<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission File Number 1-5725
QUANEX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 38-1872178
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 West Loop South, Suite 1500, Houston, Texas 77027
------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 961-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1999
- --------------------------------------- -------------------------------
Common Stock, par value $0.50 per share 14,248,847
<PAGE> 2
QUANEX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - January 31, 1999 and
October 31, 1998................................................................. 1
Consolidated Statements of Income - Three Months
Ended January 31, 1999 and 1998 .................................................. 2
Consolidated Statements of Cash Flow - Three months
Ended January 31, 1999 and 1998 .................................................. 3
Notes to Consolidated Financial Statements........................................... 4 - 6
Item 2: Management's Discussion and Analysis of Results of Operations
and Financial Condition ............................................................. 7 - 16
Item 3: Quantitative and Qualitative Disclosure about Market Risk ........................... 16
Part II. Other Information
Item 1: Legal Proceedings.................................................................... 17
Item 5: Other Information.................................................................... 17
Item 6: Exhibits and Reports on Form 8-K..................................................... 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 31, October 31,
1999 1998
----------- ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ..................................... $ 21,405 $ 26,279
Accounts and notes receivable, net ....................... 78,804 85,166
Inventories .............................................. 80,615 85,397
Deferred income taxes .................................... 11,119 11,560
Prepaid expenses ......................................... 2,223 1,410
--------- ---------
Total current assets ............................. 194,166 209,812
Property, plant and equipment .............................. 716,449 702,955
Less accumulated depreciation and amortization ............. (318,811) (307,901)
--------- ---------
Property, plant and equipment, net ......................... 397,638 395,054
Goodwill, net .............................................. 51,302 52,281
Other assets ............................................... 17,166 17,141
--------- ---------
$ 660,272 $ 674,288
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 65,373 $ 75,160
Accrued expenses ......................................... 47,358 56,125
Current maturities of long-term debt ..................... 13,583 12,248
Income taxes payable ..................................... 3,473 3,300
--------- ---------
Total current liabilities ........................ 129,787 146,833
Long-term debt ............................................. 189,425 188,302
Deferred pension credits ................................... 8,181 7,832
Deferred postretirement welfare benefits ................... 7,197 7,092
Deferred income taxes ...................................... 32,797 33,412
Other liabilities .......................................... 18,617 18,773
--------- ---------
Total liabilities ................................ 386,004 402,244
Stockholders' equity:
Preferred stock, no par value ............................ -- --
Common stock, $.50 par value ............................. 7,124 7,090
Additional paid-in capital ............................... 109,866 108,624
Retained earnings ........................................ 157,867 156,278
Cumulative foreign currency translation adjustment ....... 491 1,132
Adjustment for minimum pension liability ................. (1,080) (1,080)
--------- ---------
Total stockholders' equity ....................... 274,268 272,044
--------- ---------
$ 660,272 $ 674,288
========= =========
</TABLE>
1
<PAGE> 4
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
------------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Net sales .................................................. $ 183,103 $ 180,982
Cost and expenses:
Cost of sales ............................................ 148,735 154,282
Selling, general and administrative expense .............. 14,302 11,340
Depreciation and amortization ............................ 11,572 10,567
--------- ---------
Operating income ........................................... 8,494 4,793
Other income (expense):
Interest expense ......................................... (3,681) (3,744)
Capitalized interest ..................................... 346 1,477
Other, net ............................................... 794 1,001
--------- ---------
Income from continuing operations
before income taxes ................................... 5,953 3,527
Income tax expense ......................................... (2,084) (1,234)
--------- ---------
Income from continuing operations .......................... 3,869 2,293
Gain on sale of discontinued operations, net
of income taxes ....................................... -- 13,606
--------- ---------
Net income ................................................. $ 3,869 $ 15,899
========= =========
Earnings per common share:
Basic:
Continuing operations ................................ $ 0.27 $ 0.16
Gain on sale of discontinued operations .............. -- 0.97
--------- ---------
Total basic net earnings .......................... $ 0.27 $ 1.13
========= =========
Diluted:
Continuing operations ................................ $ 0.27 $ 0.16
Gain on sale of discontinued operations .............. -- 0.95
--------- ---------
Total diluted net earnings ........................ $ 0.27 $ 1.11
========= =========
Weighted average shares outstanding:
Basic ................................................... 14,224 14,085
========= =========
Diluted ................................................. 14,234 14,284
========= =========
Common stock dividends per share ........................... $ 0.16 $ 0.16
</TABLE>
2
<PAGE> 5
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
--------------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income ................................................................... $ 3,869 $ 15,899
Adjustments to reconcile net income
to cash provided by operating activities:
Gain on sale of discontinued operations ................................. -- (13,606)
Depreciation and amortization ........................................... 11,712 10,708
Deferred income taxes ................................................... (603) 3,086
Deferred pension costs .................................................. 349 (17)
Deferred postretirement welfare benefits ................................ 105 28
-------- --------
15,432 16,098
Changes in assets and liabilities net of effects from
acquisitions and dispositions:
Decrease in accounts and notes receivable ............................... 6,153 10,812
Decrease in inventory ................................................... 4,615 3,615
Decrease in accounts payable ............................................ (9,636) (5,579)
Decrease in accrued expenses ............................................ (8,686) (8,786)
Other, net .............................................................. (231) (4,358)
-------- --------
Cash provided by operating activities .............................. 7,647 11,802
Investment activities:
Proceeds from the sale of discontinued operations ............................ -- 31,434
Capital expenditures, net of retirements ..................................... (14,530) (13,774)
Other, net ................................................................... (239) (1,297)
-------- --------
Cash provided (used) by investment activities ...................... (14,769) 16,363
-------- --------
Cash provided (used) by operating and
investment activities ........................................... (7,122) 28,165
Financing activities:
Bank borrowings (repayments), net ............................................ 3,694 (11,244)
Purchase of subordinated debentures .......................................... (400) --
Common dividends paid ........................................................ (2,280) (2,256)
Issuance of common stock, net ................................................ 1,276 1,564
Other, net ................................................................... (26) --
-------- --------
Cash provided (used) in financing activities ....................... 2,264 (11,936)
Effect of exchange rate changes on cash and equivalents ........................ (16) --
-------- --------
Increase (decrease) in cash and equivalents .................................... (4,874) 16,229
Cash and equivalents at beginning of period .................................... 26,279 26,851
-------- --------
Cash and equivalents at end of period .......................................... $ 21,405 $ 43,080
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ....................................................................... $ 4,934 $ 5,183
Income taxes ................................................................... $ 2,048 $ 1,245
</TABLE>
3
<PAGE> 6
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
The interim consolidated financial statements of Quanex Corporation and
subsidiaries ("the Company") are unaudited, but include all adjustments
which the Company deems necessary for a fair presentation of its financial
position and results of operations. All such adjustments are of a normal
recurring nature. Results of operations for interim periods are not
necessarily indicative of results to be expected for the full year. All
significant accounting policies conform to those previously set forth in the
Company's fiscal 1998 Annual Report on Form 10-K which is incorporated by
reference. Certain amounts for prior periods have been reclassified in the
accompanying consolidated financial statements to conform to 1999
classifications.
2. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following: January 31, October 31,
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Raw materials ............................................................... $21,634 $25,167
Finished goods and work in process........................................... 51,647 52,485
------- -------
73,281 77,652
Other........................................................................ 7,334 7,745
------- -------
$80,615 $85,397
======= =======
</TABLE>
The values of inventories in the consolidated balance sheets are based on
the following accounting methods:
<TABLE>
<S> <C> <C>
LIFO............................................................................ $60,312 $57,594
FIFO............................................................................ 20,303 27,803
------- -------
$80,615 $85,397
======= =======
</TABLE>
With respect to inventories valued using the LIFO method, replacement
cost exceeded the LIFO value by approximately $12 million at January 31,
1999, and October 31, 1998.
3. Acquisition
On October 9, 1998, the Company, acquired the stock of Decatur Aluminum
Corp., a Decatur, Alabama based coiled aluminum sheet manufacturer for
approximately $19 million. Included in the purchase price was debt totaling
$5 million and other specified liabilities for $5 million assumed by the
Company. The newly acquired company has been renamed Nichols
Aluminum-Alabama, Inc. ("Nichols Aluminum Alabama"). Based on preliminary
purchase accounting, goodwill associated with Nichols Aluminum Alabama is
approximately $10 million as of January 31, 1999. Nichols Aluminum Alabama's
operations include cold rolling aluminum sheet to specific gauge, annealing,
leveling, custom painting and slitting to width. Nichols Aluminum Alabama
employs approximately 110 people.
4. Discontinued Operations
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 sale was effective November
1, 1997. The Company recorded an after tax gain on the sale of $12.8 million
during the first quarter of fiscal 1998.
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 $36.3 million in the second quarter of fiscal 1997 and an
additional $833 thousand in the first quarter of 1998 as a result of
post-closing adjustments.
4
<PAGE> 7
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Earnings Per Share
The following table presents information necessary to calculate basic and
diluted earnings per share per FAS 128 for the periods indicated (in
thousands except per share amounts):
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
January 31, 1999 January 31, 1998
--------------------------------------- ---------------------------------------
Per- Per-
Income Shares Amount Income Shares Amount
(Numerator) (Denominator) Share (Numerator) (Denominator) Share
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income from Cont. Oper. $3,869 14,224 $0.27 $ 2,293 14,085 $0.16
Gain on sale of Discont. Oper. -- -- 13,606 0.97
------ ----- ------- -----
Total basic net earnings $3,869 $0.27 $15,899 $1.13
====== ===== ======= =====
EFFECT OF DILUTIVE SECURITIES
Effect of common stock Equiv.
arising from stock options -- 10 -- 199
Effect of conversion of
subordinated debentures(1) -- -- -- --
DILUTED EPS
Income from Cont. Oper. $3,869 14,234 $0.27 $ 2,293 14,284 $0.16
Gain on sale of Discont. Oper. -- -- 13,606 0.95
------ ----- ------- -----
Total diluted net earnings $3,869 $0.27 $15,899 $1.11
====== ===== ======= =====
</TABLE>
(1) Conversion of the Company's 6.88% convertible subordinated debentures
into common stock is anti-dilutive for the periods presented and therefore
not included in the calculation of Diluted EPS.
6. Comprehensive Income
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. In accordance with this new
pronouncement, the Company has calculated total comprehensive income for the
three months ended January 31, 1999 and 1998 to be $3,228 and $15,271,
respectively. Included in comprehensive income is net income, the change in
the cumulative foreign currency translation adjustment balance and the
change in the adjustment for minimum pension liability balance.
5
<PAGE> 8
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Industry Segment Information
<TABLE>
<CAPTION>
Corporate
Three Months Ended Engineered Aluminum Mill Engineered and
January 31, 1999 Steel Bars Sheet Products Products Other(1) Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies................ $ 63,996 $ 66,444 $ 52,663 $ 0 $ 183,103
Intersegment(2).......................... 1,101 4,976 1 (6,078) 0
---------- ---------- ---------- -------- ----------
Total..................................... $ 65,097 $ 71,420 $ 52,664 $ (6,078) $ 183,103
========== ========== ========== ======== ==========
Operating income (loss)................... $ 11,303 $ 2,165 $ (222) $ (4,752) $ 8,494
========== ========== ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Corporate
Three Months Ended Engineered Aluminum Mill Engineered and
January 31, 1998 Steel Bars Sheet Products Products Other(1) Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies................ $ 79,197 $ 52,559 $ 49,226 $ 0 $ 180,982
Intersegment(2).......................... 894 4,789 -- (5,683) 0
---------- ---------- ---------- -------- ----------
Total..................................... $ 80,091 $ 57,348 $ 49,226 $ (5,683) $ 180,982
========== ========== ========== ======== ==========
Operating income (loss)................... $ 11,759 $ (2,180) $ (461) $ (4,325) $ 4,793
========== ========== ========== ======== ==========
</TABLE>
(1) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
6
<PAGE> 9
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition
GENERAL
The discussion and analysis of the Company's financial condition and results of
operations should be read in conjunction with the January 31, 1999 and October
31, 1998 Consolidated Financial Statements of the Company and the accompanying
notes.
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 Company's principal customers,
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 and the Year 2000 readiness efforts, 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.
RESULTS OF OPERATIONS
Overview
Summary Information as % of Sales: (Dollars in millions)
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED JANUARY 31,
1999 1998
Dollar % of Dollar % of
Amount Sales Amount Sales
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net Sales $183.1 100% $181.0 100%
Cost of Sales 148.7 81 154.3 85
Selling, general and admin. 14.3 8 11.3 6
Depreciation and amortization 11.6 6 10.6 6
------ --- ------ ---
Operating Income 8.5 5% 4.8 3%
Interest Expense (3.7) (2) (3.7) (2)
Capitalized Interest .3 0 1.4 1
Other, net .8 0 1.0 0
Income tax expense (2.0) (1) (1.2) (1)
------ --- ------ ---
Income from continuing
operations
$ 3.9 2% $ 2.3 1%
====== ======
</TABLE>
The Company's fiscal 1999 first quarter results benefited from higher volumes
at Nichols Aluminum and falling prices for the steel and aluminum scrap
processed at the engineered bar mills and aluminum sheet mini-mill. Nichols
Aluminium Alabama, Inc., which was acquired in October of 1998, contributed to
fiscal 1999's first quarter volume and net sales. Compared with the first
quarter of fiscal 1998, the Company achieved significantly higher earnings at
nearly the same overall sales level largely as a result of lower material
costs. Additionally, there were some benefits realized at the engineered steel
bar business which amounted to
7
<PAGE> 10
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition
approximately $2 million (pre-tax) as a result of a business interruption
insurance recovery and an electrode litigation settlement received.
Business Segments
Pursuant to SFAS 131, the Company has three reportable segments: engineered
steel bars, aluminum mill sheet products, and engineered products. The
engineered steel bar segment consists of engineered steel bars manufacturing,
steel bar and tube heat treating services and steel bar and tube wear and
corrosion resistant finishing services. The aluminum mill sheet segment
manufactures mill finished and coated aluminum sheet. The engineered products
segment manufactures impact-extruded aluminum and steel parts, aluminum window
and patio door screens, window frames and other roll formed products and
stamped shapes.
The following table sets forth selected operating data for the Company's
three business segments:
<TABLE>
<CAPTION>
Three Months Ended
January 31,
--------------------------------
1999 1998
--------------------------------
(In thousands)
<S> <C> <C>
Engineered Steel Bars:
Net sales.......................... $ 65,097 $ 80,091
Operating income................... 11,303 11,759
Depreciation and amortization...... 4,056 3,377
Identifiable assets................ $222,581 $196,607
Aluminum Mill Sheet Products:(1)
Net sales.......................... $ 71,420 $ 57,348
Operating income................... 2,165 (2,180)
Depreciation and amortization...... 3,130 2,744
Identifiable assets................ $194,408 $159,160
Engineered Products:
Net sales.......................... $ 52,664 $ 49,226
Operating income (loss)............ (222) (461)
Depreciation and amortization...... 4,354 4,412
Identifiable assets................ $216,036 $274,824
</TABLE>
===============================================================================
(1) 1999 results include Nichols Aluminum Alabama's operations acquired
October 9, 1998. (See Note 3 to financial statements)
8
<PAGE> 11
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition
The engineered steel bar business posted another good quarter. Demand from
automotive and truck manufacturers remained strong; however other durable goods
markets began to soften. This slowdown, in combination with the scheduled
shutdown for maintenance projects, contributed to lower volumes and sales for
engineered steel bars for the quarter ended January 31, 1999. Despite lower
volume and net sales, operating income levels were strong largely due to
falling material costs. Additionally, there were some benefits realized which
amounted to approximately $2 million as a result of a business interruption
insurance recovery and an electrode settlement received. The Phase IV, $16
million expansion project that will double MACSTEEL's shipping capacity for
MACPLUS cold finished steel bars, its premium value-added product, is in
start-up production at the Fort Smith plant and on-schedule to be finished at
the Jackson plant in August 1999.
The aluminum mill sheet business posted very strong first quarter results
for net sales and operating income reflecting the additional finishing capacity
brought by the acquisition of Nichols Aluminum Alabama in October of 1998 as
well as falling prices for aluminum scrap. In order to supply the Alabama
facility, the casting plant in Davenport is running at its highest levels ever.
The casting plant is utilizing its two new rotary furnaces and dross recovery
system to melt more economical aluminum scrap and improve the yield of scrap to
molten metal. Work continues to optimize the rotary furnaces' melting
capabilities and to identify and remove constraints throughout the operations.
This includes restoration and improvement projects for the Alabama-based mill.
The engineered products business posted an operating loss for the first
quarter of 1999. Higher labor costs at Piper Impact were the major contributor
to this loss. Productivity has been adversely affected as employees at Piper
Impact's consolidated operations in New Albany, Mississippi are being trained
to finish products that were previously processed at the Company's Utah-based
facility. The Utah facility remains open on a limited basis, with shutdown
expected by the end of the third quarter. For this time of year, Fabricated
Products (AMSCO and Homeshield) realized stronger than normal demand for window,
door and other residential products. The division continues to make progress in
reducing costs and providing solutions for customers' unique material needs.
Outlook
The Company currently expects that overall business levels for the remainder of
fiscal 1999 should be similar to those experienced during 1998, excluding the
one-time, mostly non-cash restructuring charge taken in the fourth quarter of
fiscal 1998. The higher sales volume in the aluminum mill sheet segment is
expected to be offset by the slowing in demand in the engineered steel bar
segment. The improved spreads resulting from lower steel and aluminum scrap for
the first quarter of 1999, will likely not continue for the remainder of 1999
as selling prices to customers are reduced. The acquisition of Nichols Aluminum
Alabama is expected to continue to contribute to earnings for the remainder of
fiscal 1999. Domestic and global market factors will impact the Company and any
slowdown in the U.S. economy could adversely affect demand and pricing for many
of the Company's products.
9
<PAGE> 12
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Fiscal Quarter ended January 31, 1999 vs 1998
Net Sales - Consolidated net sales for the three months ended January 31, 1999,
were $183.1 million representing an increase of $2.1 million, or 1%, when
compared to consolidated net sales for the same period in 1998. This
improvement was a result of increased net sales in the aluminum mill sheet and
engineered products businesses, partially offset by lower net sales at the
Company's engineered steel bar business.
Net sales from the Company's engineered steel bar business for the three
months ended January 31, 1999, were $65.1 million representing a decrease of
$15.0 million, or 19%, when compared to the same period last year. This decline
was primarily due to sales volume decreases of 18% for the three months ended
January 31, 1999, as compared to the same prior year period. The engineered
steel bar business sales volume decrease is principally due to the declined
demand in some of the durable goods market, inventory adjustments by customers
and import pressures on bars and forged components.
Net sales from the Company's aluminum mill sheet products business for the
three months ended January 31, 1999, were $7l.4 million representing an
increase of $14.1 million, or 25%, when compared to the same period last year.
This increase comes from a 36% increase in volume largely due to the
acquisition of Nichols Aluminum Alabama in October of 1998 as well as strong
first quarter demand in the building products market.
Net sales from the Company's engineered products business for the three
months ended January 31, 1999, were $52.7 million representing an increase of
$3.4 million, or 7%, when compared to the same period last year. This increase
is largely due to increased sales at Piper Europe and Fabricated Products.
Operating income - Consolidated operating income for the three months ended
January 31, 1999 was $8.5 million representing an increase of $3.7 million, or
77%, when compared to the same period last year. The increase was largely due
to increased operating income at the aluminum mill sheet products business.
Operating income from the Company's engineered steel bar business for the
three months ended January 31, 1999, was $11.3 million representing a decrease
of $.5 million, or 4%, when compared to the same period last year due to
decreased volume and net sales. Despite the fact that volume and net sales both
declined approximately 20%, operating income only declined 4%. This was due
largely to the improved spread that was realized as steel scrap material costs
declined. Additionally, there were some benefits realized which amounted to
approximately $2 million as a result of a business interruption insurance
recovery and an electrode litigation settlement received.
10
<PAGE> 13
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Operating income from the Company's aluminum mill sheet products business
for the three months ended January 31, 1999, was $2.2 million compared to an
operating loss of $2.2 million for the same period last year. The increase was
largely due to increased volume and net sales, as well as falling aluminum
scrap material costs which contributed to improved spreads.
Operating loss from the Company's engineered products business for the three
months ended January 31, 1999, was $222 thousand compared to an operating loss
of $461 thousand for the same period last year. The slight improvement was
largely due to increased sales and earnings at fabricated products (AMSCO and
Homeshield) as a result of the strong first quarter building market.
Selling, general and administrative expenses increased by $3.0 million, or
26%, for the three months ended January 31, 1999, as compared to the same
period of last year. This increase is a result of the acquisition of Nichols
Aluminum Alabama, implementation of Year 2000 readiness issues, relocation
expenses and consulting expenses for system implementations.
Depreciation and amortization increased by $1.0 million, or 10%, for the
three months ended January 31, 1999, as compared to the same period of last
year. The increase is principally due to increased depreciation at the
engineered steel bar and aluminum mill sheet products businesses for recently
completed projects as well as the inclusion of Nichols Aluminum Alabama which
was acquired in October 1998.
Interest expense decreased by $63 thousand for the three months ended
January 31, 1999, as compared to the same period of 1998 as a result of lower
average bank borrowing levels for the period as well as lower interest rates.
Capitalized interest decreased by $1.1 million for the three months ended
January 31, 1999, as compared to the same period of 1998 primarily due to the
completion of significant capital projects at MACSTEEL and completion of the
steel plant at Piper Impact.
"Other, net" decreased $207 thousand for the three months ended January 31,
1999, as compared to the same period of 1998 primarily as a result of decreased
investment income on lower cash balances.
Income from continuing operations increased $1.6 million for the three
months ended January 31, 1999, or 69%, as compared to the same period of 1998.
The increase was principally due to increased operating earnings from the
Company's aluminum mill sheet products business.
Net income was $3.9 million for the three months ended January 31, 1999,
compared to $15.9 million for the same period of 1998. Included in net income
for the first quarter of fiscal 1998 was $13.6 million of gain on the sale of
discontinued operations, net of taxes.
11
<PAGE> 14
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
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"). At January 31, 1999, the Company had
$80 million borrowed against the Bank Agreement. There have been no significant
changes to the Company's debt structure or level of borrowings under the
various debt facilities during the period ended January 31, 1999.
At January 31, 1999, the Company had commitments of approximately $25
million for the purchase or construction of capital assets, primarily relating
to the Company's continued expansions at MACSTEEL and Piper Impact. The Company
plans to fund these capital expenditures through cash flow from operations and,
if necessary, additional borrowings.
The Company believes that it has sufficient funds and adequate financial
sources available to meet its anticipated liquidity needs. The Company also
believes that cash flow from operations, cash balances and available borrowings
will be sufficient for the foreseeable future to finance anticipated working
capital requirements, capital expenditures, debt service requirements,
environmental expenditures and dividends.
Operating Activities
Cash provided by operating activities during the three months ended January 31,
1999 was $7.6 million. This represents a decrease of $4.2 million, or 35%,
compared to the three months ended January 31, 1998. This decrease is a result
of several factors such as:
1) the timing of raw material purchases resulting in larger payments made for
the quarter ended January 31, 1999 compared to 1998,
2) the timing of accounts receivable collections from a major customer which
provided larger receipts in the period ended January 31, 1998 compared to
1999 and
3) higher working capital requirements in the period ended January 31, 1999
compared to 1998 due to the acquisition of Nichols Auminum Alabama.
Investment Activities
Net cash used by investment activities during the three months ended January
31, 1999 was $14.8 million compared to $16.4 million provided by investment
activities for the same period of 1998. Fiscal 1998 cash from investing
activities included proceeds from the sale of the Tubing Operations of $31.4
million. Capital expenditures and other investment activities remained similar
for the two periods. The Company estimates that fiscal 1999 capital
expenditures will approximate $60 to $70 million.
Financing Activities
Net cash provided by financing activities for the three months of January 31,
1999 was $2.3 million, compared to cash used by financing activities of $11.9
million for the same prior year period. The Company borrowed $3.7 million
during the first quarter of fiscal 1999 compared with the repayment of $11.2
million during the same period last year.
12
<PAGE> 15
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits", which is effective for the
Company's year ending October 31, 1999. This statement defines new disclosure
requirements for pension and other postretirement benefits in an effort to
facilitate financial analysis by adding useful information and deleting
disclosures that the FASB considers no longer useful. The Company continues to
analyze SFAS No. 132 to determine what additional disclosures will be required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the Company's year
ending October 31, 2000. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company will
analyze SFAS No. 133 to determine what, if any, impact or additional disclosure
requirements this pronouncement will have.
YEAR 2000
The Company, like other businesses, is facing the Year 2000 issue. Many
computer systems and equipment with embedded chips or processors use only two
digits to represent the calendar year. This could result in computational or
operational errors as dates are compared across the century boundary causing
possible disruptions in business operations. The Year 2000 issue can arise at
any point in the Company's supply, manufacturing, processing, distribution, and
financial chains.
State of Readiness
The Company began addressing the Year 2000 issue in 1997, with an initial
assessment of Year 2000 readiness efforts at each of its operating units. Based
on responses from the operating units, a standardized Year 2000 Plan format was
developed. By July 1998, each operating unit had developed a Year 2000 Plan
that included the following components:
1. Inventory of all systems - identifying them as critical and non-critical
2. Assessment of all systems for Year 2000 compliance
3. Development of a project schedule for remediation or replacement of
non-compliant systems
4. Development of a project schedule for testing the compliant systems
5. Development of a list of significant vendors/suppliers for surveying their
Year 2000 readiness efforts
The Year 2000 issue is being addressed within the Company by its individual
business units, and progress is reported periodically to management. The
Company has committed necessary resources to conduct risk assessment and to
take corrective actions, where required, with a target date of becoming Year
2000 ready for the most critical systems by July 1999.
Business and Information Systems (IT Systems)
Engineered Steel Bars Segment:
Engineered Steel Bars Segment has completed the inventory, assessment, and
remediation/replacement phases. The testing of systems is in progress.
Approximately 90 percent of the testing is finished, with a projected
completion date of July 1999.
13
<PAGE> 16
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Aluminum Mill Sheet Products Segment:
Aluminum Mill Sheet Products segment is in the process of upgrading its main
business system. Approximately 50 percent of the tasks are finished, with a
projected completion date of July 1999. The inventory and assessment phases
have been completed for all other business systems. Remediation/replacement and
testing are scheduled to be complete by June 1999, except for the Human
Resource Management and Payroll system which is projected to be complete by
October 1999.
Engineered Products Segment:
Engineered Products Segment has finished the inventory and assessment phases
for all business systems. Fabricated Products Division has remediated or
replaced 90 percent of its critical business systems. Upgrading the balance of
the systems, and testing of all IT Systems is scheduled to be complete by July
1999. Piper Impact is approximately 50 percent finished in the process of
implementing an ERP system. Completion of this implementation, including
testing, is projected to occur by July 1999. Remediation/replacement and
testing of remaining business systems at Piper are at different stages of
completion, ranging from 25 to 50 percent. The timeframe for completion is
anticipated to be June to October of 1999.
Non-IT Systems
For Non-IT systems, the inventory phase is complete at all business segments.
The Company is relying on a combination of vendor certification and internal
testing for assessment phase. At Engineered Steel Bars Segment, assessment,
replacement, and testing phases have been completed on approximately 80 percent
of the critical systems. Assessment and testing, with corrective action as
required, at the other two business segments is ranging between 10 and 20
percent accomplished, with anticipated completion by the fourth quarter of
1999.
Third Party Relationships
The Company's business units are in the process of surveying the Year 2000
readiness efforts of critical external parties, including suppliers and
customers. Approximately 600 major suppliers have been contacted. Over 60
percent have responded, with varying levels of readiness being reported.
Follow-up surveys and risk assessments are expected to be complete by April
1999. Monitoring risk in this area will continue into the third quarter of
1999, as many suppliers will not have completed their Year 2000 readiness
efforts until such time.
All business segments have recently initiated a survey of major customers'
Year 2000 readiness efforts. Approximately 270 major customers have been
contacted. Less than 20 percent have responded. Monitoring and risk assessment
will continue into the fourth quarter of 1999.
Contingency Planning
The Company is developing contingency plans intended to mitigate possible
disruption in business operations that may result from the Year 2000 issue.
Contingency plans may include stockpiling necessary materials and inventories,
securing alternate sources of supply, adjusting facility shutdown and start-up
schedules, development of manual procedures to execute transactions and
complete processes and other appropriate measures. Once developed, contingency
plans will be continually refined, as additional information becomes available.
14
<PAGE> 17
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Independent Verification and Validation
Quanex commissioned a Third Party Review of its Y2K program. Detailed interviews
were conducted at Quanex's Group and Corporate offices, and at most plant
locations. The results of this study highlighted the progress being made, and
pointed out areas where additional resources were needed. As a result of the
review, Quanex has augmented the staff resources working on the Y2K program with
several experienced Y2K project managers and technicians in order to address the
requirements identified. The Company has also retained BrightStar Information
Technology Group, Inc. to provide Y2K Program coordination support for the
Corporate Office, and to assist in the audit of readiness efforts at the
business segments.
Cost
Year 2000 activities and associated costs are being managed within each business
unit. The historical costs of remediation and other activities directly
connected with Year 2000 issues have been less than $ 500,000. The timing of
these expenses may vary and is not necessarily indicative of readiness efforts
or progress to date. Not included in these historical costs are expenditures
associated with normal upgrades and acquisition or implementation of new
business systems planned for other business reasons and not accelerated due to
Year 2000 issues. As of now, the Company's best estimate of total costs,
directly related to Year 2000 issues, is between $2 and $3 million.
Risks
Quanex is a diversified and decentralized company comprised of three business
segments. Each of these segments has multiple operating units, resulting in
thirteen separate Year 2000 Plans. Quanex does not have standardized systems
throughout the Company. This diversification has allowed the Company to spread
the risk of the Year 2000 issue, since no one system is responsible for the
entire financial and operational needs of the Company.
While the diversification reduces the risk of a material Year 2000 issue
affecting the entire Company, this same diversification increases the
possibility that the Year 2000 issue will cause a problem at one or more units
since many more systems exist than in a centralized environment. Management is
addressing this issue by requiring regular periodic reporting from each
business unit and monitoring the progress with follow-up review by independent
consultants. However, if implementation of the Enterprise Resource Planning
("ERP") systems at two major business units is not completed in a timely
manner, the affected units will implement contingency plans to minimize
disruptions in business operations that may result from the Year 2000 issue.
The Company relies on third party suppliers for raw materials, water,
utilities, transportation and other key services. Interruption of supplier
operations due to Year 2000 issues could affect the Company's operations. While
each business unit will evaluate the status of its major suppliers' Year 2000
readiness efforts and develop contingency plans to manage the risk, it can not
eliminate the potential for disruption due to third party failures.
The Company is also dependent upon its customers for sales and cash flow.
Year 2000 interruptions in the operations of its major customers could result
in reduced sales, increased inventory or receivable levels and cash flow
reductions. The Company is in the process of surveying its major customers'
Year 2000 readiness efforts to assess risk and develop plans to minimize the
impact on its operations.
15
<PAGE> 18
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
The Company believes that it is taking all reasonable steps to ensure Year
2000 readiness. Its ability to meet the projected goals, including the costs of
addressing the Year 2000 issue and the dates upon which compliance will be
attained, depends on the availability and cost of personnel trained in this
area, the timing and success of Year 2000 remediation and testing efforts, the
Year 2000 readiness of its key suppliers and customers and the successful
development and implementation of contingency plans. Although these and other
unanticipated Year 2000 issues could have an adverse effect on the results of
operations or financial condition of the Company, it is not possible to
anticipate the extent of impact or the worst case scenario at this time, since
the contingency plans are still under development.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR
2000 INFORMATION AND READINESS DISCLOSURE ACT.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") introduced
a new currency, the Euro, on January 1, 1999. The new currency was introduced
in response to the EMU's policy of economic convergence to harmonize trade
policy, eliminate business costs associated with currency exchange and to
promote the free flow of capital, goods and services among the participating
countries.
On January 1, 1999, the participating countries adopted the Euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash (banking) transactions. The existing local currencies, or legacy
currencies, will remain legal tender through January 1, 2002. Beginning on
January 1, 2002, Euro-denominated bills and coins will be issued for cash
transactions. For a period of six months from this date, both legacy currencies
and the Euro will be legal tender. On or before July 1, 2002, the participating
countries will withdraw all legacy currency and use exclusively the Euro.
At the current time, the Company does not believe that the conversion to the
Euro will have a material impact on its business or its financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant quantitative or qualitative changes during the
first fiscal quarter of 1999 in the Company's market risk sensitive
instruments.
16
<PAGE> 19
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings.
There are no material legal proceedings to which Quanex, its subsidiaries, or
their property is subject.
Item 5 - Other Information.
In January 1999, the production and maintenance employees at the Arkansas plant
of MACSTEEL voted to have the United Steel Workers as their bargaining
representative.
A five-year contract was ratified by the United Steel Workers representing 190
employees at the MACSTEEL's Michigan plant as of February 28, 1999.
Item 6 - Exhibits and Reports on Form 8-K.
Exhibit 27 - Financial Data Schedule - January 31, 1999.
No reports on Form 8-K were filed by the Company during the quarter for which
this report is being filed.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUANEX CORPORATION
/s/ VIREN M. PARIKH
-----------------------------------------
Viren M. Parikh
Controller (Chief Accounting Officer)
Date: March 12, 1999
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
Exhibit 27 - Financial Data Schedule - January 31, 1999.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of January 31, 1999 and the income statement for the three months
ended January 31, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 21,405
<SECURITIES> 0
<RECEIVABLES> 78,804
<ALLOWANCES> 0
<INVENTORY> 80,615
<CURRENT-ASSETS> 194,166
<PP&E> 716,449
<DEPRECIATION> 318,811
<TOTAL-ASSETS> 660,272
<CURRENT-LIABILITIES> 129,787
<BONDS> 189,425
0
0
<COMMON> 7,124
<OTHER-SE> 267,144
<TOTAL-LIABILITY-AND-EQUITY> 660,272
<SALES> 183,103
<TOTAL-REVENUES> 183,103
<CGS> 160,307
<TOTAL-COSTS> 160,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,681
<INCOME-PRETAX> 5,953
<INCOME-TAX> 2,084
<INCOME-CONTINUING> 3,869
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,869
<EPS-PRIMARY> 0.270
<EPS-DILUTED> 0.270
</TABLE>
