired alloy
composition and the best economics. After melting the molten metal flows into a
Hazelett thin-slab caster, which casts up to a 52-inch wide aluminum slab. The
slab then is fed directly to a hot mill with three in-line rolling stands to
reduce the slab from a thickness of approximately .75 inches to coiled aluminum
sheet with a target thickness of .045 to 0.125 inches. The combination of
capacity increases and technological enhancements directed at producing quality
hot rolled aluminum sheet with cost savings derived from optimized scrap
utilization, reduced unit energy cost, reduced cold rolling requirements and
decreased labor costs results in a significant manufacturing advantage.
Further processing of the coiled aluminum hot rolled sheet from the mini-mill
occurs at NAD and NAL plants, where the specific product requirements of
customers can be met through cold rolling to various gauges,
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annealing for additional product mechanical properties and formability, tension
leveling and slitting to specific widths. Products at the NAD plant can also be
custom coated, an important feature for the building products applications of
certain customers.
The Company's Piper Impact plants in New Albany, Mississippi, Park City, Utah,
and Zwolle, The Netherlands manufacture custom designed, impact extruded
aluminum and steel parts for automotive air bag inflators, ordnance and
electronic products. Piper Impact's operations make use of the impact extrusion
technology to produce highly engineered near net shaped components from aluminum
and steel bar slugs involving complex design and machining requirements. This
unique production method uses impact presses, punches and dies that flow metal
under pressure into precisely designed shapes. The cold working of the metal
develops high strength products with superior surface quality and little
material yield loss. Heat treated and precision machined parts are then
delivered to customers' assembly lines, requiring little or no additional
processing.
Manufacturing of the Company's value added fabricated products takes place at
its AMSCO plant in Rice Lake, Wisconsin and HFP plants in Chatsworth, Illinois.
These facilities use roll forming, laser welding and polylaminate technology to
produce engineered products such as window screens, insulated glass spacers,
cladding and muntin for premium wood and vinyl window manufacturers. In
cooperation with a market leader in the office furnishings business, AMSCO
developed an award winning office partition product, thus allowing AMSCO to
penetrate a new market.
RAW MATERIALS AND SUPPLIES
The Company's MacSteel plants purchase steel scrap, pig iron and hot briquetted
iron, their principal raw materials, on the open market. Transportation of these
raw materials to Company plants can be adversely affected by cold weather,
creating seasonal price increases. Prices for quality scrap also vary in
relation to the general business cycle, typically declining in periods of slow
economic growth.
Nichols-Aluminum's principal raw material is aluminum scrap. N-A Casting's
mini-mill includes a scrap processing and delacquering facility, which enables
the Company to use the broadest and most economical mix of aluminum scrap for
its requirements. The Company also purchases aluminum ingot futures contracts on
the London Metals Exchange in amounts equal to N-A's requirements for fixed
price sales commitments of aluminum products and then sells these contracts
coincident with delivery of product, thereby protecting against increases in the
price of the aluminum scrap used to manufacture the related products.
Piper Impact's raw material consists of aluminum bars and slugs which it
purchases on the open market and steel bars which it purchases from MacSteel.
Piper Europe purchases its raw material consisting of aluminum slugs and steel
sheet on the open market in Europe.
BACKLOG
At October 31, 1997, Quanex's backlog of orders to be shipped in the next twelve
months was $110.6 million. This compares to $123.4 million at October 31, 1996.
Because many of the markets in which Quanex operates have short lead times,
backlog figures are not reliable indicators of annual sales volume or operating
results.
COMPETITION
All of the Company's products are sold under highly competitive conditions. The
Company competes with a number of companies, some of which have financial and
other resources greater than those of the Company. Competitive factors include
product quality, price, delivery and ability to manufacture products to customer
specifications. The amounts of engineered steel bars and aluminum products
produced by the Company represent a small percentage of annual domestic
production.
The MacSteel bar plants compete with two large integrated steel producers, two
large non-integrated steel producers and two smaller steel companies. Although
many of these producers are larger and have greater resources than the Company,
the Company believes that the technology used at the MacSteel facilities permits
it to compete effectively in the markets it serves.
The Company's aluminum products businesses compete with many small and large
aluminum sheet manufacturers, metal fabricators and impact extruders. Some of
these competitors are divisions or subsidiaries of major corporations with
substantially greater resources. The Company also competes with major aluminum
producers in coil-coated and mill products, primarily on the basis of the
breadth of product lines, the quality and design of its products, the
responsiveness of its services and its prices.
SALES AND DISTRIBUTION
The Company has a nationwide system of sales offices. MacSteel sells hot rolled
engineered steel bars primarily to original equipment manufacturers ("OEM's")
through its sales organization and manufacturers' representatives.
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The sales and distribution of products in the Company's aluminum products
businesses are organized by major product group. Engineered and fabricated
products are sold primarily to OEM's. Mill products are sold directly to OEM's
and through metal service centers and residential building products are sold
primarily through distributors.
SEASONAL NATURE OF BUSINESS
With the exception of Piper Impact, the business of which is not seasonal, the
Company's aluminum and fabricated products businesses are seasonal because its
primary markets are in the Northeast and Midwest regions of the United States
where winter weather reduces home building and home improvement activity.
Historically, this business's lowest sales have occurred during the Company's
first fiscal quarter. Because a high percentage of this business's manufacturing
overhead and operating expenses is due to labor and costs that are generally
fixed throughout the year, profits for the operations in this business tend to
be lower in quarters with lower sales.
The other businesses in which the Company competes are not seasonal. However,
due to the holidays in the Company's first fiscal quarter and steel plant
shutdowns for vacations and maintenance in the Company's third fiscal quarter,
sales have historically been lower in those quarters. Due to the combined
effects of seasonality, the Company generally expects that, absent unusual
activity or changes in economic conditions, its lowest sales will occur in the
first fiscal quarter.
TRADEMARKS, TRADE NAMES AND PATENTS
The Company's Nichols-Homeshield, MacSteel and Piper logos and designs are
registered trademarks. The trade name "Homeshield" and its unregistered name
"Nichols-Homeshield" are used in connection with the sale of the Company's
aluminum products. The Homeshield, MacSteel and Piper logos and designs and
their trade names are considered valuable in the conduct of the Company's
business.
The businesses conducted by the Company generally do not depend upon patent
protection. Although the Company holds numerous patents, in many cases the
proprietary technology that the Company has developed for using the patents is
more important than the patents themselves.
RESEARCH AND DEVELOPMENT
Expenditures for research and development of new products or services during the
last three years were not significant. Although not technically defined as
research and development, a significant amount of time, effort and expense is
devoted to customizing and qualifying the Company's products for specific
customer applications.
ENVIRONMENTAL MATTERS
As a manufacturer of specialized metal products, Quanex is subject to extensive
laws and regulations concerning the discharge of materials into the environment
and the remediation of chemical contamination. Quanex is required to make
capital and other expenditures on an ongoing basis in order to satisfy such
requirements. The cost of environmental matters has not had a material adverse
effect on Quanex's operations or financial condition in the past, and management
is not now aware of any existing conditions that it currently believes are
likely to have a material adverse effect on Quanex's operations or financial
condition.
Under applicable state and federal laws, the Company may be responsible for,
among other things, all or part of the costs required to remove or remediate
wastes or hazardous substances at the locations Quanex has owned or operated at
any time. This responsibility includes cleanup of historic soil and groundwater
contamination and other corrective action at a plant currently operated by the
Company's Piper Impact subsidiary in New Albany, Mississippi. Having undertaken
preliminary technical studies of the contamination, Quanex estimates that $20
million will be required to complete necessary cleanup and corrective action.
The timing and final extent of remediation work currently are not determined.
The final cost could be more or less; however, Quanex has reserved $20 million
towards the work and is attempting to negotiate mutually acceptable remediation
plans with the state of Mississippi.
From time to time, Quanex has been alleged to be liable for all or part of the
costs incurred to clean up third-party sites where it supposedly arranged for
disposal of hazardous substances. The Company's allocable share of liability at
those sites, taking into account the likelihood that other parties will pay
their shares, has not been material to its operations or financial condition.
Amendments to the Federal Clean Air Act were adopted in 1990, and
environmental agencies continue to develop implementing regulations. Depending
on the nature of the regulations adopted, Quanex may be required to incur
additional capital and other expenditures sometime in the next several years for
air pollution control equipment, to maintain or obtain operating permits and
approvals, and to address other air emission-related issues. The Company's Board
of Directors has approved capital expenditures totaling approximately $20
million to be spent between 1996 and 1998 to meet those requirements. That
amount includes spending in fiscal 1998
7
<PAGE> 9
toward a significant upgrade to pollution control systems at MacSteel to ensure
compliance with the air standards. Based upon its analysis and experience to
date, Quanex does not believe that its compliance with Clean Air Act
requirements will have a material effect on its operations or financial
condition.
Quanex incurred approximately $13,800,000 and $3,900,000 during fiscal 1997
and 1996, respectively, in expenses and capital expenditures in order to comply
with existing or proposed environmental regulations. The Company estimates
spending of approximately $14,000,000 at various of its facilities during fiscal
1998. The 1997 and 1998 amounts include spending toward a significant upgrade to
pollution control systems at MacSteel. Quanex will continue to have expenditures
in connection with environmental matters beyond 1998, but it is not possible at
this time to reasonably estimate the amount of any obligation that would be
material to the Company as a whole. Future expenditures relating to
environmental matters will necessarily depend upon the application to Quanex and
its facilities of future regulations and government decisions.
EMPLOYEES
At October 31, 1997, the Company employed 3,771 persons. Of the total employed,
27% were covered by collective bargaining agreements. On November 22, 1997, the
International Brotherhood of Teamsters ratified a five-year agreement covering
250 employees at two Davenport, Iowa, plants of Nichols Aluminum. No labor
contracts expire during 1998.
ITEM 2. PROPERTIES
The following table lists Quanex's principal plants together with their
locations, general character and the industry segment which uses the facility.
Each of the facilities identified as being owned by the Company is free of any
material encumbrance.
<TABLE>
<CAPTION>
Square
Location Plant Footage
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Owned: ENGINEERED STEEL BARS
Fort Smith, Arkansas MacSteel 415,723
Jackson, Michigan MacSteel 245,150
Huntington, Indiana Heat Treating 82,000
Leased (expires 2009):
Kenosha, Wisconsin NitroSteel 35,000
Owned: ALUMINUM PRODUCTS
Rice Lake, Wisconsin AMSCO 290,800
Chatsworth, Illinois Homeshield Fabricated Products (two plants) 212,000
Lincolnshire, Illinois Nichols Aluminum 142,000
Davenport, Iowa Nichols Aluminum 236,000
Davenport, Iowa Nichols Aluminum Casting 245,000
New Albany, Mississippi Piper Impact (two plants) 683,000
Park City, Utah Piper Impact 130,000
Zwolle, The Netherlands Piper Impact Europe 110,000
Leased (expires 1999): EXECUTIVE OFFICES
Houston, Texas Quanex Corporation 21,000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Other than the proceedings described under Item 1, "Environmental Matters",
there are no material legal proceedings to which Quanex, its subsidiaries, or
their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
8
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quanex's common stock, $.50 par value, is traded on the New York Stock Exchange,
under the ticker symbol: NX. Quarterly stock price information and annual
dividend information for the common stock is as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
QUARTERLY COMMON STOCK DIVIDENDS
January..................................................... .15 .15 .14 .14 .14
April....................................................... .15 .15 .15 .14 .14
July........................................................ .15 .15 .15 .14 .14
October..................................................... .16 .15 .15 .14 .14
- ----------------------------------------------------------------------------------------------
Total............................................. .61 .60 .59 .56 .56
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMON STOCK SALES PRICE (High & Low)
January...................................... 29 1/8-24 1/4 21 1/8-18 24 5/8-20 21 1/4-16 1/8 27-17 5/8
April........................................ 27 7/8-23 3/8 22 3/8-19 5/8 23 3/8-21 22 7/8-19 1/8 20 7/8-14 1/4
July......................................... 34 1/8-25 1/8 23 7/8-19 3/8 26 5/8-22 1/8 23-18 1/8 17 3/4-14
October...................................... 36 1/2-26 1/4 28 3/4-19 5/8 26-18 5/8 27 1/4-20 3/4 20 3/4-16 1/2
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The terms of Quanex's revolving credit arrangements with certain banks limit the
total amount of common and preferred stock dividends and other distributions on
such stock. Under the most restrictive test under such credit facilities, the
total common stock dividends the Company may declare and pay is limited to $21
million, plus 50% of consolidated net earnings after October 31, 1989, adjusted
for other factors as defined in their respective Loan Agreements. As of October
31, 1997, the amount of dividends and other distributions the Company was
permitted to declare and pay under its credit facilities was $42.95 million.
There were 5,743 record holders of Quanex common stock on December 31, 1997.
9
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
GLOSSARY OF TERMS
The exact definitions of commonly used financial terms and ratios vary somewhat
among different companies and investment analysts. The following list gives the
definition of certain financial terms that are used in this report:
CAPITAL EXPENDITURES: Additions to property, plant and equipment.
BOOK VALUE PER COMMON SHARE: Stockholders' equity less the stated value of
preferred stock divided by the number of common shares outstanding.
ASSET TURNOVER: Net sales divided by average total assets.
CURRENT RATIO: Current assets divided by current liabilities.
FIXED CHARGE COVERAGE: The sum of income before income taxes plus interest
expense, plus the estimated interest component of rentals, less capitalized
interest, plus amortization of previously capitalized interest, plus
amortization of deferred debt issuance costs; divided by interest expense, plus
the estimated interest component of rentals, plus amortization of deferred debt
issuance costs.
RETURN ON INVESTMENT: The sum of net income and the after-tax effect of interest
expense less capitalized interest divided by the sum of the averages for
long-term debt and stockholders' equity.
RETURN ON COMMON STOCKHOLDERS' EQUITY: Net income attributable to common
stockholders divided by average common stockholders' equity.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY 1992-1997
($ thousands, except per share data)
<TABLE>
<CAPTION>
(For definition of items, see page 10) Fiscal years ended October 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
REVENUES AND EARNINGS
Net sales(6)......................................................... 746,093 620,069 603,985 435,983 371,266
Cost of sales including depreciation................................. 643,618 526,886 521,521 376,077 329,220
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit......................................................... 102,475 93,183 82,464 59,906 42,046
Other depreciation and amortization.................................. 3,669 1,791 1,258 1,266 1,596
Selling, general and administrative expenses(3)...................... 43,798 44,959 33,746 31,893 30,605
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss).............................................. 55,008 46,433 47,460 26,747 9,845
Percent of net sales................................................. 7.4 7.5 7.9 6.1 2.7
Other income (expense)-net........................................... 1,637 4,544 1,721 2,765 4,508
Interest expense-net................................................. 14,002 11,360 8,870 10,178 11,962
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, extraordinary items, cumulative
effect of accounting change, and income from discontinued
operations......................................................... 42,643 39,617 40,311 19,334 2,391
Income taxes (credit)................................................ 14,925 16,639 16,931 8,120 1,004
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations.................................... 27,718 22,978 23,380 11,214 1,387
Income from discontinued operations.................................. 5,176 9,912 10,480 7,638 7,041
Gain on sale of discontinued operations.............................. 36,290
Extraordinary items and cumulative effect of accounting changes,
net of taxes....................................................... -- (2,522)(2) (2,021)(2) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss).................................................... 69,184 30,368 31,839 18,852 8,428
Percent of net sales................................................. 9.3(5) 4.9 5.3 4.3 2.3
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Income from continuing operations.................................... 1.98 1.68 1.43 0.39 (0.34)
Income from discontinued operations.................................. 0.37 0.73 0.77 0.57 0.52
Gain on sale of discontinued operations.............................. 2.58 ---------- ---------- ---------- --
Extraordinary items and cumulative effect of accounting change....... -- (0.19) (0.15) ---------- --
Net earnings (loss) per primary common shares........................ 4.93 2.22 2.05 0.96 0.18
Cash dividends declared.............................................. 0.61 0.60 0.59 0.56 0.56
Book value........................................................... 19.13 14.50 12.81 11.04 10.48
Average shares outstanding (000)..................................... 14,029 13,658 13,580 13,496 13,551
Market closing price range
High............................................................... 36 1/2 28 5/8 26 27 20 3/4
Low................................................................ 23 3/8 18 3/8 18 3/8 16 1/4 14 1/4
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION -- YEAR END(1)
Working capital...................................................... 52,818 88,238 53,629 100,007 121,959
Property, plant and equipment -- net................................. 379,071 319,165 233,982 239,642 218,851
Other assets......................................................... 119,738 117,142 55,989 54,736 61,313
Total assets......................................................... 685,705 638,948 466,458 491,329 463,362
Noncurrent deferred income taxes..................................... 48,111 40,454 45,740 39,298 32,535
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt....................................................... 201,858 253,513 111,894 107,442 128,476
Stockholders' equity................................................. 268,823 197,009 172,814 233,883 225,776
Total capitalization................................................. 470,681 450,522 284,708 341,325 354,252
Long-term debt percent of capitalization............................. 42.9 56.3 39.3 31.5 36.3
- ---------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Asset turnover....................................................... 1.1 1.0 1.3 0.9 0.8
Current ratio........................................................ 1 TO 1 1.8 to 1 1.4 to 1 2.0 to 1 3.0 to 1
Fixed charge coverage................................................ 6.28 5.48 6.04 3.08 1.98
- ---------------------------------------------------------------------------------------------------------------------------
Return on average investment -- percent.............................. 16.7(5) 9.8 11.1 6.9 4.3
Return on average common equity -- percent........................... 29.7(5) 16.4 17.4 9.0 1.7
- ---------------------------------------------------------------------------------------------------------------------------
Working capital provided (used) by operations(4)..................... 73,321 60,378 57,767 39,326 30,482
Depreciation and amortization........................................ 37,865 36,499 29,062 25,520 26,184
Capital expenditures................................................. 69,146 34,737 21,629 42,297 34,281
Backlog for shipment in next 12 months............................... 110,565 123,382 94,464 109,626 73,207
- ---------------------------------------------------------------------------------------------------------------------------
Number of stockholders............................................... 5,488 3,425 3,659 3,454 3,540
Average number of employees.......................................... 2,994 1,950 1,653 1,530 1,549
Sales/employee....................................................... 249 318 365 285 240
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(For definition of items, see page 10) Fiscal years ended October 31, 1992
<S> <C>
REVENUES AND EARNINGS
Net sales(6)....................................................... 360,250
Cost of sales including depreciation............................... 311,034
- ------------------------------------------------------------------------------
Gross profit....................................................... 49,216
Other depreciation and amortization................................ 1,138
Selling, general and administrative expenses(3).................... 36,062(3)
- ------------------------------------------------------------------------------
Operating income (loss)............................................ 12,016
Percent of net sales............................................... 3.3
Other income (expense)-net......................................... 3,221
Interest expense-net............................................... 10,495
- ------------------------------------------------------------------------------
Income (loss) before income taxes, extraordinary items, cumulative
effect of accounting change, and income from discontinued
operations....................................................... 4,742
Income taxes (credit).............................................. 1,992
- ------------------------------------------------------------------------------
Income from continuing operations.................................. 2,750
Income from discontinued operations................................ 3,445
Gain on sale of discontinued operations............................
Extraordinary items and cumulative effect of accounting changes,
net of taxes..................................................... (25,108)(2)
- ------------------------------------------------------------------------------
Net income (loss).................................................. (18,913)
Percent of net sales............................................... (5.3)
- ------------------------------------------------------------------------------
PER SHARE DATA
Income from continuing operations.................................. 0.01
Income from discontinued operations................................ 0.27
Gain on sale of discontinued operations............................ --
Extraordinary items and cumulative effect of accounting change (1.98)
Net earnings (loss) per primary common shares...................... (1.70)
Cash dividends declared............................................ 0.52
Book value......................................................... 11.10
Average shares outstanding (000)................................... 12,696
Market closing price range
High............................................................. 31 1/2
Low.............................................................. 15 1/2
- ------------------------------------------------------------------------------
FINANCIAL POSITION -- YEAR END(1)
Working capital.................................................... 137,332
Property, plant and equipment -- net............................... 215,505
Other assets....................................................... 56,655
Total assets....................................................... 470,777
Noncurrent deferred income taxes................................... 32,649
- ------------------------------------------------------------------------------
Long-term debt..................................................... 128,694
Stockholders' equity............................................... 237,592
Total capitalization............................................... 366,286
Long-term debt percent of capitalization........................... 35.1
- ------------------------------------------------------------------------------
OTHER DATA
Asset turnover..................................................... 0.8
Current ratio...................................................... 3.2 to 1
Fixed charge coverage.............................................. 1.52
- ------------------------------------------------------------------------------
Return on average investment -- percent............................ (3.8)
Return on average common equity -- percent......................... (14.2)
- ------------------------------------------------------------------------------
Working capital provided (used) by operations(4)................... 35,484
Depreciation and amortization...................................... 30,046
Capital expenditures............................................... 48,366
Backlog for shipment in next 12 months............................. 71,368
- ------------------------------------------------------------------------------
Number of stockholders............................................. 3,596
Average number of employees........................................ 1,678
Sales/employee..................................................... 215
- ------------------------------------------------------------------------------
</TABLE>
(1) On August 9, 1996, Quanex Corporation acquired Piper Impact, Inc. 1996
results include three months of Piper Impact's operations.
(2) 1996 and 1995-early extinguishment of debt; 1992-cumulative effect of
accounting change from postretirement welfare benefits.
(3) Includes $7.2 million facilities realignment charge.
(4) Working capital provided by operations is a supplemental financial
measurement used in the company's business and should not be construed as an
alternative to operating income or cash provided by operating activities
since it excludes the effects of changes in working capital.
(5) Includes gain on sale of discontinued operations.
(6) Excludes sales from discontinued operations for the years 1997-1992,
respectively of $187,123, $275,641, $287,210, $263,331, $244,879, and
$211,840.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company classifies its operations into two business segments: engineered
steel bars 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 commercial and residential
building and remodeling industries.
For the fifth consecutive year, the Company's continuing operations achieved
higher sales. Net sales from continuing operations in fiscal 1997 were $746.1
million, compared to $620.1 million in fiscal 1996, a 20% increase. Primary
earnings per share from continuing operations in fiscal 1997 were $1.98 compared
to $1.68 in fiscal 1996, an 18% increase.
The Company's internal growth investments, principally at the MacSteel
Division and at Piper Impact, Inc. ("Piper Impact") were focused toward capacity
expansions, new product offerings, quality improvements, and enhanced customer
service capabilities. The Company also completed a strategic acquisition and
divestitures during and shortly after fiscal 1997 to improve operations and
align its businesses for growth.
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".
In October 1997, the Company, through its Dutch subsidiary, Piper Impact
Europe B.V. ("Piper Europe"), purchased the net assets of Advanced Metal Forming
C.V., a Dutch limited partnership, for approximately $30 million. The Company's
balance sheet as of October 31, 1997 includes Piper Europe. The Company's income
statement for the twelve months ended October 31, 1997 does not include results
for Piper Europe.
In December 1997, the Company completed the sale of its tubing operations
("Tubing Operations"), comprised of Michigan Seamless Tube, Gulf States Tube,
and the Tube Group Administrative Office. The Tubing Operations' results of
operations have been classified as discontinued operations and prior periods
have been restated. For business segment reporting purposes, these businesses
were previously classified as "Steel Tubes". Two small divisions, Heat Treat
Division and Nitro Steel Division, which were previously included with this
segment, were retained by the Company and are now included in the Engineered
Steel Bars segment.
The Company's engineered steel bars business reflected improvements in net
sales and operating income for fiscal 1997 compared to fiscal 1996. The improved
results were due primarily to higher sales volume, but also reflect the benefits
realized from the Company's capital expenditure programs, which have allowed the
Company to increase production, enhance quality and manage manufacturing costs.
The Company's aluminum products business experienced lower operating income
for fiscal 1997 compared to fiscal 1996 as a result of the start-up costs for
Piper Impact's new plant, including higher labor and training expenses and the
temporary use of less efficient production processes, as well as 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 fiscal 1998
should be similar to those experienced during 1997. 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 start-up
costs at Piper Impact's new plant are expected to continue to affect earnings
through the first half of fiscal 1998. The sale of LaSalle in April 1997 and the
sale of the Tubing Operations in December 1997 will affect income for fiscal
1998 by the difference between the amount these businesses would have earned and
the reduction in interest expense as a result of the repayment of debt with the
net proceeds from these sales. 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.
12
<PAGE> 14
The following table sets forth selected operating data for the Company's two
business segments:
<TABLE>
<CAPTION>
Years Ended October 31,
--------------------------------
1997 1996 1995
--------------------------------
(In thousands)
<S> <C> <C> <C>
Engineered Steel Bars(1):
Net sales................................................. $319,468 $292,167 $286,649
Operating income.......................................... 50,762 39,090 43,668
Depreciation and amortization............................. 13,940 18,263 15,537
Identifiable assets....................................... $192,937 $171,351 $177,079
Aluminum Products(2):
Net sales................................................. $444,657 $344,867 $331,565
Operating income.......................................... 17,415 22,070 21,128
Depreciation and amortization............................. 23,227 17,712 13,135
Identifiable assets....................................... $443,799 $412,048 $230,586
</TABLE>
- ---------------
(1) Includes Nitro Steel and Heat Treat divisions previously reported under the
Steel Tubes segment. (See Note 3)
(2) 1996 Results include three months of Piper Impact's operations. Identifiable
assets as of October 31, 1997 includes assets of Piper Europe, acquired,
October 29, 1997.
1997 COMPARED TO 1996
Net Sales -- Net sales for fiscal 1997 were $746.1 million, representing an
increase of $126.0 million when compared to fiscal 1996. This increase resulted
principally from a full year of Piper Impact sales in 1997 compared to three
months in 1996 and higher volumes in the engineered steel bar business.
Net sales for fiscal 1997 from the Company's engineered steel bar business
were $319.5 million, representing an increase of $27.3 million, or 9%, when
compared to fiscal 1996. This increase was attributable to record volume. An 11%
increase in volume resulted from improved market share following the Company's
capacity expansion program.
Net sales from the Company's aluminum products business for fiscal 1997 were
$444.7 million, representing an increase of $99.8 million, or 29%, when compared
to fiscal 1996. This increase was mostly attributable to a full year of Piper
Impact in 1997 compared to three months in 1996.
Operating Income -- Consolidated operating income for fiscal 1997 was $55.0
million, representing an increase of $8.6 million, or 18%, when compared to
fiscal 1996. This increase resulted from improved sales and operating income
from the engineered steel bar business, partly offset by lower operating income
from the aluminum products business.
Operating income from the Company's engineered steel bar business for fiscal
1997 was $50.8 million, representing an increase of $11.7 million, or 30%, when
compared to fiscal 1996. This increase was principally due to increased sales
following the Company's capacity expansion program but 1996 operating income was
also affected by higher accruals to the allowance for doubtful accounts. These
higher accruals were necessary as the engineered steel bar business increased
sales during the past several years.
Operating income from the Company's aluminum products business for fiscal 1997
was $17.4 million, representing a decrease of $4.7 million, or 21%, when
compared to fiscal 1996. This decrease was principally due to volatility in the
aluminum scrap markets, resulting in higher average raw material costs and lower
price spreads. Results for 1997 were also affected by Piper Impact which is
included for a full year in 1997 compared to three months in 1996. However,
fourth quarter results were affected by start-up costs, including higher labor
and training expenses and the temporary use of less efficient production
processes at Piper Impact's new plant in New Albany, Mississippi.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses decreased in fiscal 1997 by $1.2 million, or 3%,
compared to fiscal 1996. This decrease was principally due to higher accruals to
the allowance for doubtful accounts in the prior year affecting the engineered
steel bar and the aluminum products businesses. These higher accruals were
needed because the Company experienced $5.7 million in bad debts during the year
ended October 31, 1996, and to recognize risks associated with higher sales
volume achieved during the past several years. Fiscal 1997 selling, general and
administrative expenses were also affected by a full year of Piper Impact
compared to three months in fiscal 1996.
Depreciation and Amortization -- Depreciation and amortization increased by
$1.2 million in fiscal 1997 compared to fiscal 1996. Increased depreciation
resulting from a full year of Piper Impact was partly offset by lower
depreciation at MacSteel.
Interest Expense and Capitalized Interest -- Interest expense increased by
$5.6 million compared to fiscal 1996 primarily due to increased long-term debt
related to the Piper Impact acquisition in the fourth quarter of fiscal
13
<PAGE> 15
1996. Capitalized interest increased by $3.0 million in 1997 compared to 1996
primarily due to Phase III of the MacSteel expansion project and the
construction of the new Piper Impact plant in New Albany, Mississippi.
Other -- Included in "Other, net" for fiscal 1996, was a $2.3 million pretax
gain which represents the final recovery of a business interruption claim
related to a fire at the Company's Lincolnshire, Illinois facility that occurred
in 1993. In addition, "Other, net" included investment income of $2.0 million
for fiscal 1997 compared to $1.6 million for fiscal 1996.
Income From Continuing Operations -- Income from continuing operations
improved by $4.7 million, or 21%, compared to fiscal 1996. The improvements were
principally attributable to improved results at the Company's MacSteel division.
The Company's effective income tax rate was 35% for fiscal 1997 compared to 42%
in 1996.
Income From Discontinued Operations -- Income from discontinued operations,
net of income taxes, for fiscal 1997, was $5.2 million, compared to $9.9 million
for 1996. Fiscal 1996 included a full year of LaSalle which was sold during the
second quarter of fiscal 1997.
Net Income -- Fiscal 1997 net income was $69.2 million, compared to $30.4
million for fiscal 1996. Included in net income for fiscal 1997 is an after-tax
gain of $36.3 million on the sale of LaSalle Steel Company.
1996 COMPARED TO 1995
Net Sales -- Net sales for fiscal 1996 were $620.1 million, representing an
increase of $16.1 million when compared to fiscal 1995. This increase resulted
principally from higher volumes in the engineered steel bar and aluminum
products businesses, offset by lower selling prices in both of these businesses.
Net sales for fiscal 1996 from the Company's engineered steel bar business
were $292.2 million, representing an increase of $5.5 million, or 2%, when
compared to fiscal 1995. This increase was primarily attributable to a 5%
increase in volume and was offset by a 3% decrease in average selling prices.
Decreases in average selling prices resulted from unusually high surcharges for
molybdenum, chrome and scrap during 1995. The increased volume resulted from
improved market share and the additional capacity added during fiscal 1995.
Net sales from the Company's aluminum products business for fiscal 1996 were
$344.9 million, representing an increase of $13.3 million, or 4%, when compared
to fiscal 1995. This increase was partly attributable to the acquisition of
Piper Impact. Excluding Piper Impact, pounds shipped increased 9% in 1996
compared to 1995. Average selling prices, however, decreased 13% during the same
period. The increase in pounds shipped was primarily the result of improved
market share.
Operating Income -- Consolidated operating income for fiscal 1996 was $46.4
million, down slightly from fiscal 1995.
Operating income from the Company's engineered steel bar business for fiscal
1996 was $39.1 million, representing a decrease of $4.6 million, or 10%, when
compared to fiscal 1995. This decrease was principally due to increased selling,
general and administrative expenses related to higher accruals to the allowance
for doubtful accounts. These higher accruals were necessary as the engineered
steel bar business increased sales during the past several years.
Operating income from the Company's aluminum products business for fiscal 1996
was $22.1 million, representing an increase of $942 thousand when compared to
fiscal 1995. This increase was principally due to the acquisition of Piper
Impact in August 1996. Results for 1996 were also affected by higher volumes and
lower conversion costs. These positive factors were mostly offset by lower price
spreads and higher accruals to the allowance for doubtful accounts in 1996
compared to 1995. These higher accruals were necessary as the aluminum products
business increased sales during the past several years. Also affecting 1996 was
$1.5 million additional depreciation resulting from abandonment of idle assets.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses increased in fiscal 1996 by $11.2 million, or 33%,
compared to fiscal 1995. This increase is principally due to higher accruals to
the allowance for doubtful accounts in the engineered steel bar and the aluminum
products businesses. These higher accruals were needed because the Company
experienced $5.7 million in bad debts during the year ended October 31, 1996,
and to recognize risks associated with higher sales volume achieved during the
past several years.
Depreciation and Amortization -- Depreciation and amortization increased in
fiscal 1996 by $7.3 million compared to fiscal 1995. Increased depreciation at
MacSteel resulted from the completion of Phase II expansion project. Fiscal 1996
depreciation in the aluminum products business was affected by $1.5 million of
additional depreciation resulting from abandonment of idle assets. Also included
in 1996 is three months of Piper Impact.
Interest Expense and Capitalized Interest -- Interest expense increased by
$1.2 million compared to fiscal 1995 primarily due to increased long-term debt
related to the Piper Impact acquisition in the fourth quarter of fiscal 1996.
Through the first three quarters of fiscal 1996, interest expense was comparable
to the same periods of 1995. Increased interest related to the Company's $84.9
million of 6.88% Convertible Subordinated Debentures that were issued in June
1995 in exchange for the Company's outstanding preferred stock was offset by the
early extinguishment of a portion of the Company's senior debt in the first
quarter of fiscal 1995 and the early
14
<PAGE> 16
extinguishment of the remaining senior debt in the first fiscal quarter of 1996.
Capitalized interest decreased by $1.3 million in 1996 compared to 1995
primarily resulting from the completion in March 1995 of Phase II of the
Company's MacSteel Ultra Clean Steel Program.
Other -- Included in "Other, net" for fiscal 1996, was a $2.3 million pretax
gain which represents the final recovery of a business interruption claim
related to a fire at the Company's Lincolnshire, Illinois facility that occurred
in 1993. Included in "Other, net" for fiscal 1995 was a $1.1 million pretax gain
related to a life insurance policy on a deceased former officer. In addition,
"Other, net" included investment income of $1.6 million for fiscal 1996 compared
to $783 thousand for fiscal 1995.
Income From Continuing Operations -- Income from continuing operations for
fiscal 1996 was $23.0 million, slightly down from $23.4 million in fiscal 1995.
Income From Discontinued Operations -- Income form discontinued operations,
net of income taxes, for fiscal 1996 was $9.9 million compared to $10.5 million
in 1995. This decrease was attributable to lower sales of cold finished steel
bars and higher conversion costs of steel tubes.
Extraordinary Charge -- Included in fiscal 1996 was an extraordinary charge of
$2.5 million compared to $2.0 million in 1995 relating to early extinguishment
of debt.
Net Income -- Net income attributable to common shareholders for fiscal 1996
was $30.4 million, compared to $27.9 million for fiscal 1995. Preferred
dividends reduced net income attributable to common shareholders by $4.0 million
for fiscal 1995. There were no preferred dividends in 1996.
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. At October 31, 1997, retained earnings of
approximately $42.95 million were available for dividends. Under the Bank
Agreement, at October 31, 1997, there were $100 million of outstanding Revolver
borrowings.
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 additional borrowings under the Old
Bank Agreement.
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 Impact. Piper Impact'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 Impact 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.
On October 29, 1997, the Company acquired, through its Dutch subsidiary, Piper
Impact Europe B.V. ("Piper Europe"), substantially all of the assets of Advance
Metal Forming C.V., a Dutch limited partnership, for
15
<PAGE> 17
approximately $30 million. The acquisition was financed with existing cash and
bank borrowings of 35 million Dutch Guilders. Piper Europe's primary source of
funds is a stand-alone secured credit facility ("Credit Facility") providing up
to 50 million Dutch Guilders ("NLG"). At October 31, 1997, 1 NLG was equal to
.514 dollars. The Credit Facility consists of a Roll-Over Term Loan, a Medium
Term Loan and an Overdraft Facility. The Roll-Over Term Loan provides NLG 15
million for loan periods of 1, 2, 3, 6, or 12 months with repayment of
outstanding borrowings on October 27, 2002. Interest is payable on the repayment
date at the Amsterdam Interbank Offering Rate (AIBOR) plus 90 basis points. In
the case of a loan period of twelve months, interest is payable six months after
the beginning of the loan period and on the repayment date. The Medium Term Loan
provides NLG 15 million at 6.375% payable quarterly in arrears from March 1,
1998, with quarterly repayments of principal in equal amounts of NLG 500
thousand commencing January 1, 1999 through April 1, 2006. The Overdraft
Facility provides an aggregate amount of NLG 20 million to cover overdrafts or
up to NLG 15 million of loans for a period of one year, subject to annual
renewal. Overdrafts bear interest at the Bank's published rate for overdraft
facilities plus 1% per annum. Loans under the Overdraft Facility bear interest
at AIBOR plus 45 to 55 basis points. The terms of Overdraft Facility loans are
selected by Piper Europe to be a period of 1, 2, 3, 6 or 12 months. Interest on
overdrafts are paid quarterly in arrears.
On December 3, 1997, the Company completed the sale of its Tubing Operations
for approximately $30 million in cash. The proceeds will be used to improve the
Company's debt structure and for investment in the Company's value-added
businesses.
At October 31, 1997, the Company had commitments of $23 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.
On December 22, 1997, the Company renewed its letter of intent to purchase
Decatur Aluminum Corp., a Decatur, Alabama based aluminum sheet manufacturer.
The acquisition of Decatur Aluminum is subject to certain conditions, including
the receipt of necessary governmental approvals, due diligence and the
negotiation of a definitive agreement.
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 fiscal 1997 was $79.4 million. This
represents an increase of $13.8 million, or 21%, compared to fiscal 1996. This
improvement resulted from improved income and lower working capital requirements
related primarily to inventories, partly offset by higher income taxes.
Investment Activities
Net cash used by investment activities in fiscal 1997 was $49.6 million compared
to $174.2 million in fiscal 1996. The decrease in cash used by investment
activities was principally due to the acquisition of the assets of Piper Impact
in 1996 and the proceeds from the sale of LaSalle Steel in 1997, partly offset
by increased capital expenditures and the acquisition of Piper Europe. The
Company estimates that fiscal 1998 capital expenditures will approximate $50 to
$60 million.
Financing Activities
Net cash used by financing activities for fiscal 1997 was $39.4 million,
principally consisting of net reductions in long-term debt of $41.8 million,
$8.4 million in common dividends, partly offset by proceeds from exercise of
stock options.
The Company uses futures and option contracts to hedge a portion of its
exposure to price fluctuations of aluminum. The exposure is related to the
Company's backlog of aluminum sales orders with committed prices as well as
future aluminum sales for which a sales price increase would lag a raw material
cost increase. Firm price commitments do not extend beyond December 1998.
Hedging gains and losses are included in "Cost of sales" in the income statement
concurrently with the hedged sales. Unrealized gains and losses related to open
contracts are not reflected in the consolidated statements of income.
EFFECTS OF INFLATION
Inflation has not had a significant effect on earnings and other financial
statement items.
16
<PAGE> 18
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS 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
disclosure. Under SFAS No. 128, the Company's pro forma basic and diluted EPS
for fiscal 1997 would have been $5.01 and $4.38, respectively.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for the Company's year ending October 31, 1999. SFAS No. 130
establishes standards for the reporting and displaying of comprehensive income
and its components. The Company will be analyzing SFAS No. 130 during 1998 to
determine what, if any, additional disclosures will be required.
In June 1997, The FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for the Company's year
ended October 31, 1999. This statement establishes standards for the reporting
of information about operating segments. The Company will be analyzing SFAS No.
131 during 1998 to determine what, if any, additional disclosures will be
required.
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 Impact, 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.
17
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Quanex Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Quanex
Corporation and subsidiaries as of October 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 1997. Our audits also
included the financial statement schedule listed in the index on page 41. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Quanex Corporation and subsidiaries
as of October 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Houston, Texas
December 11, 1997
RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Quanex Corporation and
subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles and include amounts that are based on
management's best judgments and estimates.
Quanex's system of internal controls is designed to provide reasonable
assurance, at justifiable cost, as to the reliability of financial records and
reporting and the protection of assets. The system of controls provides for
appropriate division of responsibility and the application of policies and
procedures that are consistent with high standards of accounting and
administration. Internal controls are monitored through recurring internal audit
programs and are updated as our businesses and business conditions change.
The Audit Committee, composed solely of outside directors, determines that
management is fulfilling its financial responsibilities by meeting periodically
with management, Deloitte & Touche LLP, and Quanex's internal auditors, to
review internal accounting control and financial reporting matters. The internal
and independent auditors have free and complete access to the Audit Committee.
We believe that Quanex's system of internal controls, combined with the
activities of the internal and independent auditors and the Audit Committee,
provides reasonable assurance of the integrity of our financial reporting.
<TABLE>
<S> <C>
/s/ VERSON E. OECHSLE /s/ WAYNE M. ROSE
Vernon E. Oechsle Wayne M. Rose
President and Vice President and
Chief Executive Officer Chief Financial Officer
</TABLE>
18
<PAGE> 20
Quanex Corporation
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, 1997 1996
- -------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 26,851 $ 35,962
Accounts and notes receivable, less allowance for doubtful
accounts of $10,338,000 in 1997 and $7,703,000 in
1996................................................... 80,089 78,439
Inventories............................................... 73,035 78,828
Deferred income taxes..................................... 5,601 9,302
Prepaid expenses.......................................... 1,320 110
--------- ---------
Total current assets.............................. 186,896 202,641
Property, plant and equipment, net.......................... 379,071 319,165
Net assets of discontinued operations....................... 13,554 18,830
Goodwill, net............................................... 91,496 84,343
Other assets................................................ 14,688 13,969
--------- ---------
$ 685,705 $ 638,948
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ -- $ 5,575
Accounts payable.......................................... 71,317 67,037
Accrued expense........................................... 43,208 37,984
Current maturities of long-term debt...................... 11,050 --
Income taxes payable...................................... 8,503 3,807
--------- ---------
Total current liabilities......................... 134,078 114,403
Long-term debt.............................................. 201,858 253,513
Deferred pension credits.................................... 6,627 7,110
Deferred postretirement welfare benefits.................... 6,835 6,459
Deferred income taxes....................................... 48,111 40,454
Other liabilities........................................... 19,373 20,000
--------- ---------
Total liabilities................................. 416,882 441,939
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized; issued & outstanding -- none in 1997 and
1996................................................... -- --
Common stock, $.50 par value, 25,000,000 shares
authorized; 14,050,411 shares in 1997 and 13,590,400
shares in 1996 issued and outstanding.................. 7,025 6,795
Additional paid-in capital................................ 105,146 94,251
Retained earnings......................................... 156,528 96,623
Cumulative foreign currency translation adjustment........ 422 --
Unearned compensation..................................... -- (185)
Adjustment for minimum pension liability.................. (298) (475)
--------- ---------
Total stockholders' equity........................ 268,823 197,009
--------- ---------
$ 685,705 $ 638,948
========= =========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 21
Quanex Corporation
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended October 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------
(In thousands, except per share
amounts)
<S> <C> <C> <C>
Net sales................................................... $746,093 $620,069 $603,985
Costs and expenses:
Cost of sales............................................. 609,989 492,594 493,994
Selling, general and administrative....................... 43,798 44,959 33,746
Depreciation and amortization............................. 37,298 36,083 28,785
-------- -------- --------
Operating income............................................ 55,008 46,433 47,460
Other income (expense):
Interest expense.......................................... (17,541) (11,929) (10,742)
Capitalized interest...................................... 3,539 569 1,872
Other, net................................................ 1,637 4,544 1,721
-------- -------- --------
Income from continuing operations before income taxes and
extraordinary charge...................................... 42,643 39,617 40,311
Income tax expense.......................................... (14,925) (16,639) (16,931)
-------- -------- --------
Income from continuing operations and before extraordinary
charge.................................................... 27,718 22,978 23,380
Income from discontinued operations, net of income taxes.... 5,176 9,912 10,480
Gain on sale of discontinued operations, net of income
taxes..................................................... 36,290 -- --
-------- -------- --------
Income before extraordinary charge.......................... 69,184 32,890 33,860
Extraordinary charge -- early extinguishment of debt, net of
income taxes.............................................. -- (2,522) (2,021)
-------- -------- --------
Net income.................................................. 69,184 30,368 31,839
Preferred dividends......................................... -- -- (3,957)
-------- -------- --------
Net income attributable to common stockholders.............. $ 69,184 $ 30,368 $ 27,882
======== ======== ========
Earnings per common share:
Primary:
Continuing operations.................................. $ 1.98 $ 1.68 $ 1.43
Discontinued operations................................ 0.37 0.73 0.77
Gain on sale of discontinued operations................ 2.58 -- --
Extraordinary charge................................... -- (0.19) (0.15)
-------- -------- --------
Total primary net earnings........................ $ 4.93 $ 2.22 $ 2.05
======== ======== ========
Fully diluted:
Continuing operations.................................. $ 1.90 $ 1.60 $ 1.43
Discontinued operations................................ 0.31 0.60 0.77
Gain on sale of discontinued operations................ 2.17 -- --
Extraordinary charge................................... -- (0.15) (0.15)
-------- -------- --------
Total assuming full dilution...................... $ 4.38 $ 2.05 $ 2.05
======== ======== ========
Weighted average number of shares outstanding
Primary................................................ 14,029 13,658 13,580
Assuming full dilution................................. 16,725 16,585 13,580
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 22
Quanex Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Additional Stock-
Years Ended October 31, 1997, ------------------- --------------------- Paid-in Retained holders'
1996, and 1995 Shares Amount Shares Amount Capital Earnings Other Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994... 345,000 $ 86,250 13,377,724 $6,688 $ 86,323 $ 55,081 $(459) $233,883
Net income.................. -- -- -- -- -- 31,839 -- 31,839
Common dividends ($.59 per
share).................... -- -- -- -- -- (7,932) -- (7,932)
Preferred dividends......... -- -- -- -- -- (4,451) -- (4,451)
Conversion of preferred
stock to subordinated
debentures................ (339,681) (84,920) -- -- 3,350 -- -- (81,570)
Conversion of preferred
stock to common stock..... (5,319) (1,330) 42,211 21 1,309 -- -- --
Adjustment for minimum
pension liability......... -- -- -- -- -- -- (355) (355)
Unearned compensation....... -- -- -- -- -- -- 53 53
Other....................... -- -- 65,377 34 1,424 (111) -- 1,347
-------- -------- ---------- ------ -------- -------- ----- --------
Balance at October 31, 1995... -- -- 13,485,312 6,743 92,406 74,426 (761) 172,814
Net income.................. -- -- -- -- -- 30,368 30,368
Common dividends ($.60 per
share).................... -- -- -- -- -- (8,115) -- (8,115)
Adjustment for minimum
pension liability......... -- -- -- -- -- -- (31) (31)
Unearned compensation....... -- -- -- -- -- -- 132 132
Other....................... -- -- 105,088 52 1,845 (56) -- 1,841
-------- -------- ---------- ------ -------- -------- ----- --------
Balance at October 31, 1996... -- -- 13,590,400 6,795 94,251 96,623 (660) 197,009
Net income.................. -- -- -- -- -- 69,184 69,184
Common dividends ($.61 per
share).................... -- -- -- -- -- (8,422) -- (8,422)
Adjustment for minimum
pension liability......... -- -- -- -- -- -- 177 177
Unearned compensation....... -- -- -- -- -- -- 185 185
Foreign currency translation
adjustment................ 422 422
Other....................... -- -- 460,011 230 10,895 (857) -- 10,268
-------- -------- ---------- ------ -------- -------- ----- --------
Balance at October 31, 1997... -- $ -- 14,050,411 $7,025 $105,146 $156,528 $ 124 $268,823
======== ======== ========== ====== ======== ======== ===== ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 23
Quanex Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended October 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income................................................ $ 69,184 $ 30,368 $ 31,839
Adjustments to reconcile net income to cash provided by
operating activities:
Income from discontinued operations.................. (5,176) (9,912) (10,480)
Gain on sale of discontinued operations.............. (36,290) -- --
Depreciation and amortization........................ 37,865 36,654 29,410
Deferred income taxes................................ 7,545 2,533 6,668
Deferred pension costs............................... (183) 318 76
Deferred postretirement welfare benefits............. 376 417 254
-------- --------- --------
73,321 60,378 57,767
Changes in assets and liabilities net of effects from
acquisitions and dispositions:
Decrease (increase) in accounts and notes
receivable.......................................... 2,957 7,798 (19,630)
Decrease (increase) in inventory..................... 8,898 (17,568) (3)
Increase (decrease) in accounts payable.............. 112 (4,848) 12,863
Increase in accrued expenses......................... 2,919 2,907 3,926
Other, net........................................... (8,868) 900 (3,656)
-------- --------- --------
Cash provided by continuing operations............ 79,339 49,567 51,267
Cash provided by discontinued operations.......... 89 16,073 15,885
-------- --------- --------
Cash provided by operating activities............. 79,428 65,640 67,152
INVESTMENT ACTIVITIES:
Acquisition of Advanced Metal Forming, C.V., net of cash
and equivalents acquired............................... (33,584) -- --
Acquisition of Piper Impact, Inc., net of cash and
equivalents acquired................................... (5,575) (123,264) --
Net proceeds from sale of LaSalle Steel Company........... 63,900 -- --
Capital expenditures, net of retirements.................. (68,916) (34,699) (21,615)
Capital expenditures of discontinued operations........... (3,868) (11,089) (4,986)
Decrease in short-term investments........................ -- -- 54,070
Other, net................................................ (1,550) (5,120) (1,878)
-------- --------- --------
Cash provided (used) by investment activities..... (49,593) (174,172) 25,591
-------- --------- --------
Cash provided (used) by operating and investment
activities...................................... 29,835 (108,532) 92,743
FINANCING ACTIVITIES:
Bank borrowings (repayments), net......................... (41,828) 160,000 --
Notes payable borrowings (repayments)..................... -- (10,000) 10,000
Purchase of Senior Notes.................................. -- (44,667) (59,500)
Repayments of long-term debt.............................. -- -- (20,958)
Common dividends paid..................................... (8,422) (8,115) (7,932)
Preferred dividends paid.................................. -- -- (4,451)
Stock options exercised................................... 8,357 1,179 454
Other, net................................................ 2,525 905 846
-------- --------- --------
Cash provided (used) by financing activities...... (39,368) 99,302 (81,541)
-------- --------- --------
Effect of exchange rate changes on cash and equivalents..... 422 -- --
-------- --------- --------
Increase (decrease) in cash and equivalents................. (9,111) (9,230) 11,202
Cash and equivalents at beginning of period................. 35,962 45,192 33,990
-------- --------- --------
Cash and equivalents at end of period....................... $ 26,851 $ 35,962 $ 45,192
======== ========= ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 24
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Quanex Corporation
and its subsidiaries (the "Company"), all of which are wholly owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
SCOPE OF OPERATIONS
The Company operates primarily in two industry segments: the manufacturing of
engineered steel bars and aluminum products. The Company's products include
engineered steel bars, aluminum sheet, aluminum fabricated products and impact
extrusions. The Company's manufacturing operations are conducted primarily in
the United States.
REVENUES
The company recognizes revenues when products are shipped and the title and risk
of ownership pass to the customer.
STATEMENTS OF CASH FLOWS
The Company generally considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. Similar
investments with original maturities beyond three months are considered
short-term investments. For fiscal years 1997, 1996 and 1995 cash paid for
income taxes was $13,906,000, $19,551,000, and $17,572,000, respectively. These
amounts are before refunds of $471,000, $204,000, and $47,000, respectively.
Cash paid for interest for fiscal 1997, 1996 and 1995 was $17,964,000,
$12,084,000, and $10,324,000, respectively. Non-cash investing and financing
activities in fiscal 1995 included the exchange of $84,920,000 of the Company's
Cumulative Convertible Exchangeable Preferred Stock for the Company's 6.88%
Convertible Subordinated Debentures due June 30, 2007, and the conversion of
$1,330,000 of the Company's Cumulative Convertible Exchangeable Preferred Stock
to the Company's common stock. (See Note 2 regarding acquisitions)
INVENTORIES
Inventories are valued at the lower of cost or market. The accounting methods
used in valuing the Company's inventories are described in Note 5.
LONG-LIVED ASSETS
Goodwill represents the excess of the purchase price over the fair value of
acquired companies and is being amortized on a straight line basis over forty
years for the goodwill resulting from the acquisition of Nichols Homeshield in
1989, and over twenty-five years for the goodwill resulting from the
acquisitions of Piper Impact, Inc. in 1996 and Piper Impact Europe B.V. in 1997
(See Note 2). At October 31, 1997 and 1996, accumulated amortization was
$10,398,000 and $7,297,000, respectively. The Company evaluates any possible
impairment of goodwill using estimates of undiscounted future cash flows.
Property, plant and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives of certain categories are as follows:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Land improvements........................................... 10 to 25
Buildings................................................... 10 to 40
Machinery and equipment..................................... 3 to 20
</TABLE>
23
<PAGE> 25
- --------------------------------------------------------------------------------
During 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of". The
statement establishes accounting standards related to the impairment of
long-lived assets, such as property, plant, equipment and intangibles. The
Company adopted statement No. 121 in fiscal 1997 and did not experience any
material impact on its financial position or results of operations.
HEDGING
The Company uses futures and option contracts to hedge a portion of its exposure
to price fluctuations of aluminum. Hedging gains and losses are recognized
concurrently with the related sales transactions. The Company enters into
interest rate agreements which effectively exchange variable interest rate debt
for fixed interest rate debt. The agreements are used to reduce the exposure to
increasing interest rates. The Company enters into these agreements with major
financial institutions. The Company does not use derivative financial
instruments for trading or speculative purposes. (See Note 15)
EARNINGS PER SHARE DATA
Primary earnings per share is computed by deducting preferred dividends from net
income in order to determine net income attributable to common stockholders.
This amount is then divided by the weighted average number of common shares
outstanding and common stock equivalents.
Fully diluted earnings per-share amounts assume conversion of the Company's
6.88% Convertible Subordinated Debentures, the elimination of the related
interest and amortization of issuance costs, net of tax, and the issuance of
common stock for all other potentially dilutive common stock equivalents
outstanding.
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 disclosure.
Under SFAS 128, the Company's pro forma basic and diluted EPS would have been:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Basic EPS:
Continuing operations..................................... $2.01 $ 1.70 $ 1.44
Discontinued operations................................... 0.37 0.73 0.78
Gain on sale of discontinued operations................... 2.63 -- --
Extraordinary charge...................................... -- (0.19) (0.15)
----- ------ ------
Total Basic EPS................................... $5.01 $ 2.24 $ 2.07
Diluted EPS:
Continuing operations..................................... $1.90 $ 1.60 $ 1.51
Discontinued operations................................... 0.31 0.60 0.64
Gain on sale of discontinued operations................... 2.17 -- --
Extraordinary charge...................................... -- (0.15) (0.12)
----- ------ ------
Total Diluted EPS................................. $4.38 $ 2.05 $ 2.03
===== ====== ======
</TABLE>
FOREIGN CURRENCY TRANSLATION
Gains and losses resulting from translation of the Company's foreign
subsidiary's operations are included as a separate component of stockholder's
equity.
USE OF ESTIMATES
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the
24
<PAGE> 26
- --------------------------------------------------------------------------------
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts for prior periods have been reclassified in the accompanying
consolidated financial statements to conform to 1997 presentations.
2. ACQUISITIONS
On August 9, 1996, the Company acquired the assets, net of various liabilities,
of Piper Impact, Inc. ("Piper Impact"). Piper Impact is a manufacturer of
custom-designed, impact-extruded aluminum and steel parts for the
transportation, electronics and defense markets, with production facilities in
New Albany, Mississippi and Park City, Utah.
Piper Impact's net assets were acquired for approximately $130 million in
cash, cash equivalents, and notes. The acquisition was accounted for using the
purchase method of accounting. The purchase price was allocated to the assets
and liabilities of Piper Impact based on their estimated fair values. The
goodwill associated with the Piper Impact acquisition approximated $56 million,
which is being amortized on a straight-line basis over twenty-five years. To
finance the acquisition, the Company entered into an unsecured revolving
credit/term loan facility which provides for the borrowing of up to $250
million. (See Note 8)
Liabilities assumed included an estimated $20 million related to costs for
further investigation and specified environmental remediation. These cost
estimates include charges for additional studies, remediation, renovations to
affected facilities and equipment, and other compliance expenditures. The
estimated range of costs is $15 million to $25 million of which the accrual
represents management's best estimate of total costs expected to be incurred.
Actual expenditures could differ from current estimates as additional studies
are completed, requiring revisions to the remediation and restoration plan.
The unaudited pro-forma consolidated results of operations of the Company are
shown below as if the acquisition had occurred at the beginning of the fiscal
periods indicated. These results are not necessarily indicative of the results
which would actually have occurred if the purchase had taken place at the
beginning of the periods, nor are they necessarily indicative of future results.
<TABLE>
<CAPTION>
Pro Forma
--------------------
October 31,
--------------------
1996 1995
--------------------
(In thousands,
except per
share amounts)
(Unaudited)
<S> <C> <C>
Net sales................................................... $708,492 $710,357
Income before extraordinary charge.......................... 27,751 28,801
Preferred dividends......................................... -- 3,957
Net income attributable to common shareholders before
extraordinary charge...................................... 27,751 24,844
Earnings per share before extraordinary charge:
Primary................................................... $ 2.03 $ 1.83
Fully diluted............................................. $ 1.89 $ 1.83
</TABLE>
25
<PAGE> 27
- --------------------------------------------------------------------------------
On October 29, 1997, the Company, through its Dutch subsidiary, Piper Impact
Europe B.V. ("Piper Europe"), acquired the net assets of Advanced Metal Forming
C.V., a Dutch limited partnership, for approximately $30 million. The Company's
balance sheet as of October 31, 1997 includes Piper Europe. The income statement
for the twelve months ended October 31, 1997 does not include Piper Europe.
Piper Europe produces aluminum impact extrusions and precision steel stampings
for the automotive and electronics industries in Europe and North America. Piper
Europe employs approximately 260 people, and its manufacturing facilities are
located near Zwolle in The Netherlands.
3. DISCONTINUED OPERATIONS
In April 1997, the Company completed the sale of its LaSalle Steel Company
("LaSalle") subsidiary. The Company recorded an after tax gain on the sale of
$36,290,000 in the second quarter of fiscal 1997. 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".
In December 1997, the Company completed the sale of its tubing operations,
comprised of Michigan Seamless Tube, Gulf States Tube, and the Tube Group
Administrative Office ("Tubing Operations"). The Company will record a gain on
the sale of approximately $13,000,000 in the first quarter of fiscal 1998.
Results of these operations have been classified as discontinued and prior
periods have been restated. For business segment reporting purposes, Tubing
Operations were previously classified as "Steel Tubes". (See Note 17)
Net sales and income from discontinued operations are as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
--------------------------------
1997 1996 1995
--------------------------------
(In thousands)
<S> <C> <C> <C>
Net sales................................................... $187,123 $275,641 $287,210
Operating income............................................ 7,962 17,090 18,069
Income tax expense.......................................... (2,786) (7,178) (7,589)
Income from discontinued operations......................... $ 5,176 $ 9,912 $ 10,480
</TABLE>
<TABLE>
<CAPTION>
October 31,
--------------------
1997 1996
--------------------
(In thousands)
<S> <C> <C>
Net Assets of Discontinued Operations
Current assets.............................................. $ 24,388 $ 60,697
Property, plant and equipment, net.......................... 17,357 32,381
Other assets................................................ 2,784 5,010
Current liabilities......................................... (11,241) (38,663)
Deferred pension credits.................................... (4,373) (10,183)
Deferred postretirement welfare benefits.................... (22,406) (49,169)
Deferred income taxes....................................... 6,718 16,421
Adjustment for minimum pension liability.................... 327 2,336
-------- --------
Net assets of discontinued operations..................... $ 13,554 $ 18,830
======== ========
</TABLE>
26
<PAGE> 28
- --------------------------------------------------------------------------------
4. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Years Ended October 31,
-----------------------------
1997 1996 1995
-----------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal................................................... $ 846 $12,914 $11,147
State..................................................... 2,829 2,865 562
------- ------- -------
3,675 15,779 11,709
Deferred.................................................... 11,250 860 5,222
------- ------- -------
Income taxes from continuing operations..................... 14,925 16,639 16,931
Income taxes from discontinued operations................... 2,786 7,178 7,589
Income taxes from sale of discontinued operations........... 13,178 -- --
Reduction of taxes from extinguishment of debt.............. -- (1,826) (1,463)
------- ------- -------
Totals................................................. $30,889 $21,991 $23,057
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
October 31,
------------------
1997 1996
------------------
(In thousands)
<S> <C> <C>
Deferred tax liability:
Property, plant and equipment............................. $43,092 $34,843
Inventory................................................. 412 (587)
Other..................................................... 12,735 12,791
------- -------
56,239 47,047
------- -------
Deferred tax assets:
Postretirement benefit obligation......................... 2,969 2,762
Other employee benefit obligations........................ 8,143 7,041
Other accrued liabilities................................. 2,617 6,092
------- -------
13,729 15,895
------- -------
Net deferred tax liability.................................. $42,510 $31,152
======= =======
Deferred income tax liability -- non-current................ $48,111 $40,454
Deferred tax assets -- current.............................. (5,601) (9,302)
------- -------
Net deferred tax liability........................ $42,510 $31,152
======= =======
</TABLE>
Income tax expense differs from the amount computed by applying the statutory
federal income tax rate to income from continuing operations before income taxes
for the following reasons:
<TABLE>
<CAPTION>
Years Ended October 31,
-----------------------------
1997 1996 1995
-----------------------------
(In thousands)
<S> <C> <C> <C>
Income tax expense at statutory tax rate.................... $14,925 $13,866 $14,109
Increase (decrease) in taxes resulting from:
State income taxes, net of federal effect................. 1,655 2,148 2,220
Goodwill.................................................. 334 334 334
Other items, net.......................................... (1,989) 291 268
------- ------- -------
$14,925 $16,639 $16,931
======= ======= =======
</TABLE>
The Company reached a settlement with the Internal Revenue Service with respect
to its tax audit of fiscal years 1992 through 1994. During 1997, the company
made a payment of $2,016,000 of tax and related interest. Adequate provisions
had been made in prior years and the settlement did not have a material effect
on earnings for fiscal 1997.
27
<PAGE> 29
- --------------------------------------------------------------------------------
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31,
------------------
1997 1996
------------------
(In thousands)
<S> <C> <C>
Raw materials............................................... $19,432 $19,757
Finished goods and work in process.......................... 47,739 53,100
------- -------
67,171 72,857
Other....................................................... 5,864 5,971
------- -------
Total............................................. $73,035 $78,828
======= =======
</TABLE>
The values of inventories in the consolidated balance sheets are based on the
following accounting methods:
<TABLE>
<S> <C> <C>
LIFO........................................................ $51,517 $60,904
FIFO........................................................ 21,518 17,924
------- -------
Total............................................. $73,035 $78,828
======= =======
</TABLE>
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $16,000,000 and $13,000,000 at October
31, 1997 and 1996, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
October 31,
-----------------------
1997 1996
-----------------------
(In thousands)
<S> <C> <C>
Land and land improvements.................................. $ 18,901 $ 16,381
Buildings................................................... 80,981 75,466
Machinery and equipment..................................... 461,817 424,577
Construction in progress.................................... 81,155 34,890
--------- ---------
642,854 551,314
Less accumulated depreciation and amortization.............. (263,783) (232,149)
--------- ---------
$ 379,071 $ 319,165
========= =========
</TABLE>
The Company had commitments for the purchase or construction of capital assets
amounting to approximately $23 million at October 31, 1997.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
October 31,
------------------
1997 1996
------------------
(In thousands)
<S> <C> <C>
Accrued contribution to pension funds....................... $ 1,033 $ 1,023
Interest.................................................... 2,516 2,925
Payroll, payroll taxes and employee benefits................ 21,995 20,682
State and local taxes....................................... 1,985 1,647
Other....................................................... 15,679 11,707
------- -------
$43,208 $37,984
======= =======
</TABLE>
28
<PAGE> 30
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 31,
--------------------
1997 1996
--------------------
(In thousands)
<S> <C> <C>
Revolving credit agreements................................. $100,185 $160,000
Convertible subordinated debentures......................... 84,920 84,920
Term loan................................................... 7,709 --
Bank borrowings due within one year......................... 10,278 --
Industrial Revenue and Economic Development Bonds,
unsecured, payable in annual installments through the year
2005, bearing interest ranging from 6.50% to 8.375%....... 3,275 3,275
Other....................................................... 6,541 5,318
-------- --------
$212,908 $253,513
Less maturities due within one year included in current
liabilities............................................... 11,050 --
-------- --------
$201,858 $253,513
======== ========
</TABLE>
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"). The Bank Agreement consists of a
revolving line of credit ("Revolver"). In July 1997, the term loan provisions of
the Bank Agreement expired. The Bank Agreement expires July 23, 2002, and
provides for up to $25 million for standby 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 (a) the prime rate or the
federal funds rate plus one percent, whichever is higher, or (b) a Eurodollar
based rate. At October 31, 1997, the Company had $100 million outstanding under
the Revolver. The weighted average interest rates on borrowings under the
Revolver were 6.6% and 6.3% in 1997 and 1996, respectively. As of October 31,
1997, the Company was in compliance with all Bank Agreement covenants. Under the
Company's most restrictive loan covenants, retained earnings of $42,954,000 at
October 31, 1997 were available for dividends.
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.
At October 31, 1994, the Company had $125 million outstanding in Senior Notes.
The Senior Notes paid interest at 10.77% per annum. In December 1994, the
Company acquired $59.5 million principal amount of the Senior Notes for a
purchase price equal to 105% of the principal amount plus accrued interest. The
Company recorded an extraordinary charge of $2.0 million ($3.5 million before
tax) in the first quarter of 1995 related to the call premium and write-off of
deferred debt issuance costs for the Senior Notes that were repurchased. In
August 1995, the Company made a required annual repayment of $20.8 million
principal amount. In December 1995, the Company acquired the remaining $44.7
million principal amount of the Senior Notes for a purchase price equal to
107.5% of the principal amount plus accrued interest. The second 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.
On October 28, 1997, Piper Impact Europe B.V. ("Piper Europe") executed a
stand-alone secured credit facility ("Credit Facility") providing up to 50
million Dutch Guilders ("NLG"). At October 31, 1997, 1 NLG was equal to .514
U.S. dollars. The Credit Facility consists of a Roll-Over Term Loan, a Medium
Term Loan and an Overdraft Facility. The Roll-Over Term Loan provides NLG 15
million for loan periods of 1, 2, 3, 6, or 12 months with repayment of
outstanding borrowings on October 27, 2002. Interest is payable on the repayment
date at the Amsterdam Interbank Offering Rate (AIBOR) plus 90 basis points. In
the case of a loan period of twelve months, interest is payable six months after
the beginning of the loan period and on the repayment date. The Medium Term Loan
provides NLG 15 million at 6.375% payable quarterly in arrears from March 1,
1998, with quarterly repayments of principal in equal amounts of NLG 500
thousand commencing January 1, 1999 through April 1, 2006. The Overdraft
Facility provides an aggregate amount of NLG 20 million to cover overdrafts or
up to NLG 15 million of loans for a period of one year, subject to annual
renewal. Overdrafts bear interest at the Bank's published rate for overdraft
facilities plus 1% per annum. Loans under the Overdraft Facility bear interest
at AIBOR plus 45 to 55 basis points. The terms of Overdraft Facility loans are
selected by Piper Europe to be a period of 1, 2, 3, 6, or 12 months. Interest on
overdrafts are paid quarterly in arrears.
29
<PAGE> 31
- --------------------------------------------------------------------------------
Interest on loans under the Overdraft Facility is payable on the repayment
date, however, in the case of a loan period of twelve months, interest is
payable six months after the beginning of the loan period and on the repayment
date. At October 31, 1997, Piper Europe had NLG 35.3 million outstanding under
the Credit Facility. As of October 31, 1997, Piper Europe was in compliance with
all Credit Facility covenants.
Aggregate maturities of long-term debt at October 31, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
1998................. $ 11,050
1999................. --
2000................. --
2001................. --
2002................. 100,185
Thereafter........... 101,673
--------
$212,908
========
</TABLE>
9. PENSION PLANS AND RETIREMENT BENEFITS
The Company has retirement plans covering substantially all employees. The plans
provide for defined benefits. The plans pay benefits to employees at retirement
using formulas based upon years of service and compensation rates near
retirement. The Company's funding policy is generally to make the minimum annual
contributions required by applicable regulations.
The plans' funded status was as follows:
<TABLE>
<CAPTION>
Assets exceed Accumulated benefit
accumulated obligation
benefit obligation exceeds assets
-------------------- --------------------
October 31,
--------------------------------------------
1997 1996 1997 1996
--------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Assets available for benefits.............................. $ 12,807 $ 9,910 $ 3,606 $ 2,323
-------- -------- ------- -------
Projected benefit obligation
Vested................................................... (10,602) (8,571) (4,446) (3,637)
Nonvested................................................ (170) (283) (752) (834)
-------- -------- ------- -------
Accumulated benefit obligation........................ (10,772) (8,854) (5,198) (4,471)
Effect of future salary increases........................ (5,990) (5,378) -- --
-------- -------- ------- -------
Total projected benefit obligation............... (16,762) (14,232) (5,198) (4,471)
-------- -------- ------- -------
Assets less than projected benefit obligation.............. $ (3,955) $ (4,322) $(1,592) $(2,148)
======== ======== ======= =======
Consisting of:
Amounts to be offset against future pension costs:
Assets in excess of obligation at adoption............ $ 772 $ 876 $ 52 $ 59
Obligation (increase) decrease due to plan
amendments.......................................... 238 294 (816) (826)
Actuarial gains (losses).............................. 1,103 492 (541) (836)
Minimum liability adjustment.......................... -- -- 1,305 1,604
Amounts recognized in consolidated balance sheets:
Deferred pension credit............................... (5,371) (5,250) (1,256) (1,860)
Accrued contribution to pension funds................. (697) (734) (336) (289)
-------- -------- ------- -------
$ (3,955) $ (4,322) $(1,592) $(2,148)
======== ======== ======= =======
</TABLE>
In accordance with the provisions of Statement of Financial Accounting Standards
No. 87, the Company recorded additional minimum pension liabilities as of
October 31, 1997 and 1996, representing the excess of the accumulated benefit
obligations over the fair value of plan assets and accrued pension liabilities.
The Company recorded additional pension liabilities of $1,305,000 and
$1,604,000; intangible assets of $816,000 and $827,000; and stockholders' equity
reductions, net of income taxes, of $298,000 and $475,000, as of October 31,
1997 and 1996, respectively.
The projected unit credit method was used to determine the actuarial present
value of the accumulated benefit obligation and the projected benefit
obligation. For 1997, 1996 and 1995 the discount rate was 7.5%. The expected
long term rate of return on assets was 10% for the three year period ending
October 31, 1997. The assumed rate of increase in future compensation levels was
4.5% in 1997, 1996 and 1995. The plans invest primarily in marketable equity and
debt securities.
30
<PAGE> 32
- --------------------------------------------------------------------------------
Net pension costs for defined benefit plans were as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
-----------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Benefits earned during the year............................. $ 1,371 $ 1,270 $ 1,109
Interest cost on projected benefit obligation............... 1,511 1,293 1,142
Actual return on plan assets................................ (2,561) (1,400) (1,319)
Net amortization and deferral............................... 1,250 335 348
------- ------- -------
$ 1,571 $ 1,498 $ 1,280
======= ======= =======
</TABLE>
The Company has various defined contribution plans in effect for certain
eligible employees. The Company makes contributions to the plans subject to
certain limitations outlined in the plans. Contributions to these plans were
approximately $2,919,000, $2,476,000, and $2,299,000 during fiscal 1997, 1996,
and 1995, respectively.
The Company has a Supplemental Benefit Plan covering certain key officers of
the Company. Earned vested benefits under the Supplemental Benefit Plan were
approximately $3,724,000, $2,959,000, and $4,107,000 at October 31, 1997, 1996
and 1995, respectively. These benefits are funded with life insurance policies
purchased by the Company.
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain healthcare and life insurance benefits for eligible
retired employees. Employees may become eligible for those benefits if they
reach normal retirement age while working for the Company. The Company continues
to fund benefit costs on a pay-as-you-go basis; and, for fiscal year 1997, the
Company made benefit payments totaling $247,000, compared to $171,000 and
$366,000 in fiscal 1996 and 1995, respectively.
The following table sets forth the funded status of the Company's projected
postretirement benefits other than pensions, reconciled with amounts recognized
in the Company's consolidated balance sheets at:
<TABLE>
<CAPTION>
October 31,
------------------
1997 1996
------------------
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $(4,233) $(3,870)
Fully eligible active plan participants................... (161) (178)
Other active plan participants............................ (2,217) (2,043)
------- -------
(6,611) (6,091)
Plan assets at fair value................................... -- --
------- -------
Accumulated postretirement benefit obligation
in excess of plan assets............................... (6,611) (6,091)
Unrecognized prior service cost............................. -- --
Unrecognized net loss from past experience different from
that assumed and from changes in assumption............... (224) (368)
------- -------
Accrued postretirement benefit cost......................... $(6,835) $(6,459)
======= =======
</TABLE>
<TABLE>
<CAPTION>
Years Ended October 31,
-----------------------
1997 1996 1995
-----------------------
(In thousands)
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost -- benefits attributed to service during the
period................................................. $148 $145 $124
Interest cost on accumulated postretirement Benefit
obligation............................................. 472 438 442
Net amortization and deferral............................. 3 5 54
---- ---- ----
Net periodic postretirement benefit cost.................. $623 $588 $620
==== ==== ====
</TABLE>
The assumed healthcare cost trend rate was 8.8% in 1997, decreasing uniformly to
5.5% in the year 2003 and remaining level thereafter. The assumed discount rate
used to measure the accumulated postretirement benefit obligation was 7.5% at
October 31, 1997 and October 31, 1996.
31
<PAGE> 33
- --------------------------------------------------------------------------------
If the healthcare cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of October 31, 1997 would be
increased by 3.5%. The effect of this change on the sum of the service cost and
interest cost would be an increase of 2.8%.
11. INDUSTRY SEGMENT INFORMATION
Quanex is principally a producer of specialized metals and metal products. The
Company's operations primarily consist of two segments: engineered steel bars
and aluminum products.
For the year ended October 31, 1997, sales to Autoliv Inc. represented 13% of
the Company's consolidated net sales. Sales to Autoliv are included in the
aluminum products segment.
<TABLE>
<CAPTION>
Corporate
Year ended Engineered Aluminum and
October 31, 1997 Steel Bars(4) Products(1) Other(2) Consolidated
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies........................ $301,436 $444,657 -- $746,093
Intersegment(3).................................. 18,032 -- $(18,032) --
------- ------- ------- -------
Total.............................................. $319,468 $444,657 $(18,032) $746,093
======= ======= ======= =======
Operating Income (loss)............................ $50,762 $17,415 $(13,169) $55,008
Depreciation and amortization:
Operating........................................ $13,940 $23,227 $ 131 $37,298
Other............................................ -- -- 567 567
------- ------- ------- -------
Total.............................................. $13,940 $23,227 $ 698 $37,865
======= ======= ======= =======
Capital expenditures............................... $35,220 $33,581 $ 345 $69,146
Identifiable assets................................ $192,937 $443,799 $48,969 $685,705
</TABLE>
(1) Identifiable assets includes Advanced Metal Forming C.V., acquired on
October 29, 1997.
(2) Included in "Corporate and Other" are intersegment eliminations, corporate
expenses and net assets of discontinued operations.
(3) Intersegment sales are conducted on an arm's-length basis.
(4) Includes Nitro Steel and Heat Treat divisions previously reported under the
Steel Tubes segment. See Note 3.
<TABLE>
<CAPTION>
Corporate
Year ended Engineered Aluminum and
October 31, 1996 Steel Bars(4) Products(1) Other(2) Consolidated
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies........................ $275,202 $344,867 -- $620,069
Intersegment(3).................................. 16,965 -- $(16,965) --
------- ------- ------- -------
Total.............................................. $292,167 $344,867 $(16,965) $620,069
======= ======= ======= =======
Operating Income (loss)............................ $39,090 $22,070 $(14,727) $46,433
Depreciation and amortization:
Operating........................................ $18,263 $17,712 $ 108 $36,083
Other............................................ -- -- 571 571
------- ------- ------- -------
Total.............................................. $18,263 $17,712 $ 679 $36,654
======= ======= ======= =======
Capital expenditures............................... $19,573 $15,031 $ 133 $34,737
Identifiable assets................................ $171,351 $412,048 $55,549 $638,948
</TABLE>
(1) Includes three months of Piper Impact's operations.
(2) Included in "Corporate and Other" are intersegment eliminations, corporate
expenses and net assets of discontinued operations.
(3) Intersegment sales are conducted on an arm's-length basis.
(4) Includes Nitro Steel and Heat Treat divisions previously reported under the
Steel Tubes segment. See Note 3.
32
<PAGE> 34
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Corporate
Year ended Engineered Aluminum and
October 31, 1995 Steel Bars(3) Products Other(1) Consolidated
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies........................ $272,420 $331,565 -- $603,985
Intersegment(2).................................. 14,229 -- $(14,229) --
------- ------- ------- -------
Total.............................................. $286,649 $331,565 $(14,229) $603,985
======= ======= ======= =======
Operating Income (loss)............................ $43,668 $21,128 $(17,336) $47,460
Depreciation and amortization:
Operating........................................ $15,537 $13,135 $ 113 $28,785
Other............................................ -- -- 625 625
------- ------- ------- -------
Total.............................................. $15,537 $13,135 $ 738 $29,410
======= ======= ======= =======
Capital expenditures............................... $12,776 $ 8,704 $ 149 $21,629
Identifiable assets................................ $177,079 $230,586 $58,793 $466,458
</TABLE>
(1) Included in "Corporate and Other" are intersegment eliminations, corporate
expenses and net assets of discontinued operations.
(2) Intersegment sales are conducted on an arm's length basis.
(3) Includes Nitro Steel and Heat Treat divisions previously reported under the
Steel Tubes segment. See Note 3.
12. PREFERRED STOCK PURCHASE RIGHTS
The Company declared a dividend in 1986 of one Preferred Stock Purchase Right (a
"Right") on each outstanding share of its common stock. This action was intended
to assure that all shareholders would receive fair treatment in the event of a
proposed takeover of the Company. On April 26, 1989, the Company amended the
Rights to provide for additional protection to shareholders and to provide the
Board of Directors of the Company with needed flexibility in responding to
abusive takeover tactics. Each Right, when exercisable, entitles the holder to
purchase 1/100th of a share of the Company's Series A Junior Participating
Preferred Stock at an exercise price of $60. Each 1/100th of a share of Series A
Junior Participating Preferred Stock will be entitled to a dividend equal to the
greater of $.01 or the dividend declared on each share of common stock, and will
be entitled to 1/100th of a vote, voting together with the shares of common
stock. The Rights will be exercisable only if, without the Company's prior
consent, a person or group of persons acquires or announces the intention to
acquire 20% or more of the Company's common stock. If the Company is acquired
through a merger or other business combination transaction, each Right will
entitle the holder to purchase $120 worth of the surviving company's common
stock for $60. Additionally, if someone acquires 20% or more of the Company's
common stock, each Right not owned by the 20% or greater shareholder would
permit the holder to purchase $120 worth of the Company's common stock for $60.
The Rights are redeemable, at the option of the Company, at $.02 per Right at
any time until ten days after someone acquires 20% or more of the common stock.
The Rights expire in 1999.
As a result of the Rights distribution, 150,000 of the 1,000,000 shares of
authorized Preferred Stock were reserved for issuance as Series A Junior
Participating Preferred Stock.
13. PREFERRED STOCK -- DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED SHARES
During May 1992, the Company issued 3,450,000 Depositary Convertible
Exchangeable Preferred Shares ("Depositary Shares"), each representing 1/10th of
a share of the Company's 6.88% Cumulative Convertible Exchangeable Preferred
Stock ("Preferred Stock"). The net proceeds from the issuance was $82.9 million.
The dividend per annum and liquidation preference for each share of Preferred
Stock were $17.20 and $250, respectively, and for each Depositary Share were
$1.72 and $25, respectively. Dividends on the Preferred Stock and Depositary
Shares were cumulative and payable quarterly, commencing September 30, 1992. The
Company was prohibited from paying any dividends on Common Stock (other than in
Common Stock or junior stock) unless all required preferred dividends had been
paid.
The Preferred Stock was convertible at the option of the holder into shares of
the Company's Common Stock at a conversion price of $31.50 per share, subject to
adjustment in certain events. The Preferred Stock was exchangeable at the option
of the Company, in whole but not in part, on any dividend payment date
commencing June 30, 1995 for the Company's 6.88% Convertible Subordinated
Debentures due June 30, 2007 ("6.88% Debentures") at the rate of $250 principal
amount of 6.88% Debentures for each share of Preferred Stock and $25 principal
amount of 6.88% Debentures for each Depositary Share.
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% Debentures. Interest is payable
33
<PAGE> 35
- --------------------------------------------------------------------------------
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.
14. RESTRICTED STOCK AND STOCK OPTION PLANS
The Company has restricted stock and stock option plans which provide for the
granting of common shares or stock options to key employees. Under the Company's
restricted stock plan, common stock may be awarded to key employees. The
recipient is entitled to all of the rights of a shareholder, except that during
the forfeiture period the shares are nontransferable. The award vests during an
eight year period based on the price of the Company's stock. Upon issuance of
stock under the plan, unearned compensation equal to the market value at the
date of grant is charged to stockholders' equity and subsequently amortized to
expense over the restricted period. There were no restricted shares granted in
1995, 1996 or 1997. The amount charged to compensation expense was $185,000 in
1997, $132,000 in 1996, and $53,000 in 1995.
Options are granted at prices determined by the Board of Directors which may
not be less than the fair market value of the shares at the time the options are
granted. Unless otherwise provided by the Board at the time of grant, options
become exercisable in 33 1/3% increments maturing cumulatively on each of the
first through third anniversaries of the date of grant and must be exercised no
later than ten years from the date of grant. No options may be granted under the
plans after December 1, 2002. There were 722,322, 624,035, and 140,151 shares
available for granting of options at October 31, 1997, 1996, and 1995,
respectively. Stock option transactions for the three years ended October 31,
1997, were as follows:
<TABLE>
<CAPTION>
Shares Average
Shares Under Price
Exercisable Option Per Share
-------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1994................................. 405,299 794,801 $19
=======
Granted................................................... 295,000 20
Exercised................................................. (28,768) 15
Cancelled................................................. -- --
---------
Balance at October 31, 1995................................. 567,243 1,061,033 20
=======
Granted................................................... 269,650 28
Exercised................................................. (69,503) 12
Cancelled................................................. (3,534) 22
---------
Balance at October 31, 1996................................. 726,609 1,257,646 22
=======
Granted................................................... 165,700 29
Exercised................................................. (323,218) 18
Cancelled................................................. (13,987) 25
---------
Balance at October 31, 1997................................. 650,053 1,086,141 $24
======= =========
</TABLE>
The Company also has a stock option plan which provides for the granting of
stock options to non-employee Directors to purchase up to an aggregate amount of
100,000 shares of common stock. The plan provides that each non-employee
Director and each future non-employee Director, as of the first anniversary of
the date of his election as a Director of the Company, will be granted an option
to purchase 10,000 shares of common stock at a price per share of common stock
equal to the fair market value of the common stock as of the date of the grant.
Options become exercisable in 33 1/3% increments maturing cumulatively on each
of the first through third anniversaries of the date of the grant and must be
exercised no later than 10 years from the date of grant. No options may be
granted under the plan after June 22, 1997. There were no shares available for
granting of options
34
<PAGE> 36
- --------------------------------------------------------------------------------
at October 31, 1997. There were 20,000, and 40,000 shares available for granting
of options at October 31, 1996 and 1995, respectively. Stock option transactions
for the three years ended October 31, 1997, were as follows:
<TABLE>
<CAPTION>
Shares Average
Shares Under Price
Exercisable Option Per Share
----------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1994................................. 13,333 20,000 $17
=======
Granted................................................... -- --
Exercised................................................. -- --
Cancelled................................................. -- --
--------
Balance at October 31, 1995................................. 16,666 20,000 $17
=======
Granted................................................... 20,000 20
Exercised................................................. -- --
Cancelled................................................. -- --
--------
Balance at October 31, 1996................................. 20,000 40,000 $18
=======
Granted................................................... -- --
Exercised................................................. (15,000) 18
Cancelled................................................. -- --
--------
Balance at October 31, 1997................................. 11,666 25,000 $18
======= ========
</TABLE>
In addition, the Company has a stock option plan which provides for the granting
of stock options to non-employee Directors to purchase up to an aggregate of
210,000 shares of common stock. Each non-employee Director as of December 6,
1989, was granted an option to purchase 3,000 shares of common stock at a price
per share of common stock equal to the fair market value of the common stock as
of the date of grant. Also, each non-employee Director who is a director of the
Company on any subsequent October 31, while the plan is in effect and shares are
available for the granting of options hereunder, shall be granted on such
October 31, an option to purchase 3,000 shares of common stock at a price equal
to the fair market value of the common stock as of such October 31. Options
become exercisable at any time commencing six months after the grant and must be
exercised no later than 10 years from the date of grant. No option may be
granted under the plan after December 5, 1999. There were 30,000, 51,000, and
72,000 shares available for granting of options at October 31, 1997, 1996 and
1995, respectively. Stock option transactions for the three years ended October
31, 1997, were as follows:
<TABLE>
<CAPTION>
Shares Average
Shares Under Price
Exercisable Option Per Share
----------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1994................................. 66,000 87,000 $20
=======
Granted................................................... 21,000 20
Exercised................................................. -- --
Cancelled................................................. -- --
--------
Balance at October 31, 1995................................. 87,000 108,000 $20
=======
Granted................................................... 21,000 29
Exercised................................................. (6,000) 19
Cancelled................................................. -- --
--------
Balance at October 31, 1996................................. 102,000 123,000 $22
=======
Granted................................................... 21,000 28
Exercised................................................. (30,000) 18
Cancelled................................................. -- --
--------
Balance at October 31, 1997................................. 93,000 114,000 $24
======= ========
</TABLE>
On October 1, 1992, Carl E. Pfeiffer retired as the Chief Executive Officer of
the Company. In connection with such retirement, the Company replaced options to
purchase 60,000 shares of Common Stock at a weighted average exercise price of
$15.85 held by Mr. Pfeiffer, under the Company's employee stock option plans
with new options
35
<PAGE> 37
- --------------------------------------------------------------------------------
having the same exercise prices and expiration dates. Such options are
substantially similar to the options previously held by him with the exception
that vesting is not contingent upon his continued employment with the Company
and the options expire on various dates between October 25, 1999, and October
13, 2001, instead of one year after retirement. There were no shares exercisable
at October 31, 1997. There were 60,000 shares exercisable at October 31, 1996
and 1995. During the year ended October 31, 1997, 60,000 shares were exercised
at an average price of $15.85 per share. There were no transactions related to
these stock options during the years ended October 31, 1996 and 1995.
STOCK BASED COMPENSATION
Effective November 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." In accordance with SFAS No. 123, the Company will
continue to apply the existing rules contained in Accounting Principles Opinion
No. 25, "Accounting for Stock Issued to Employees," and disclose the required
pro forma effect on net income and earnings per share of the fair value based
method of accounting for stock based compensation as required by SFAS No. 123.
The following pro forma summary of the Company's consolidated results of
operations have been prepared as if the fair value based method of accounting
for stock based compensation as required by SFAS No. 123 had been applied:
<TABLE>
<CAPTION>
Years Ended October 31,
------------------------
1997 1996
<S> <C> <C>
------------------------
<CAPTION>
(In thousands)
<S> <C> <C>
Net income attributable to common stockholders.............. $69,184 $30,368
SFAS No. 123 adjustment..................................... (995) (1,431)
------- -------
Pro forma net attributable to common stockholders........... $68,189 $28,937
======= =======
Earnings per Common share:
Primary as reported....................................... $ 4.93 $ 2.22
Primary pro forma......................................... $ 4.86 $ 2.12
Fully diluted as reported................................. $ 4.38 $ 2.05
Fully diluted pro forma................................... $ 4.32 $ 1.96
</TABLE>
Fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------------
<S> <C> <C>
Risk-free interest rate..................................... 5.39% 5.44%
Dividend yield.............................................. 2.23% 2.23%
Volatility factor........................................... 29.83% 29.83%
Weighted average expected life.............................. 5 YEARS 5 years
</TABLE>
15. FINANCIAL INSTRUMENTS
The Company uses futures and option contracts to hedge a portion of its exposure
to price fluctuations of aluminum. The exposure is related to the Company's
backlog of aluminum sales orders with committed prices as well as future
aluminum sales for which a sales price increase would lag a raw material cost
increase. Firm price commitments do not extend beyond December, 1998. Hedging
gains and losses are included in "Cost of sales" in the income statement
concurrently with the hedged sales. Unrealized gains and losses related to open
contracts are not reflected in the consolidated statements of income. At October
31, 1997, the Company had open futures contracts at fair values of $2.8 million
and unrealized losses of $16,000 on such contracts. At October 31, 1997, these
contracts covered a notional volume of 3,693,000 pounds of aluminum.
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 received on a LIBOR based variable rate (5.78125% at October 31,
1997). Differentials to be paid or received under the agreements are recognized
as interest expense. The agreements mature in 2003. The unrealized losses
related to the interest rate swaps are $4.1 million ($3.1 million in 1996) on
the total notional amount of $100 million ($100 million in 1996).
36
<PAGE> 38
- --------------------------------------------------------------------------------
The fair values of the Company's financial assets approximate the carrying
values reported on the consolidated balance sheet. The fair value of long-term
debt was $215.6 million and $256.9 million, as of October 31, 1997 and 1996,
respectively, as compared to carrying values at October 31, 1997 and 1996 of
$212.9 million and $253.5 million, respectively.
The fair value of long-term debt was based on the quoted market price, recent
transactions, or based on rates available to the Company for instruments with
similar terms and maturities. The fair value of interest rate swaps were
estimated by discounting expected cash flows using quoted market interest rates.
16. CONTINGENCIES
Quanex is subject to loss contingencies arising from federal, state, and local
environmental laws. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. The Company accrues its best
estimates of its cleanup obligations and adjusts such accruals as further
information develops or circumstances change. Costs of future expenditures for
environmental laws might be deemed to impose joint and several liability for
remediation obligations, the Company accrues its allocable share of liability
taking into account the number of companies participating, their ability to pay
their shares, the volumes and nature of the wastes involved, the nature of
anticipated response actions, and the nature of the Company's alleged
connections. It is management's opinion that the company has established
appropriate reserves for environmental remediation obligations at various of its
plant sites and disposal facilities. Those amounts are not expected to have a
material adverse effect on the Company's financial condition. Total reserves
include $20 million related to costs for further investigations, environmental
remediation, and corrective actions in connection with the acquisition of Piper
Impact. Actual cleanup costs at the Company's current plan sites, former plants,
and disposal facilities could be more or less than the amounts accrued for
remediation obligations. It is not possible at this point to reasonably estimate
the amount of any obligation for remediation in excess of current accruals that
would be material to Quanex's financial statements because of uncertain ties as
to the extent of environmental impact and concurrence of governmental
authorities.
17. SUBSEQUENT EVENT
In December 1997, the Company completed the sale of its tubing operations,
comprised of Michigan Seamless Tube, Gulf States Tube, and the Tube Group
Administrative Office ("Tubing Operations"), to Vision Metals, Inc., a new
company formed by certain management of the Tubing Operations and Citicorp
Venture Capital, Ltd. Under the terms of the Purchase Agreement dated December
3, 1997, the Company received cash consideration of approximately $30 million,
subject to post closing adjustments. The results of operations of the Tubing
Operations have been classified as discontinued operations and prior periods
have been restated. For business segment reporting purposes, the Tubing
Operations were previously classified as "Steel Tubes". Two small divisions,
Heat Treat Division and Nitro Steel Division, which were previously included
within the "Steel Tubes" segment, were retained by the Company and are now
included in the "Engineered Steel Bars" segment.
37
<PAGE> 39
Quanex Corporation
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following sets forth the selected quarterly information for the years ended
October 31, 1997 and 1996. The information presented has been restated to
reflect LaSalle and the Tubing Operations as discontinued operations. (See Note
3 to the Consolidated Financial Statements)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1997:
Net sales................................................... $167,955 $185,999 $196,589 $195,550
Gross profit................................................ 20,732 26,265 28,807 26,671
Income from continuing operations........................... 3,372 7,339 8,607 8,400
Income from discontinued operations......................... 954 1,751 813 1,658
Gain on sale of discontinued operations..................... -- 36,290 -- --
-------- -------- -------- --------
Net income.................................................. 4,326 45,380 9,420 10,058
Earnings per share:
Primary:
Income from continuing operations...................... 0.23 0.53 0.61 0.59
Income from discontinued operations.................... 0.08 0.12 0.06 0.11
Gain on sale of discontinued operations................ -- 2.60 -- --
Earnings per primary common share...................... 0.31 3.25 0.67 0.70
Assuming full dilution.................................... $ 0.31 $ 2.78 $ 0.62 $ 0.65
1996:
Net sales................................................... $121,845 $143,497 $160,294 $194,433
Gross profit................................................ 14,728 17,955 26,409 34,091
Income from continuing operations........................... 1,524 5,254 7,478 8,722
Income from discontinued operations......................... 2,523 2,878 1,667 2,844
Extraordinary charge -- early extinguishment of debt........ (2,522) -- -- --
Net income.................................................. 1,525 8,132 9,145 11,566
Earnings per share:
Primary:
Income from continuing operations...................... 0.11 0.39 0.55 0.63
Income from discontinued operations.................... 0.19 0.21 0.12 0.21
Extraordinary charge -- early extinguishment of debt... (.19) -- -- --
Earnings per primary common share...................... 0.11 0.60 0.67 0.84
Assuming full dilution.................................... $ 0.11 $ 0.55 $ 0.61 $ 0.75
</TABLE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning costs and at end
Description of year expenses Write-offs Other of year
- ------------------------------------------------------ ---------- ---------- ---------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended October 31, 1997......................... $7,703 $ 2,674 $ (39) $ -- $10,338
Year ended October 31, 1996......................... $2,933 $10,449 $(5,679) $ -- $ 7,703
Year ended October 31, 1995......................... $2,942 $ 445 $ (454) $ -- $ 2,933
</TABLE>
38
<PAGE> 40
QUARTERLY FINANCIAL RESULTS
(from continuing operations)
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES (millions)
January..................................................... 167.96 121.85 128.64
April....................................................... 186.00 143.50 154.16
July........................................................ 196.58 160.29 160.22
October..................................................... 195.55 194.43 160.97
- ---------------------------------------------------------------------------------------------
Total................................................ 746.09 620.07 603.99
GROSS PROFIT (millions)
January..................................................... 20.73 14.73 15.48
April....................................................... 26.27 17.95 19.98
July........................................................ 28.81 26.41 23.55
October..................................................... 26.67 34.09 23.45
- ---------------------------------------------------------------------------------------------
Total................................................ 102.48 93.18 82.46
INCOME FROM CONTINUING OPERATIONS (millions)
January..................................................... 3.37 1.52 2.30
April....................................................... 7.34 5.26 6.11
July........................................................ 8.61 7.48 7.57
October..................................................... 8.40 8.72 7.40
- ---------------------------------------------------------------------------------------------
Total................................................ 27.72 22.98 23.38
INCOME FROM CONTINUING OPERATIONS PER PRIMARY COMMON SHARE
January..................................................... .23 .11 .07
April....................................................... .53 .39 .34
July........................................................ .61 .55 .48
October..................................................... .59 .63 .54
- ---------------------------------------------------------------------------------------------
Total................................................ 1.98 1.68 1.43
QUARTERLY COMMON STOCK DIVIDENDS
January..................................................... .15 .15 .14
April....................................................... .15 .15 .15
July........................................................ .15 .15 .15
October..................................................... .16 .15 .15
- ---------------------------------------------------------------------------------------------
Total................................................ .61 .60 .59
COMMON STOCK SALES PRICE (High & Low)
January..................................................... 29 1/8-24 1/4 21 1/8-18 24 5/8-20
April....................................................... 27 7/8-23 3/8 22 3/8-19 5/8 23 7/8-21
July........................................................ 34 1/8-25 1/8 23 7/8-19 3/8 26 5/8-22 1/8
October..................................................... 36 1/2-26 1/4 28 3/4-19 5/8 26-18 5/
- ---------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 41
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, information on directors and
executive officers of the Registrant is incorporated herein by reference from
the Registrant's Definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days after the close of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) to Form 10-K, information on executive
compensation is incorporated herein by reference from the Registrant's
Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3) to Form 10-K, information on security
ownership of certain beneficial owners and management is incorporated herein by
reference from the Registrant's Definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-K, information on certain
relationships and related transactions is incorporated herein by reference from
the Registrant's Definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days after the close of the fiscal year.
40
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
(a) 1. Financial Statements
Independent Auditors' Report................................ 18
Consolidated Balance Sheets................................. 19
Consolidated Statements of Income........................... 20
Consolidated Statements of Stockholders' Equity............. 21
Consolidated Statements of Cash Flow........................ 22
Notes to Consolidated Financial Statements.................. 23
2. Financial Statement Schedule
Schedule II -- Valuation and qualifying accounts............ 38
Schedules not listed or discussed above have been omitted as they
are either inapplicable or the required information has been
given in the consolidated financial statements or the notes
thereto.
3. Exhibits.................................................... 41
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 -- Asset Purchase Agreement dated July 31, 1996, among the
Company, Piper Impact, Inc., a Delaware corporation,
Piper Impact, Inc., A Tennessee corporation, B. F.
Sammons and M. W. Robbins, filed as Exhibit 2.1 of the
Company's Report on Form 8-K, dated August 9, 1996, and
incorporated herein by reference.
2.2 -- Stock Purchase Agreement dated 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.
2.3 -- Purchase Agreement dated December 31, 1997, among Quanex
Corporation, Vision Metals Holdings, Inc., and Vision
Metals, Inc., filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated December 3, 1997, and
incorporated herein by reference.
3.1 -- Restated Certificate of Incorporation of the Registrant,
as amended on February 27, 1997, filed as Exhibit 4.1 to
the Registrant's Registration Statement on Form S-8,
Registration No. 333-22977, and incorporated herein by
reference.
3.2 -- Amended and Restated Bylaws of the Registrant, as amended
through December 12, 1996, filed as Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1996, and incorporated herein by
reference.
4.1 -- Form of Registrant's Common Stock certificate, filed as
Exhibit 4.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1987, and
incorporated herein by reference.
4.2 -- Amended and Restated Rights Agreement between the
Registrant and Manufacturers Hanover Trust Company, as
Rights Agent, filed as Exhibit 1 to Amendment No. 1 to
the Registrant's Form 8-A dated April 28, 1989, and
incorporated herein by reference.
4.3 -- Amended and Restated Certificate of Designation,
Preferences and Rights of the Registrant's Series A
Junior Participating Preferred Stock, filed as Exhibit 1
to Amendment No. 1 to the Registrant's Form 8-A dated
April 28, 1989, and incorporated herein by reference.
4.4 -- Form of Indenture relating to the Registrant's 6.88%
Convertible Subordinated Debentures due 2007 between the
Registrant and Chemical Bank, as Trustee, filed as
Exhibit 19.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1992, and
incorporated herein by reference.
</TABLE>
41
<PAGE> 43
<TABLE>
<S> <C>
4.5 -- $250,000,000 Revolving Credit and Term Loan Agreement
dated as of July 23, 1996, among the Company, Comerica
Bank, as Agent, and Harris Trust and Savings Bank and
Wells Fargo Bank (Texas), NA as Co-Agents, filed as
Exhibit 4.1 of the Company's Report on Form 8-K, dated
August 9, 1996, and incorporated herein by reference.
10.1 -- Agreement of Lease between Leland Tube Company, Inc. and
Role Realty Co., dated March 5, 1970, with attached
Assignment of Tenant's Interest in Lease from Leland Tube
Company to the Registrant, dated May 31, 1979, and filed
as Exhibit 10.3 of the Registrant's Form S-2,
Registration No. 2-88583, and incorporated herein by
reference.
10.2 -- Agreement of Lease between Leland Tube Company, Inc. and
Role Realty Co., dated January 24, 1973, with attached
Assignment of Tenant's Interest in Lease from Leland Tube
Company to the Registrant, dated May 31, 1979, and filed
as Exhibit 10.4 of the Registrant's Form S-2,
Registration No. 2-88583, and incorporated herein by
reference.
10.3 -- Lease Agreement between the Registrant and William M.
Paul and Associates, dated August 27, 1980, filed as
Exhibit 10.5 of the Registrant's Form S-2, Registration
No. 2-88583, and incorporated herein by reference.
10.4 -- Agreement of Lease between the Registrant and 3D Tower
Limited, dated March 5, 1985, filed as Exhibit 10.13 of
the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1985, and incorporated
herein by reference, as amended by the First Amendment to
Lease Agreement between the Registrant and VPM 1989-1,
Ltd. effective December 8, 1989 and the amendment filed
as Exhibit 10.23 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1995.
+10.5 -- Quanex Corporation 1988 Stock Option Plan, as amended,
and form of Stock Option Agreement filed as Exhibit 10.4
to the Registrant's Annual Report on Form 10-K for the
year ended October 31, 1988, together with the amendment
filed as Exhibit 10.17 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31,
1995, and incorporated herein by reference.
+10.6 -- Quanex Corporation Deferred Compensation Plan, as amended
and restated filed as Exhibit 10.6 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1995, and incorporated herein by reference
+10.7 -- Quanex Corporation 1978 Stock Option Plan, as amended,
filed as Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1988,
together with the amendment filed as Exhibit 10.16 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995, and incorporated herein
by reference.
+10.8 -- Quanex Corporation Executive Incentive Compensation Plan,
as amended, filed as Exhibit 10.8 to the Registrant's
Form 10-K for the fiscal year ended October 31, 1993, and
incorporated herein by reference.
+10.9 -- Quanex Corporation Supplemental Benefit Plan, effective
February 28, 1980 as restated November 1, 1988 and
amended on June 28, 1991, filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1991, and incorporated herein by
reference.
+10.10 -- Form of Severance Compensation Agreement and Escrow
Agreement, adopted on February 28, 1985, between the
Registrant and each executive officer of the Registrant,
filed as Exhibit 10.14 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 31, 1985,
and incorporated herein by reference.
+10.11 -- Quanex Corporation Stock Option Loan Plan for Key
Officers, filed as Exhibit 10.13 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1988, and incorporated herein by reference.
+10.12 -- Quanex Corporation 1987 Non-Employee Director Stock
Option Plan, as amended, and the related form of Stock
Option Agreement, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1988, together with the amendment
filed as Exhibit 10.14 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31,
1995, and incorporated herein by reference.
</TABLE>
42
<PAGE> 44
<TABLE>
<S> <C>
+10.13 -- Quanex Corporation 1989 Non-Employee Director Stock
Option Plan, as amended, filed as Exhibit 4.4 of the
Registrant's Form S-8, Registration No. 33-35128,
together with the amendment filed as Exhibit 10.15 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995, and incorporated herein
by reference.
+10.14 -- Quanex Corporation Employee Stock Option and Restricted
Stock Plan, as amended, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1994, and incorporated herein by
reference.
+10.15 -- Retirement Agreement dated as of September 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1992, and
incorporated herein by reference.
+10.16 -- Stock Option Agreement dated as of October 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1992, and
incorporated herein by reference.
+10.17 -- Deferred Compensation Agreement dated as of July 31,
1992, between the Registrant and Carl E. Pfeiffer, filed
as Exhibit 10.22 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended October 31, 1992, and
incorporated herein by reference.
+10.18 -- Quanex Corporation Non-Employee Director Retirement Plan,
filed as Exhibit 10.18 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 31, 1994,
and incorporated herein by reference.
+10.19 -- 1996 Employee Stock Option Plan and Restricted Stock
Plan, filed as Exhibit 10.19 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31,
1996, and incorporated herein by reference.
+10.20 -- Quanex Corporation Deferred Compensation Trust filed as
Exhibit 4.8 of the Registrant's Registration Statement on
Form S-3, Registration No. 333-36635, and incorporated
herein by reference.
+*10.21 -- Quanex Corporation 1997 Non-Employee Director Stock
Option Plan.
*11 -- Statement re computation of per share earnings.
*21 -- Subsidiaries of the Registrant.
*23 -- Consent of Deloitte & Touche LLP.
*27 -- Financial Data Schedule
</TABLE>
- ---------------
+ Management Compensation or Incentive Plan
* Filed herewith
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has not
filed with this Annual Report on Form 10-K certain instruments defining the
rights of holders of long-term debt of the Registrant and its subsidiaries
because the total amount of securities authorized under any of such instruments
does not exceed 10% of the total assets of the Registrant and its subsidiaries
on a consolidated basis. The Registrant agrees to furnish a copy of any such
agreements to the Securities and Exchange Commission upon request.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the quarter ended
October 31, 1997.
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
<TABLE>
<C> <S> <C>
By: /s/ VERNON E. OECHSLE Director, President and Chief Executive January 12, 1998
------------------------------------------------- Officer (Principal Executive Officer)
Vernon E. Oechsle
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By: /s/ ROBERT C. SNYDER Director and Chairman January 12, 1998
-------------------------------------------------
Robert C. Snyder
By: /s/ VERNON E. OECHSLE Director, President and Chief Executive January 12, 1998
------------------------------------------------- Officer
Vernon E. Oechsle
By: /s/ CARL E. PFEIFFER Director January 12, 1998
-------------------------------------------------
Carl E. Pfeiffer
By: /s/ GERALD B. HAECKEL Director January 12, 1998
-------------------------------------------------
Gerald B. Haeckel
By: /s/ JOHN D. O'CONNELL Director January 12, 1998
-------------------------------------------------
John D. O'Connell
By: /s/ DONALD G. BARGER, JR. Director January 12, 1998
-------------------------------------------------
Donald G. Barger, Jr.
By: /s/ VINCENT R. SCORSONE Director January 12, 1998
-------------------------------------------------
Vincent R. Scorsone
By: /s/ MICHAEL J. SEBASTIAN Director January 12, 1998
-------------------------------------------------
Michael J. Sebastian
By: /s/ RUSSELL M. FLAUM Director January 12, 1998
-------------------------------------------------
Russell M. Flaum
By: /s/ JAMES H. DAVIS Executive Vice President and Chief January 12, 1998
------------------------------------------------- Operating Officer (Principal
James H. Davis Operating Officer)
By: /s/ WAYNE M. ROSE Vice President-Finance and Corporate January 12, 1998
------------------------------------------------- Development Chief Financial Officer
Wayne M. Rose (Principal Financial Officer)
By: /s/ VIREN M. PARIKH Controller (Principal Accounting January 12, 1998
------------------------------------------------- Officer)
Viren M. Parikh
</TABLE>
44
<PAGE> 46
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 -- Asset Purchase Agreement dated July 31, 1996, among the
Company, Piper Impact, Inc., a Delaware corporation,
Piper Impact, Inc., A Tennessee corporation, B. F.
Sammons and M. W. Robbins, filed as Exhibit 2.1 of the
Company's Report on Form 8-K, dated August 9, 1996, and
incorporated herein by reference.
2.2 -- Stock Purchase Agreement dated 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.
2.3 -- Purchase Agreement dated December 31, 1997, among Quanex
Corporation, Vision Metals Holdings, Inc., and Vision
Metals, Inc., filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated December 3, 1997, and
incorporated herein by reference.
3.1 -- Restated Certificate of Incorporation of the Registrant,
as amended on February 27, 1997, filed as Exhibit 4.1 to
the Registrant's Registration Statement on Form S-8,
Registration No. 333-22977, and incorporated herein by
reference.
3.2 -- Amended and Restated Bylaws of the Registrant, as amended
through December 12, 1996 filed as Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1996, and incorporated herein by
reference.
4.1 -- Form of Registrant's Common Stock certificate, filed as
Exhibit 4.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1987, and
incorporated herein by reference.
4.2 -- Amended and Restated Rights Agreement between the
Registrant and Manufacturers Hanover Trust Company, as
Rights Agent, filed as Exhibit 1 to Amendment No. 1 to
the Registrant's Form 8-A dated April 28, 1989, and
incorporated herein by reference.
4.3 -- Amended and Restated Certificate of Designation,
Preferences and Rights of the Registrant's Series A
Junior Participating Preferred Stock, filed as Exhibit 1
to Amendment No. 1 to the Registrant's Form 8-A dated
April 28, 1989, and incorporated herein by reference.
4.4 -- Form of Indenture relating to the Registrant's 6.88%
Convertible Subordinated Debentures due 2007 between the
Registrant and Chemical Bank, as Trustee, filed as
Exhibit 19.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1992, and
incorporated herein by reference.
4.5 -- $250,000,000 Revolving Credit and Term Loan Agreement
dated as of July 23, 1996, among the Company, Comerica
Bank, as Agent, and Harris Trust and Savings Bank and
Wells Fargo Bank (Texas), NA as Co-Agents, filed as
Exhibit 4.1 of the Company's Report on Form 8-K, dated
August 9, 1996, and incorporated herein by reference.
10.1 -- Agreement of Lease between Leland Tube Company, Inc. and
Role Realty Co., dated March 5, 1970, with attached
Assignment of Tenant's Interest in Lease from Leland Tube
Company to the Registrant, dated May 31, 1979, and filed
as Exhibit 10.3 of the Registrant's Form S-2,
Registration No. 2-88583, and incorporated herein by
reference.
10.2 -- Agreement of Lease between Leland Tube Company, Inc. and
Role Realty Co., dated January 24, 1973, with attached
Assignment of Tenant's Interest in Lease from Leland Tube
Company to the Registrant, dated May 31, 1979, and filed
as Exhibit 10.4 of the Registrant's Form S-2,
Registration No. 2-88583, and incorporated herein by
reference.
10.3 -- Lease Agreement between the Registrant and William M.
Paul and Associates, dated August 27, 1980, filed as
Exhibit 10.5 of the Registrant's Form S-2, Registration
No. 2-88583, and incorporated herein by reference.
</TABLE>
45
<PAGE> 47
<TABLE>
<S> <C>
10.4 -- Agreement of Lease between the Registrant and 3D Tower
Limited, dated March 5, 1985, filed as Exhibit 10.13 of
the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1985, and incorporated
herein by reference, as amended by the First Amendment to
Lease Agreement between the Registrant and VPM 1989-1,
Ltd. effective December 8, 1989 and the amendment filed
as Exhibit 10.23 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1995.
+10.5 -- Quanex Corporation 1988 Stock Option Plan, as amended,
and form of Stock Option Agreement filed as Exhibit 10.4
to the Registrant's Annual Report on Form 10-K for the
year ended October 31, 1988, together with the amendment
filed as Exhibit 10.17 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31,
1995, and incorporated herein by reference.
+10.6 -- Quanex Corporation Deferred Compensation Plan, as amended
and restated filed as Exhibit 10.6 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1995, and incorporated herein by reference
+10.7 -- Quanex Corporation 1978 Stock Option Plan, as amended,
filed as Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1988,
together with the amendment filed as Exhibit 10.16 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995, and incorporated herein
by reference.
+10.8 -- Quanex Corporation Executive Incentive Compensation Plan,
as amended, filed as Exhibit 10.8 to the Registrant's
Form 10-K for the fiscal year ended October 31, 1993, and
incorporated herein by reference.
+10.9 -- Quanex Corporation Supplemental Benefit Plan, effective
February 28, 1980 as restated November 1, 1988 and
amended on June 28, 1991, filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1991, and incorporated herein by
reference.
+10.10 -- Form of Severance Compensation Agreement and Escrow
Agreement, adopted on February 28, 1985, between the
Registrant and each executive officer of the Registrant,
filed as Exhibit 10.14 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 31, 1985,
and incorporated herein by reference.
+10.11 -- Quanex Corporation Stock Option Loan Plan for Key
Officers, filed as Exhibit 10.13 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1988, and incorporated herein by reference.
+10.12 -- Quanex Corporation 1987 Non-Employee Director Stock
Option Plan, as amended, and the related form of Stock
Option Agreement, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1988, together with the amendment
filed as Exhibit 10.14 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31,
1995, and incorporated herein by reference.
+10.13 -- Quanex Corporation 1989 Non-Employee Director Stock
Option Plan, as amended, filed as Exhibit 4.4 of the
Registrant's Form S-8, Registration No. 33-35128,
together with the amendment filed as Exhibit 10.15 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995, and incorporated herein
by reference.
+10.14 -- Quanex Corporation Employee Stock Option and Restricted
Stock Plan, as amended, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1994, and incorporated herein by
reference.
+10.15 -- Retirement Agreement dated as of September 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1992, and
incorporated herein by reference.
+10.16 -- Stock Option Agreement dated as of October 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1992, and
incorporated herein by reference.
</TABLE>
46
<PAGE> 48
<TABLE>
<S> <C>
+10.17 -- Deferred Compensation Agreement dated as of July 31,
1992, between the Registrant and Carl E. Pfeiffer, filed
as Exhibit 10.22 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended October 31, 1992, and
incorporated herein by reference.
+10.18 -- Quanex Corporation Non-Employee Director Retirement Plan,
filed as Exhibit 10.18 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 31, 1994,
and incorporated herein by reference.
+10.19 -- 1996 Employee Stock Option Plan and Restricted Stock
Plan, filed as Exhibit 10.19 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31,
1996, and incorporated herein by reference.
+10.20 -- Quanex Corporation Deferred Compensation Trust filed as
Exhibit 4.8 of the Registrant's Registration Statement on
Form S-3, Registration No. 333-36635, and incorporated
herein by reference.
+*10.21 -- Quanex Corporation 1997 Non-Employee Director Stock
Option Plan.
*11 -- Statement re computation of per share earnings.
*21 -- Subsidiaries of the Registrant.
*23 -- Consent of Deloitte & Touche LLP.
*27 -- Financial Data Schedule
</TABLE>
- ---------------
+ Management Compensation or Incentive Plan
* Filed herewith
47
<PAGE> 1
EXHIBIT 10.21
QUANEX CORPORATION
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
<PAGE> 2
QUANEX CORPORATION
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section
-------
<S> <C>
ARTICLE I - DEFINITIONS
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2
Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3
Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
Non-Employee Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5
Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6
Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7
Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9
Retire or Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.10
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.11
ARTICLE II - GENERAL PROVISIONS RELATING TO OPTIONS
Dedicated Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1
Non-Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2
Requirements of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
Changes in the Company's Capital Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4
Options Conditioned Upon Stockholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
ARTICLE III - OPTIONS
Automatic Annual Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1
Amount Exercisable--Automatic Annual Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2
Grants for New Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3
Amount Exercisable--Grants for New Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4
Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5
Duration of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6
Death of an Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7
Exercise of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8
Form of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9
Written Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.10
No Rights as Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.11
ARTICLE IV - AMENDMENT OR TERMINATION OF PLAN
</TABLE>
<PAGE> 3
ARTICLE V - MISCELLANEOUS
<TABLE>
<S> <C>
No Retention Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2
Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3
Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4
Other Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5
Other Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6
Arbitration of Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7
Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8
</TABLE>
<PAGE> 4
QUANEX CORPORATION
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
This Quanex Corporation 1997 Non-Employee Director Stock Option Plan
(the "Plan") is adopted, subject to stockholder approval, for the benefit of
the directors of Quanex Corporation, a Delaware corporation (the "Company")
who, at the time of their service, are not employees of the Company or any of
its subsidiaries. The Plan is intended to advance the interest of the Company
by providing such directors with an additional incentive to serve the Company
by increasing their proprietary interest in the success of the Company.
<PAGE> 5
ARTICLE I
DEFINITIONS
The words and phrases defined in this Article shall have the meaning
set out in these definitions throughout this Plan, unless the context in which
any such word or phrase appears reasonably requires a broader, narrower, or
different meaning.
1.1 "BOARD OF DIRECTORS" means the board of directors of the
Company.
1.2 "COMPANY" means Quanex Corporation, a Delaware corporation.
1.3 "DISABILITY" means a mental or physical disability of the
Optionee which, in the opinion of a physician selected by the President of the
Company, (i) shall prevent the Optionee from adequately performing his services
as a director of the Company and (ii) can be expected to result in death or has
lasted or can be expected to last for a continuous period of not less than 12
months.
1.4 "FAIR MARKET VALUE" of the Stock as of any date means the
closing sale price of the Stock on that date (or, if there was no sale on such
date, the next preceding date on which there was such a sale) on the principal
securities exchange on which the Stock is listed.
1.5 "NON-EMPLOYEE DIRECTOR" means a director of the Company who,
while a director, is not an employee of the Company, or a corporation, of which
a majority of voting securities is owned, directly or indirectly, by the
Company.
1.6 "OPTION" means an option granted under this Plan to purchase
shares of Stock.
1.7 "OPTION AGREEMENT" means the written agreement which sets out
the terms of an Option.
1.8 "OPTIONEE" means a person who is granted an Option under this
Plan.
1.9 "PLAN" means the Quanex Corporation 1997 Non-Employee Director
Stock Option Plan, as set out in this document and as it may be amended from
time to time.
1.10 "RETIRE" or "RETIREMENT" means the cessation of an Optionee's
services as a director on the Board of Directors after completing either two
full terms or six years of service as a director on the Board of Directors.
1.11 "STOCK" means the common stock of the Company, $.50 par value.
In addition, for purposes of the Plan and the Options, the term Stock shall be
deemed to include any rights to purchase the Series A Junior Participating
Preferred Stock of the Company that may then be trading with the Stock as
provided in the Rights Agreement between the Company and Chemical Bank.
I-1
<PAGE> 6
ARTICLE II
GENERAL PROVISIONS RELATING TO OPTIONS
2.1 DEDICATED SHARES. The total number of shares of Stock with
respect to which Options may be granted under the Plan shall be 400,000 shares.
The shares may be treasury shares or authorized but unissued shares. The
number of shares stated in this Section 2.1 shall be subject to adjustment in
accordance with the provisions of Section 2.4.
If any outstanding Option expires or terminates for any reason or any
Option is surrendered, the shares of Stock allocable to the unexercised portion
of that Option may again be subject to an Option under the Plan.
2.2 NON-TRANSFERABILITY. Except as expressly provided otherwise
in an Optionee's Option Agreement, Options shall not be transferable by the
Optionee otherwise than by will or under the laws of descent and distribution,
and shall be exercisable, during the Optionee's lifetime, only by him.
2.3 REQUIREMENTS OF LAW. The Company shall not be required to
sell or issue any Stock under any Option if issuing that Stock would constitute
or result in a violation by the Optionee or the Company of any provision of any
law, statute, or regulation of any governmental authority. Specifically, in
connection with any applicable statute or regulation relating to the
registration of securities, upon exercise of any Option, the Company shall not
be required to issue any Stock unless the Board of Directors has received
evidence satisfactory to it to the effect that the holder of that Option will
not transfer the Stock except in accordance with applicable law, including
receipt of an opinion of counsel satisfactory to the Company to the effect that
any proposed transfer complies with applicable law. The determination by the
Board of Directors on this matter shall be final, binding and conclusive. The
Company may, but shall in no event be obligated to, register any Stock covered
by this Plan pursuant to applicable securities laws of any country or any
political subdivision. In the event the Stock issuable on exercise of an
Option is not registered, the Company may imprint on the certificate evidencing
the Stock any legend that counsel for the Company considers necessary or
advisable to comply with applicable law. The Company shall not be obligated to
take any other affirmative action in order to cause the exercise of an Option
and the issuance of shares thereunder, to comply with any law or regulation of
any governmental authority.
2.4 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. If the Company
shall effect a subdivision or consolidation of shares or other capital
adjustment of, or the payment of a dividend in capital stock or other equity
securities of the Company on, its Common Stock, or other increase or reduction
of the number of shares of the Common Stock outstanding without receiving
consideration therefor in money, services, or property, or the reclassification
of its Stock, in whole or in part, into other equity securities of the Company,
then (a) the number, class and per share price of shares of Stock subject to
outstanding Options hereunder shall be appropriately adjusted by the Board of
Directors (or in the case of the issuance of other equity securities as a
dividend on, or
II-1
<PAGE> 7
in a reclassification of, the Stock, the Options shall extend to such other
securities) in such a manner as to entitle an Optionee to receive, upon
exercise of an Option, for the same aggregate cash compensation, the same total
number and class or classes of shares (or in the case of a dividend of, or
reclassification into, other equity securities, such other securities) he would
have held after such adjustment if he had exercised his Option in full
immediately prior to the event requiring the adjustment, or, if applicable, the
record date for determining stockholders to be affected by such adjustment; and
(b) the number and class of shares then reserved for issuance under the Plan
(or in the case of a dividend of, or reclassification into, other equity
securities, such other securities) shall be adjusted by substituting for the
total number and class of shares of Stock then received, the number and class
or classes of shares of Stock (or in the case of a dividend on, or
reclassification into, other equity securities, such other securities) that
would have been received by the owner of an equal number of outstanding shares
of Stock as the result of the event requiring the adjustment. Comparable
rights shall accrue to each Optionee in the event of successive subdivisions,
consolidations, capital adjustment, dividends or reclassifications of the
character described above.
If the Company shall distribute to all holders of its shares of Stock
(including any such distribution made to non-dissenting stockholders in
connection with a consolidation or merger in which the Company is the surviving
corporation and in which holders of shares of Stock continue to hold shares of
Stock after such merger or consolidation) evidences of indebtedness or cash or
other assets (other than cash dividends payable out of consolidated retained
earnings not in excess of, in any one year period, the greater of (a) $1.00 per
share of Stock or (b) two times the aggregate amount of dividends per share
paid during the preceding calendar year and dividends or distributions payable
in shares of Stock or other equity securities of the Company described in the
immediately preceding paragraph), then in each case the Optionee's exercise
price specified in his Option Agreement ("Exercise Price") shall be adjusted by
reducing the Option Price in effect immediately prior to the record date for
the determination of stockholders entitled to receive such distribution by an
amount equal to the Fair Market Value, as determined in good faith by the Board
of Directors (whose determination shall be described in a statement filed in
the Company's corporate records and be available for inspection by any holder
of an Option) of the portion of the evidence of indebtedness or cash or other
assets so to be distributed applicable to one share of Stock; provided that in
no event shall the Option Price be less than the par value of a share of Stock.
Such adjustment shall be made whenever any such distribution is made, and shall
become effective on the date of the distribution retroactive to the record date
for the determination of the stockholders entitled to receive such
distribution. Comparable adjustments shall be made in the event of successive
transactions of the character described above.
If the Company shall make a tender offer for, or grant to all of its
holders of its shares of Stock the right to require the Company or any
subsidiary of the Company to acquire from such stockholders shares of Stock, at
a price in excess of the Current Market Price (a "Put Right") or the Company
shall grant to all of its holders for its shares of Stock the right to acquire
shares of Stock for less than the Current Market Price (a "Purchase Right"),
then, in the case of a Put Right, the Option Price shall be adjusted by
multiplying the Option Price in effect immediately prior to the record date
II-2
<PAGE> 8
for the determination of stockholders entitled to receive such Put Right by a
fraction, the numerator of which shall be the number of shares of Stock then
outstanding minus the number of shares of Stock which could be purchased at the
Current Market Price for the aggregate amount which would be paid if all Put
Rights are exercised and the denominator of which is the number of shares of
Stock which would be outstanding if all Put Rights are exercised; and, in the
case of a Purchase Right, the Option Price shall be adjusted by multiplying the
Option Price in effect immediately prior to the record date for the
determination of the stockholders entitled to receive such Purchase Right by a
fraction, the numerator of which shall be the number of shares of Stock then
outstanding plus the number of shares of Stock which could be purchased at the
Current Market Price for the aggregate amount which would be paid if all
Purchase Rights are exercised and the denominator of which is the number of
shares of Stock which would be outstanding if all Purchase Rights are
exercised. In addition, the number of shares subject to the Option shall be
increased by multiplying the number of shares then subject to the Option by a
fraction which is the inverse of the fraction used to adjust the Option Price.
Notwithstanding the foregoing, if any such Put Rights or Purchase Rights shall
terminate without being exercised, the Option Price and number of shares
subject to the Option shall be appropriately readjusted to reflect the Option
Price and number of shares subject to the Option which would have been in
effect if such unexercised Rights had never existed. Comparable adjustments
shall be made in the event of successive transactions of the character
described above.
After the merger of one or more corporations into the Company, after
any consolidation of the Company and one or more corporations, or after any
other corporate transaction described in Section 424(a) of the Code in which
the Company shall be the surviving corporation, each Optionee, at no additional
cost, shall be entitled to receive, upon any exercise of his Option, in lieu of
the number of shares as to which the Option shall then be so exercised, the
number and class of shares of stock or other equity securities to which the
Optionee would have been entitled pursuant to the terms of the agreement of
merger or consolidation if at the time of such merger or consolidation such
Optionee had been a holder of a number of shares of Stock equal to the number
of shares as to which the Option shall then be so exercised and, if as a result
of such merger, consolidation or other transaction, the holders of Stock are
not entitled to receive any shares of Stock pursuant to the terms thereof, each
Optionee, at no additional cost shall be entitled to receive, upon exercise of
his Option, such other assets and property, including cash to which he would
have been entitled if at the time of such merger, consolidation or other
transaction he had been the holder of the number of shares of Stock equal to
the number of shares as to which the Option shall then be so exercised.
Comparable rights shall accrue to each Optionee in the event of successive
mergers or consolidations of the character described above.
After a merger of the Company into one or more corporations, after a
consolidation of the Company and one or more corporations, or after any other
corporate transaction described in Section 424(a) of the Code in which the
Company is not the surviving corporation, each Optionee shall, at no additional
cost, be entitled at the option of the surviving corporation (i) to have his
then existing Option assumed or have a new option substituted for the existing
Option by the surviving corporation to the transaction which is then employing
him, or a parent or subsidiary of such
II-3
<PAGE> 9
corporation, on a basis where the excess of the aggregate fair market value of
the shares subject to the Option immediately after the substitution or
assumption over the aggregate Option Price of such option is equal to the
excess of the aggregate fair market value of all shares subject to the option
immediately before such substitution or assumption over the aggregate Option
Price of such shares, provided that the shares subject to the new option must
be traded on the New York or American Stock Exchange or quoted on the National
Association of Securities Dealers Automated Quotation System, or (ii) to
receive, upon any exercise of his Option, in lieu of the number of shares as to
which the Option shall then be so exercised, the securities, property and other
assets, including cash, to which the Optionee would have been entitled pursuant
to the terms of the agreement of merger or consolidation or the agreement
giving rise to the other corporate transaction if at the time of such merger,
consolidation or other transaction such Optionee had been the holder of the
number of shares of Stock equal to the number of shares as to which the Option
shall then be so exercised.
If a corporate transaction described in Section 424(a) of the Code
which involves the Company is to take place and there is to be no surviving
corporation while an Option remains in whole or in part unexercised, it shall
be canceled by the Board of Directors as of the effective date of any such
corporate transaction but before that date each Optionee shall be provided with
a notice of such cancellation and shall have the right to exercise such Option
in full (without regard to any vesting limitations set forth in, or imposed
pursuant to, preceding provisions of this Plan or the Option Agreement) to the
extent it is then still unexercised during a 30-day period preceding the
effective date of such corporate transaction.
For purposes of this Section, Current Market Price per share of Stock
shall mean the last reported price for the Stock in the New York Stock Exchange
- -- Composite Transaction listing on the trading day immediately preceding the
first trading day on which, as a result of the establishment of a record date
or otherwise, the trading price reflects that an acquirer of Stock in the
public market will not participate in or receive the payment of any applicable
dividend or distribution; provided, however, that if there is no closing price
for the stock as so reported on that date or if, in the discretion of the
Committee, another means of determining the fair value of the shares of stock
at such date shall be necessary or advisable, the Committee may provide for
another means for determining the Current Market Price of the Stock.
Except as hereinbefore expressly provided, the issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Stock then
subject to outstanding Options.
2.5 OPTIONS CONDITIONED UPON STOCKHOLDER APPROVAL OF THE PLAN. No
Option granted under the Plan will be exercisable before the stockholders of
the Company approve the Plan.
II-4
<PAGE> 10
ARTICLE III
OPTIONS
3.1 AUTOMATIC ANNUAL GRANTS. Except for any October 31 on which
he receives an Option under the Quanex Corporation 1989 Non-Employee Director
Stock Option Plan, subject to the approval of the Plan by the stockholders of
the Company and the availability under the Plan of a sufficient number of
shares of Stock that may be issued upon the exercise of outstanding Options,
each Non-Employee Director who is a director of the Company on any October 31
while this Plan is in effect shall be granted on each such October 31 an Option
to purchase such number of shares of Stock as is determined by the Board of
Directors.
3.2 AMOUNT EXERCISABLE--AUTOMATIC ANNUAL GRANTS.
Subject to Section 2.5, each Option granted pursuant to Section 3.1 is
exercisable in full immediately upon the date of grant.
3.3 GRANTS FOR NEW DIRECTORS. Subject to the approval of the Plan
by the stockholders of the Company and the availability under the Plan of a
sufficient number of shares of Stock that may be issued upon the exercise of
outstanding options, there shall be granted under the Plan to each Non-Employee
Director who was not granted an Option under the Quanex Corporation 1987
Non-Employee Director Stock Option Plan as of the date upon which such
Non-Employee Director shall have continuously served as a director of the
Company for a period of one year an Option to purchase such number of shares of
Stock as is determined by the Board of Directors. Upon the receipt of an
Option under the Plan pursuant to this Section 3.3, the Optionee shall not be
eligible to receive another Option for new Non-Employee Directors pursuant to
this Section 3.3. Nothing in this Section 3.3 shall affect the eligibility of
an Optionee to receive an Option pursuant to Section 3.1.
3.4 AMOUNT EXERCISABLE--GRANTS FOR NEW DIRECTORS. Each Option
Agreement for an Option granted pursuant to Section 3.3 shall contain the
following terms of exercise:
(a) No Option granted under Section 3.3 of the Plan may
be exercised until the Optionee has served as a director of the
Company for one year following the date of grant;
(b) beginning on the day after the first anniversary of
the date of grant, the Option may be exercised up to 1/3 of the shares
subject to the Option;
(c) after the expiration of each succeeding anniversary
date of the date of grant, the Option may be exercised up to an
additional 1/3 of the shares subject to the Option, so that after the
expiration of the third anniversary of the date of grant, the Option
shall be exercisable in full; and
III-1
<PAGE> 11
(d) to the extent not exercised, installments shall be
cumulative and may be exercised in whole or in part until the Option
expires on the tenth anniversary of the date of the grant.
3.5 OPTION PRICE. The price at which Stock may be purchased under
an Option shall be equal to 100% of the Fair Market Value of the shares of
Stock on the date the Option is granted.
3.6 DURATION OF OPTIONS.
Each Option awarded, to the extent it shall not previously
have been exercised, shall terminate on the earlier of the following
dates:
(i) on the last day within the three month period
commencing on the date on which the Optionee ceases to be a
director of the Company, for any reason other than death,
Retirement or Disability; or
(ii) ten years after the date of grant of such
Option.
If the Optionee ceases to be a director of the Company for any reason
other than his death, Disability or Retirement, his Option shall not continue
to vest after such cessation of service as a director. If the Optionee ceases
to be a director of the Company due to his death, Disability or Retirement, his
Option shall continue to vest after such cessation of service as a director
until the Option expires ten years after the grant of the Option.
3.7 DEATH OF AN OPTIONEE. Upon the death of an Optionee prior to
the expiration of his Option, his executors, administrators or any person or
persons to whom his Option may be transferred by will or by the laws of descent
and distribution, shall have the right, at any time prior to the expiration
date of the Option to exercise the Option with respect to the number of shares
that the Optionee would have been entitled to exercise if he were still alive.
3.8 EXERCISE OF OPTIONS. An Optionee may exercise his Option by
delivering to the Company a written notice stating (i) that he wishes to
exercise such Option on the date such notice is so delivered, (ii) the number
of shares of Stock with respect to which such Option is to be exercised and
(iii) the address to which the certificate representing such shares of Stock
should be mailed. In order to be effective, such written notice shall be
accompanied by payment of the option price of such shares of Stock. Each such
payment shall be made by cashier's check drawn on a national banking
association and payable to the order of the Company in United States dollars.
If, at the time of receipt by the Company of such written notice, (i)
the Company has unrestricted surplus in an amount not less than the option
price of such shares of Stock, (ii) all accrued cumulative preferential
dividends and other current preferential dividends on all outstanding shares of
preferred Stock of the Company have been fully paid, (iii) the acquisition by
the Company of its own shares of Stock for the purpose of
III-2
<PAGE> 12
enabling such Optionee to exercise such Option is otherwise permitted by
applicable law and without any vote or consent of any stockholder of the
Company, and (iv) there shall have been adopted, and there shall be in full
force and effect, a resolution of the Board of Directors of the Company
authorizing the acquisition by the Company of its own shares of Stock for such
purpose, then such Optionee may deliver to the Company, in payment of the
option price of the shares of Stock with respect to which such Option is
exercised, (x) certificates registered in the name of such Optionee that
represent a number of shares of Stock legally and beneficially owned by such
Optionee (free of all liens, claims and encumbrances of every kind) and having
a Fair Market Value on the date of receipt by the Company of such written
notice that is not greater than the option price of the shares of Stock with
respect to which such Option is to be exercised, such certificates to be
accompanied by Stock powers duly endorsed in blank by the record holder of the
shares of Stock represented by such certificates, with the signature of such
record holder guaranteed by a national banking association, and (y) if the
option price of the shares of Stock with respect to which such Option is to be
exercised exceeds such Fair Market Value, a cashier's check drawn on a national
banking association and payable to the order of the Company in an amount, in
United States dollars, equal to the amount of such excess. Notwithstanding the
provisions of the immediately preceding sentence, the Treasurer of the Company,
in his sole discretion, may refuse to accept shares of Stock in payment of the
option price of the shares of Stock with respect to which such Option is to be
exercised and, in that event, any certificates representing shares of Stock
that were received by the Company with such written notice shall be returned to
such Optionee, together with notice by the Company to such Optionee of the
refusal of the Treasurer of the Company to accept such shares of Stock. If, at
the expiration of seven business days after the delivery to such Optionee of
such written notice from the Company, such Optionee shall not have delivered to
the Company a cashier's check drawn on a national banking association and
payable to the order of the Company in an amount, in United States dollars,
equal to the option price of the shares of Stock with respect to which such
Option is to be exercised, such written notice from the Optionee to the Company
shall be ineffective to exercise such Option.
As promptly as practicable after the receipt by the Company of (i)
such written notice from the Optionee and (ii) payment, in the form required by
the foregoing provisions of this Section 3.8, of the option price of the shares
of Stock with respect to which such Option is to be exercised, a certificate
representing the number of shares of Stock with respect to which such Option
has been so exercised, such certificate to be registered in the name of such
Optionee, provided that such delivery shall be considered to have been made
when such certificate shall have been mailed, postage prepaid, to such Optionee
at the address specified for such purpose in such written notice from the
Optionee to the Company.
3.9 FORM OF OPTIONS. All Options granted under this Plan will be
nonqualified stock options that are not intended to qualify as incentive stock
options under section 422 of the Internal Revenue Code of 1986, as amended.
3.10 WRITTEN AGREEMENT. Each Option shall be embodied in a written
Option Agreement which shall be subject to the terms and conditions of this
Plan and shall be signed by the Optionee and by an officer of the Company.
III-3
<PAGE> 13
3.11 NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights
as a stockholder with respect to Stock covered by his Option until the date a
stock certificate is issued for the Stock.
III-4
<PAGE> 14
ARTICLE IV
AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Company may amend or terminate this Plan
at any time, in its sole and absolute discretion; provided, however, that no
amendment shall decrease the exercise price for Options below the Fair Market
Value of the Stock at the time it is granted.
IV-1
<PAGE> 15
ARTICLE V
MISCELLANEOUS
5.1 NO RETENTION OBLIGATION. The granting of any Option shall not
impose upon the Company any obligation to continue to retain the Optionee's
services as a director of the Company.
5.2 TAXES. The Company shall not be obligated to advise an
Optionee of the existence of any tax that may apply with respect to the grant
or exercise of an Option.
5.3 GENDER. If the context requires, words of one gender when
used in this Plan shall include the others and words used in the singular or
plural shall include the other.
5.4 HEADINGS. Headings of Articles and Sections are included for
convenience of reference only and do not constitute part of this Plan and shall
not be used in construing the terms of this Plan.
5.5 OTHER COMPENSATION. The adoption of this Plan shall not
affect any other compensation in effect for the Non-Employee Directors, nor
shall this Plan preclude the Company from establishing any other forms of
compensation for Non-Employee Directors.
5.6 OTHER OPTIONS. The grant of an Option shall not confer upon
an Optionee the right to receive any future or other Options under this Plan.
5.7 ARBITRATION OF DISPUTES. Any controversy arising out of or
relating to the Plan or an Option Agreement shall be resolved by arbitration
conducted pursuant to the arbitration rules of the American Arbitration
Association. The arbitration shall be final and binding on the parties.
5.8 GOVERNING LAW. The provisions of this Plan shall be
construed, administered, and governed under the laws of the State of Texas.
V-1
<PAGE> 1
EXHIBIT 11
QUANEX CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Income from continuing operations........................... $27,718 $22,978 $23,380
Income from discontinued operations, net of income taxes.... 5,176 9,912 10,480
Gain on sale of discontinued operations, net of income
taxes..................................................... 36,290 -- --
------- ------- -------
Income before extraordinary charge.......................... 69,184 32,890 33,860
Extraordinary charge -- early extinguishment of debt........ -- (2,522) (2,021)
------- ------- -------
Net income.................................................. $69,184 $30,368 $31,839
Preferred dividend requirements............................. -- -- (3,957)
------- ------- -------
Net income attributable to common stockholders.............. $69,184 $30,368 $27,882
======= ======= =======
Weighted average shares outstanding-primary................. 14,029 13,658 13,580
======= ======= =======
Earnings per common share:
Primary:
Income from continuing operations...................... $ 1.98 $ 1.68 $ 1.43
Income from discontinued operations.................... 0.37 0.73 0.77
Gain on sale of discontinued operations................ 2.58 --
Extraordinary charge................................... -- (0.19) (0.15)
------- ------- -------
Earnings per common share......................... $ 4.93 $ 2.22 $ 2.05
======= ======= =======
Income from continuing operations........................... $27,718 $22,978 $23,380
Income from discontinued operations, net of income taxes.... 5,176 9,912 10,480
Gain on sale of discontinued operations, net of income
taxes..................................................... 36,290 -- --
------- ------- -------
Income before extraordinary charge.......................... 69,184 32,890 33,860
Extraordinary charge -- early extinguishment of debt........ -- (2,522) (2,021)
------- ------- -------
Net income.................................................. $69,184 $30,368 $31,839
Interest on 6.88% convertible subordinated debentures and
amortization of related issuance costs, net of applicable
income taxes.............................................. 3,997 3,567 1,188
------- ------- -------
Adjusted net income......................................... $73,181 $33,935 $33,027
======= ======= =======
Weighted average shares outstanding-primary................. 14,029 13,658 13,580
Effect of common stock equivalents arising from stock
options................................................... -- 231 --
Preferred stock assumed converted to common stock........... -- -- 1,825
Subordinated debentures assumed converted to common stock... 2,696 2,696 899
------- ------- -------
Weighted average shares outstanding-fully diluted........... 16,725 16,585 16,304
======= ======= =======
Earnings per common share:
Assuming full dilution:
Income from continuing operations...................... $ 1.90 $ 1.60 $ 1.51
Income from discontinued operations.................... 0.31 0.60 0.64
Gain on sale of discontinued operations................ 2.17 -- --
Extraordinary charge................................... -- (0.15) (0.12)
------- ------- -------
Earnings per common share......................... $ 4.38 $ 2.05 $ 2.03
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF QUANEX CORPORATION JURISDICTION OF INCORPORATION
---------------------------------- -----------------------------
<S> <C>
Michigan Seamless Tube Company.............................. Delaware
Piper Impact, Inc........................................... Delaware
Quanex Metals, Inc.......................................... Delaware
Nichols-Homeshield, Inc..................................... Delaware
Quanex Bar, Inc............................................. Delaware
Quanex Steel, Inc........................................... Delaware
Quanex Health Management Company, Inc....................... Delaware
Quanex Manufacturing, Inc................................... Delaware
Quanex Solutions, Inc....................................... Delaware
Quanex Enterprises, Inc..................................... Delaware
Quanex Technologies, Inc.................................... Delaware
Quanex Foreign Sales Corporation............................ U.S. Virgin Islands
Piper Impact Europe B.V..................................... Netherlands
</TABLE>
<PAGE> 1
EXHIBIT NO. 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-23474, No. 33-29585, No. 33-22550, No. 33-35128, No. 33-38702, No. 33-46824,
No. 33-57235, No. 33-54081, No. 33-54085, No. 33-54087, No. 333-18267, No.
333-22977 and No. 333-36635 of Quanex Corporation of our report dated December
11, 1997 appearing in this Annual Report on Form 10-K of Quanex Corporation for
the year ended October 31, 1997.
/s/ Deloitte & Touche LLP
- ------------------------------------------------------
DELOITTE & TOUCHE LLP
Houston, Texas
January 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF OCTOBER 31, 1997 AND THE INCOME STATEMENT FOR THE YEAR ENDED OCTOBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 26,851
<SECURITIES> 0
<RECEIVABLES> 80,089
<ALLOWANCES> 10,338
<INVENTORY> 73,035
<CURRENT-ASSETS> 186,896
<PP&E> 642,854
<DEPRECIATION> 263,783
<TOTAL-ASSETS> 685,705
<CURRENT-LIABILITIES> 134,078
<BONDS> 201,858
0
0
<COMMON> 7,025
<OTHER-SE> 261,798
<TOTAL-LIABILITY-AND-EQUITY> 685,705
<SALES> 746,093
<TOTAL-REVENUES> 746,093
<CGS> 647,287
<TOTAL-COSTS> 647,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,674
<INTEREST-EXPENSE> 17,541
<INCOME-PRETAX> 42,643
<INCOME-TAX> 14,925
<INCOME-CONTINUING> 27,718
<DISCONTINUED> 5,176
<EXTRAORDINARY> 36,290
<CHANGES> 0
<NET-INCOME> 69,184
<EPS-PRIMARY> 4.930
<EPS-DILUTED> 4.380
</TABLE>
