<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 July 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission File Number 1-5725
QUANEX CORPORATION
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1872178
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 West Loop South, Suite 1500, Houston, Texas 77027
------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 961-4600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2000
--------------------------------------- ----------------------------
Common Stock, par value $0.50 per share 13,611,397
<PAGE> 2
QUANEX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - July 31, 2000 and
October 31, 1999.................................................................. 1
Consolidated Statements of Income - Three and Nine Months
Ended July 31, 2000 and 1999...................................................... 2
Consolidated Statements of Cash Flow - Nine months Ended
July 31, 2000 and 1999............................................................ 3
Notes to Consolidated Financial Statements........................................... 4 - 9
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition................................................... 10 - 16
Item 3: Quantitative and Qualitative Disclosure about Market Risk............................ 16
Part II. Other Information
Item 1: Legal Proceedings.................................................................... 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>
July 31, October 31,
2000 1999
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ............................. $ 32,552 $ 25,874
Accounts and notes receivable, net ............... 99,019 87,204
Inventories ...................................... 96,650 78,463
Deferred income taxes ............................ 11,210 19,146
Prepaid expenses ................................. 1,667 1,700
------------ ------------
Total current assets ..................... 241,098 212,387
Property, plant and equipment ...................... 769,754 753,811
Less accumulated depreciation and amortization ..... (375,049) (346,970)
------------ ------------
Property, plant and equipment, net ................. 394,705 406,841
Goodwill, net ...................................... 47,795 48,990
Other assets ....................................... 22,895 22,228
------------ ------------
$ 706,493 $ 690,446
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 79,593 $ 70,187
Accrued expenses ................................. 50,842 54,305
Current maturities of long-term debt ............. 259 10,545
Income taxes payable ............................. 3,025 1,103
------------ ------------
Total current liabilities ................ 133,719 136,140
Long-term debt ..................................... 211,505 179,121
Deferred pension credits ........................... 6,631 6,691
Deferred postretirement welfare benefits ........... 7,634 7,490
Deferred income taxes .............................. 38,862 43,910
Other liabilities .................................. 14,423 16,033
------------ ------------
Total liabilities ........................ 412,774 389,385
Stockholders' equity:
Preferred stock, no par value .................... -- --
Common stock, $.50 par value ..................... 7,109 7,135
Common stock held by rabbi trust ................. (3,343) (2,322)
Additional paid-in capital ....................... 111,037 110,317
Retained earnings ................................ 191,948 186,867
Unearned compensation ............................ (467) (171)
Accumulated other comprehensive income ........... (462) (765)
------------ ------------
305,822 301,061
Less: Treasury Stock, at cost ............... (12,103) --
------------ ------------
Total stockholders' equity ............... 293,719 301,061
------------ ------------
$ 706,493 $ 690,446
============ ============
</TABLE>
1
<PAGE> 4
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales ............................................ $ 254,144 $ 206,619 $ 696,709 $ 592,601
Cost and expenses:
Cost of sales ...................................... 208,874 161,107 575,172 469,989
Selling, general and administrative expense ........ 14,113 12,032 40,251 39,521
Depreciation and amortization ...................... 12,310 11,571 37,381 34,548
Loss on sale of Piper Impact Europe ................ 14,280 -- 14,280 --
------------ ------------ ------------ ------------
Operating income ..................................... 4,567 21,909 29,625 48,543
Other income (expense):
Interest expense ................................... (4,149) (3,595) (11,499) (10,881)
Capitalized interest ............................... 499 383 1,690 1,204
Other, net ......................................... 289 274 1,598 1,099
------------ ------------ ------------ ------------
Income before income taxes and extraordinary gain .... 1,206 18,971 21,414 39,965
Income tax expense ................................... (491) (6,640) (7,495) (13,988)
------------ ------------ ------------ ------------
Income before extraordinary gain ..................... 715 12,331 13,919 25,977
Extraordinary gain - early extinguishment of debt .... -- -- 358 415
------------ ------------ ------------ ------------
Net income ........................................... $ 715 $ 12,331 $ 14,277 $ 26,392
============ ============ ============ ============
Earnings per common share:
Basic:
Income before extraordinary gain ............... $ 0.05 $ 0.86 $ 1.00 $ 1.82
Extraordinary gain ............................. -- -- 0.03 0.03
------------ ------------ ------------ ------------
Total basic net earnings .................... $ 0.05 $ 0.86 $ 1.03 $ 1.85
============ ============ ============ ============
Diluted:
Income before extraordinary gain ............... $ 0.05 $ 0.79 $ 1.00 $ 1.71
Extraordinary gain ............................. -- -- 0.02 0.03
------------ ------------ ------------ ------------
Total diluted net earnings .................. $ 0.05 $ 0.79 $ 1.02 $ 1.74
============ ============ ============ ============
Weighted average shares outstanding:
Basic ............................................. 13,534 14,258 13,827 14,243
============ ============ ============ ============
Diluted ........................................... 13,682 16,767 13,973 16,799
============ ============ ============ ============
Common stock dividends per share ..................... $ 0.16 $ 0.16 $ 0.48 $ 0.48
</TABLE>
2
<PAGE> 5
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
--------------------------
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income ..................................................................... $ 14,277 $ 26,392
Adjustments to reconcile net income
to cash provided by operating activities:
Extraordinary gain on early extinguishment of debt (net of taxes) ......... (358) (638)
Loss on sale of Piper Impact Europe (net of taxes of $4,998) .............. 9,282
Depreciation and amortization ............................................. 37,777 34,957
Deferred income taxes ..................................................... (2,877) 1,915
Deferred pension and postretirement benefits .............................. 158 (469)
Changes in assets and liabilities net of effects from acquisitions and
dispositions:
Decrease (increase) in accounts and notes receivable ...................... (8,546) 5,691
Decrease (increase) in inventory .......................................... (7,878) 3,190
Increase (decrease) in accounts payable ................................... 7,666 (4,114)
Decrease in accrued expenses .............................................. (5,661) (1,661)
Other, net (including income tax refund) .................................. 10,530 (4,940)
---------- ----------
Cash provided by continuing operations ............................... 54,370 60,323
Investment activities:
Acquisition of Golden Aluminum, net of cash acquired ........................... (20,148) --
Acquisition of Imperial Products, Inc., net of cash acquired ................... (15,303) --
Capital expenditures, net of retirements ....................................... (33,368) (43,885)
Other, net ..................................................................... (569) (842)
---------- ----------
Cash used by investment activities ................................... (69,388) (44,727)
---------- ----------
Cash provided (used) by operating and
investment activities ............................................. (15,018) 15,596
Financing activities:
Bank borrowings, net ........................................................... 53,193 14,196
Purchase of subordinated debentures ............................................ (9,586) (8,799)
Purchase of Quanex common stock ................................................ (15,879) --
Common dividends paid .......................................................... (6,711) (6,841)
Issuance of common stock, net .................................................. 973 1,519
Other, net ..................................................................... (361) (59)
---------- ----------
Cash provided by financing activities ................................ 21,629 16
Effect of exchange rate changes on cash and equivalents .......................... 67 (28)
---------- ----------
Increase in cash and equivalents ................................................. 6,678 15,584
Cash and equivalents at beginning of period ...................................... 25,874 26,279
---------- ----------
Cash and equivalents at end of period ............................................ $ 32,552 $ 41,863
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ....................................... $ 11,224 $ 11,810
Cash paid during the period for income taxes ................................... $ 10,524 $ 14,316
Cash received during the period for income tax refunds ......................... $ (7,000) --
</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 ("Quanex" or 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 1999 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 2000
classifications.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
------------ ------------
(In thousands)
<S> <C> <C>
Raw materials ............................................................... $ 29,158 $ 24,617
Finished goods and work in process .......................................... 60,861 46,958
------------ ------------
90,019 71,575
Other ....................................................................... 6,631 6,888
------------ ------------
$ 96,650 $ 78,463
============ ============
The values of inventories in the consolidated balance sheets are based on the
following accounting methods:
LIFO ........................................................................... $ 63,799 $ 58,968
FIFO ........................................................................... 32,851 19,495
------------ ------------
$ 96,650 $ 78,463
============ ============
</TABLE>
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $13 million and $11 million at July 31,
2000 and October 31, 1999, respectively.
3. Acquisitions
On January 25, 2000, the Company announced that it had completed the purchase
from Alcoa, Inc. of the Golden Aluminum production facility based in Fort
Lupton, Colorado. Quanex acquired the assets of the facility for $9 million plus
working capital valued at approximately $13 million.
The newly acquired facility has become part of Quanex's flat-rolled aluminum
sheet business - Nichols Aluminum (the Aluminum Mill Sheet Products segment). It
has been renamed Nichols Aluminum - Golden, Inc., ("Nichols Aluminum - Golden")
a wholly owned subsidiary of Quanex.
Operations at Nichols Aluminum-Golden include melting and casting aluminum into
sheet made from a blend of primary P1020 ingot and selected grades of scrap
metal, cold rolling it to specific gauge, annealing, leveling, custom coating
and slitting to width. Nichols Aluminum-Golden can produce more than 50 million
pounds annually of high quality metal for engineered applications in niche
markets, such as end and tab stock for food and beverage packaging, metal
components for computer disks, and home accessory products.
4
<PAGE> 7
On April 3, 2000, the Company acquired the stock of Imperial Products, Inc., a
leading manufacturer of value-added exterior door components based in Richmond,
Indiana, for approximately $15 million. Imperial Products, Inc., now doing
business as Imperial Fabricated Products ("Imperial"), operates as a wholly
owned subsidiary of Quanex. This acquisition expands the specialized design and
manufacturing operations of Quanex's Engineered Products Group. Based on
preliminary purchase accounting, goodwill associated with Imperial is
approximately $11 million.
4. Divestitures
On July 19, 2000, the Company sold Piper Impact Europe, an impact-extrusion
facility based in the Netherlands, to the plant's existing management group for
a nominal amount. The transaction was structured as a sale of stock. As a result
of this transaction, the Company recorded a pretax charge of $14.3 million for
the fiscal third quarter period ending July 31, 2000. In connection with the
sale, the Company's range forward foreign currency agreement with a notional
amount of 30 million Guilders was cashed in. This agreement was entered into to
protect the Company's investment in Piper Impact Europe from foreign currency
fluctuations. The settlement of this agreement resulted in a gain, which was
offset against the charge on the sale of Piper Impact Europe.
5
<PAGE> 8
5. Earnings Per Share
The computational components of basic and diluted earnings per share are as
follows (shares and dollars in thousands except per share amounts):
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
July 31, 2000 July 31, 1999
----------------------------------------- -----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income before extra. gain $ 715 13,534 $ 0.05 $ 12,331 14,258 $ 0.86
Extra. Gain - early debt ext. -- -- -- --
---------- ---------- ---------- ----------
Total basic net earnings $ 715 $ 0.05 $ 12,331 $ 0.86
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equiv.
arising from stock options -- 1 -- 139
Effect of common stock held
by rabbi trust -- 147 -- --
Effect of conversion of
subordinated debentures (1) -- -- 867 2,340
DILUTED EPS
Income before extra. gain $ 715 13,682 $ 0.05 $ 13,198 16,737 $ 0.79
Extra. Gain - early debt ext. -- -- -- --
---------- ---------- ---------- ----------
Total basic net earnings $ 715 $ 0.05 $ 13,198 $ 0.79
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
July 31, 2000 July 31, 1999
----------------------------------------- -----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income before extra. gain $ 13,919 13,827 $ 1.00 $ 25,977 14,243 $ 1.82
Extra. Gain - early debt ext 358 .03 415 .03
---------- ---------- ---------- ----------
Total basic net earnings $ 14,277 $ 1.03 $ 26,392 $ 1.85
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equiv
arising from stock options -- 6 -- 42
Effect of common stock held
by rabbi trust -- 140 -- --
Effect of conversion of
subordinated debentures (1) -- -- 2,796 2,514
DILUTED EPS
Income before extra. gain $ 13,919 13,973 $ 1.00 $ 28,773 16,799 $ 1.71
Extra. Gain - early debt ext 358 .02 415 .03
---------- ---------- ---------- ----------
Total basic net earnings $ 14,277 $ 1.02 $ 29,188 $ 1.74
</TABLE>
(1) Conversion of the Company's 6.88% convertible subordinated debentures into
common stock is anti-dilutive for the three and nine month period ending July
31, 2000 and therefore not included in the calculation of diluted earnings per
share.
6. Comprehensive Income ($ in thousands)
Total comprehensive income for the three and nine months ended July 31, 2000
is $963 and $14,580, respectively. Total comprehensive income for the three
and nine months
6
<PAGE> 9
ended July 31, 1999 is $12,513 and $24,827, 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.
7. Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(In thousands) July 31, October 31,
2000 1999
------------ ------------
<S> <C> <C>
Bank Agreement Revolver ......................................... $ 130,000 $ 75,000
Convertible subordinated debentures ............................. 63,337 73,720
Piper Impact Europe Credit Facility ............................. -- 22,703
Industrial Revenue and Economic Development Bonds ............... 3,275 3,275
State of Alabama Industrial Development Bonds ................... 4,755 4,755
Scott County, Iowa Industrial Waste Recycling Revenue Bonds ..... 2,800 3,000
Other ........................................................... 7,597 7,213
------------ ------------
$ 211,764 $ 189,666
Less maturities due within one year included in current
liabilities ..................................................... 259 10,545
------------ ------------
$ 211,505 $ 179,121
============ ============
</TABLE>
The debt associated with the Piper Impact Europe Credit Facility was sold as
part of the sale of the stock of Piper Impact Europe during the period ended
July 31, 2000. See footnote 4 to the financial statements.
8. Industry Segment Information
During the fiscal third quarter ended July 31, 2000, internal management
structure changes were made to increase the needed emphasis and focus on two
separate lines of business. These changes affected the way in which operating
decisions are made and performance is assessed. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 131, the industry segment disclosure
has been revised to reflect these changes. Piper Impact, which includes Piper
Impact, the two New Albany, Mississippi based facilities, as well as Piper
Impact Europe, has been separated out of the "Engineered Products" segment into
their own reporting segment named "Piper Impact". The "Engineered Products"
segment now reflects the results of AMSCO, Homeshield Fabricated Products and
Imperial Fabricated Products. Previous year's information has also been restated
to reflect this change.
<TABLE>
<CAPTION>
Engineered Aluminum
Three Months Ended Steel Mill Sheet Engineered Piper Corporate
July 31, 2000 Bars Products(3) Products(4) Impact(5) and Other(1) Consolidated
------------------ ---------- ----------- ------------ ---------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies $ 88,911 $ 104,797 $ 32,263 $ 28,173 $ -- $ 254,144
Intersegment(2) 1,027 6,046 -- -- (7,073) --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 89,938 $ 110,843 $ 32,263 $ 28,173 $ (7,073) $ 254,144
========== ========== ========== ========== ========== ==========
Operating income (loss) $ 14,481 $ 6,591 $ 4,863 $ (18,136) $ (3,232) $ 4,567
========== ========== ========== ========== ========== ==========
</TABLE>
7
<PAGE> 10
8. Industry Segment Information (Cont.)
<TABLE>
<CAPTION>
Engineered Aluminum
Three Months Ended Steel Mill Sheet Engineered Piper Corporate
July 31, 1999 Bars Products(3) Products(4) Impact and Other(1) Consolidated
------------------ ---------- ----------- ------------ ---------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies $ 75,637 $ 70,719 $ 28,669 $ 31,594 $ -- $ 206,619
Intersegment(2) 1,152 5,953 -- -- (7,105) --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 76,789 $ 76,672 $ 28,669 $ 31,594 $ (7,105) $ 206,619
========== ========== ========== ========== ========== ==========
Operating income (loss) $ 16,829 $ 4,002 $ 5,237 $ (339) $ (3,820) $ 21,909
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Engineered Aluminum
Nine Months Ended Steel Mill Sheet Engineered Piper Corporate
July 31, 2000 Bars Products(3) Products(4) Impact(5) and Other(1) Consolidated
----------------- ---------- ----------- ------------ ---------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies $ 254,740 $ 287,201 $ 73,407 $ 81,361 $ -- $ 696,709
Intersegment(2) 3,145 15,210 -- -- (18,355) --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 257,885 $ 302,411 $ 73,407 $ 81,361 $ (18,355) $ 696,709
========== ========== ========== ========== ========== ==========
Operating income (loss) $ 42,218 $ 15,376 $ 9,184 $ (25,408) $ (11,745) $ 29,625
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Engineered Aluminum
Nine Months Ended Steel Mill Sheet Engineered Piper Corporate
July 31, 1999 Bars Products(3) Products(4) Impact and Other(1) Consolidated
----------------- ---------- ----------- ------------ ---------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies $ 212,584 $ 209,168 $ 67,371 $ 103,478 $ -- $ 592,601
Intersegment(2) 4,161 15,791 1 -- (19,953) --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 216,745 $ 224,959 $ 67,372 $ 103,478 $ (19,953) $ 592,601
========== ========== ========== ========== ========== ==========
Operating income (loss) $ 42,446 $ 9,201 $ 8,682 $ (947) $ (10,839) $ 48,543
========== ========== ========== ========== ========== ==========
</TABLE>
(1) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(2) Intersegment sales are conducted on an arm's length basis.
(3) Fiscal 2000 results include Nichols Aluminum - Golden operations acquired
January 25, 2000. (See Note 3 to the financial statements)
(4) Fiscal 2000 results include Imperial Fabricated Products operations acquired
April 3, 2000. (See Note 3 to the financial statements)
(5) Fiscal 2000 results include the $14.3 million pretax loss on the sale of
Piper Impact Europe. (See Note 4 to the financial statements)
8
<PAGE> 11
9. Stock Repurchase Program
In December 1999, Quanex announced that its Board of Directors approved a
program to repurchase up to 2 million shares of the Company's common stock in
the open market or in privately negotiated transactions. During the nine months
ended July 31, 2000, the Company repurchased 762,700 shares at a cost of $15.9
million. The Company retired 156,700 of these shares purchased at a cost of
approximately $3.8 million.
For shares purchased by the Company and retired: 1) common stock is charged for
the par value of the shares, 2) additional paid in capital is charged for the
pro-rata portion associated with those shares and 3) retained earning is charged
for the remainder of the cost of the retired shares. For the shares purchased
and retired in the nine months ended July 31, 2000, the equity was reduced as
shown below:
<TABLE>
<CAPTION>
Repurchase Common Additional Retained
Cost Stock Paid in Capital Earnings
---------- ---------- --------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
$ 3,785 $ 78 $ 1,222 $ 2,485
</TABLE>
The remaining shares purchased are being held as treasury stock by the Company
and the cost of such shares of $12.1 million at July 31, 2000 is reflected as a
reduction of stockholders' equity in the balance sheet.
10. Extraordinary Item
During the first half of fiscal 2000, the Company accepted unsolicited block
offers to buy back $10.4 million principal amount of the 6.88% Convertible
Subordinated Debentures for $9.6 million in cash. An after tax extraordinary
gain of $358 thousand was recorded on this transaction. The principal amount of
bonds outstanding as of July 31, 2000 was $63,337,300. No debentures were bought
in the third quarter of fiscal 2000.
9
<PAGE> 12
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
GENERAL
The discussion and analysis of Quanex Corporation and its subsidiaries' (the
"Company"'s) financial condition and results of operations should be read in
conjunction with the July 31, 2000 and October 31, 1999 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 produce
actual results materially different 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, construction
delays, market conditions for the Company's customers, any material changes in
purchases by the Company's principal customers, environmental regulations
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.
RESULTS OF OPERATIONS
Overview
Summary Information as % of Sales: (Dollars in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31,
2000 1999
Dollar % of Dollar % of
Amount Sales Amount Sales
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 254.1 100% $ 206.6 100%
Cost of Sales 208.9 82 161.1 78
Sell., gen. and admin. 14.1 5 12.0 6
Deprec. and amort. 12.3 5 11.6 5
Loss on sale of Piper Impact Europe 14.3 6 -- --
-------- -------- -------- --------
Operating Income 4.5 2% 21.9 11%
Interest Expense (4.1) (2) (3.6) (2)
Capitalized Interest .5 0 .4 0
Other, net .3 0 .2 0
Income tax expense (.5) (0) (6.6) (3)
-------- -------- -------- --------
Income from continuing operations
$ .7 0% $ 12.3 6%
======== ========
<CAPTION>
NINE MONTHS ENDED JULY 31,
2000 1999
Dollar % of Dollar % of
Amount Sales Amount Sales
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 696.7 100% $ 592.6 100%
Cost of Sales 575.1 83 470.0 79
Sell., gen. and admin 40.3 6 39.5 7
Deprec. and amort 37.4 5 34.6 6
Loss on sale of Piper Impact Europe 14.3 2 -- --
-------- -------- -------- --------
Operating Income 29.6 4% 48.5 8%
Interest Expense (11.5) (1) (10.9) (2)
Capitalized Interest 1.7 0 1.2 0
Other, net 1.6 0 1.1 0
Income tax expense (7.5) (1) (13.9) (2)
-------- -------- -------- --------
Income from continuing operations
$ 13.9 2% $ 26.0 4%
======== ========
</TABLE>
The Company achieved best ever third quarter sales. However, operating income
for the third quarter and the nine-month period ending July 31, 2000 was
impacted by a one-time $14.3 million loss on the sale of Piper Impact Europe as
well as lower operating results from its Engineered Steel Bar, Engineered
Products and Piper Impact segments. The Company's aluminum mill sheet products
business posted record third quarter sales and operating income.
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<PAGE> 13
Business Segments
During the fiscal third quarter ended July 31, 2000, internal management
structure changes were made to increase the needed emphasis and focus on two
separate lines of business. These changes affected the way in which operating
decisions are made and performance is assessed. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 131, the industry segment disclosure
has been revised to reflect these changes. Piper Impact, which includes Piper
Impact, the two New Albany, Mississippi based facilities, as well as Piper
Impact Europe, has been separated out of the "Engineered Products" segment into
their own reporting segment named "Piper Impact". The "Engineered Products"
segment now reflects the results of AMSCO, Homeshield Fabricated Products and
Imperial Fabricated Products. Previous year's information has also been restated
to reflect this change.
Pursuant to SFAS 131, the Company now has four reportable segments:
engineered steel bars, aluminum mill sheet products, engineered products and
Piper Impact. 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 products. The engineered
products segment manufactures aluminum window and patio door screens, window
frames, exterior door components and other custom roll formed products and
stamped shapes. The Piper Impact segment manufactures impact-extruded and
machined aluminum and steel parts.
The following table sets forth selected operating data for the Company's
four business segments:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Engineered Steel Bars:
Net sales ....................... $ 89,938 $ 76,789 $ 257,885 $ 216,745
Operating income ................ 14,481 16,829 42,218 42,446
Deprec. and amort ............... 4,926 4,056 14,776 12,168
Identifiable assets ............. $ 260,317 $ 231,962 $ 260,317 $ 231,962
Aluminum Mill Sheet Products:(1)
Net sales ....................... $ 110,843 $ 76,672 $ 302,411 $ 224,959
Operating income ................ 6,591 4,002 15,376 9,201
Deprec. and amort ............... 3,196 3,112 9,991 9,370
Identifiable assets ............. $ 229,944 $ 197,355 $ 229,944 $ 197,355
Engineered Products:(2)
Net sales ....................... $ 32,263 $ 28,669 $ 73,407 $ 67,372
Operating income ................ 4,863 5,237 9,184 8,682
Deprec. and amort ............... 945 861 2,565 2,806
Identifiable assets ............. $ 64,917 $ 48,110 $ 64,917 $ 48,110
Piper Impact:
Net sales ....................... $ 28,173 $ 31,594 $ 81,361 $ 103,478
Operating loss(3) ............... (18,136) (339) (25,408) (947)
Deprec. and amort ............... 3,116 3,152 9,795 9,748
Identifiable assets ............. $ 113,136 $ 162,804 $ 113,136 $ 162,804
</TABLE>
(1) Fiscal 2000 results include Nichols Aluminum - Golden operations acquired
January 25, 2000. (See Note 3 to the financial statements)
(2) Fiscal 2000 results include Imperial Fabricated Products operations acquired
April 3, 2000. (See Note 3 to the financial statements)
(3) Fiscal 2000 results include the one-time $14.3 million loss on the sale of
Piper Impact Europe. (See Note 4 to the financial statements)
11
<PAGE> 14
During the third quarter, the engineered steel bar business earned lower
operating income on higher sales compared with the same period during the prior
year due to higher costs associated with outside processing and raw material
prices. Demand among original equipment manufacturers (OEMs) in our primary
transportation markets remains strong. Sales of MACPLUS, a premium value-added
cold-finished steel bar, are at record levels. However, pricing pressures
resulting from global sourcing continue, also contributing to reduced spreads
from a year ago.
The aluminum mill sheet business posted best-ever third quarter operating
income with record-setting volume and sales achieved during the three month and
nine month periods ended July 31, 2000. Demand remains healthy, especially for
the business' value-added product, painted aluminum sheet. The third quarter
results benefited from the acquisition of Nichols Aluminum - Golden completed on
January 25, 2000. Nichols Aluminum - Golden continues its smooth transition into
the Quanex and Nichols organization. New customer trials are underway to more
fully optimize the facility's capabilities.
In the Engineered Products Group, higher operating costs and a slowdown in
the housing industry contributed to lower earnings compared with results from a
year ago. The third quarter's results did benefit from the addition of Imperial,
the door component company, which was acquired in April (See Note 3 to the
financial statements). In cooperation with the group's other businesses, new
product introductions and developments are continuing.
The Piper Impact Group posted another quarter of loss. Included in this
loss was the one-time charge of $14.3 million resulting from the sale of Piper
Impact Europe. Additionally, results were affected by lower sales for aluminum
air bag components and the higher costs associated with new product development
as well as cellular manufacturing implementation. While Piper Impact is
aggressively developing new products that it hopes will replace the declining
aluminum air bag components business, the progress is slow. In view of the
losses experienced and the anticipated future erosion in the volume of aluminum
airbag components at Piper Impact, management will continue to monitor its
operations and evaluate various alternatives.
Outlook
The Company currently expects that the overall business levels for the remainder
of fiscal 2000 should be similar to those experienced during 1999, except for
its Piper Impact business which is experiencing lower sales and continuing
losses. Domestic and global market factors will continue to impact the Company
and any slowdown in the U.S. economy could affect demand and pricing for many of
the Company's products. Continuing global pricing pressures in the Engineered
Steel Bar business and reduced demand for aluminum airbag components in the
Piper Impact business offer significant challenges to our operations in
maintaining spreads. Improved financial results will be dependent upon, among
other things, whether the strength of the economy can be sustained, improvements
in the markets which the Company serves, successful new product development
efforts at the Piper Impact business and whether the fiscal 1999 improvement in
the price spreads of aluminum mill sheet products can be sustained.
Fiscal Quarter and Nine months ended July 31, 2000 vs. 1999
Net Sales - Consolidated net sales for the three and nine months ended July 31,
2000, were $254.1 and $696.7 million, respectively, representing an increase of
$47.5 million, or 23%, and $104.1 million or 18%, when compared to consolidated
net sales for the same periods in 1999. Increased net sales in all operating
segments, with the exception of Piper Impact, were responsible for this
increase.
Net sales from the Company's engineered steel bar business for the three
and nine months ended July 31, 2000, were $89.9 million and $257.9 million,
respectively, representing an increase of $13.1 million, or 17%, and $41.1
12
<PAGE> 15
million or 19%, when compared to the same periods last year. This increase was
principally due to higher sales volume from strong markets in the transportation
industry as well as increased sales of MACPLUS, a premium value-added
cold-finished steel bar, as compared to the same prior year periods. The impact
on net sales from the higher fiscal 2000 volume and more value-added mix was
partially offset, however, by continuing competitive pricing pressures resulting
from global sourcing.
Net sales from the Company's aluminum mill sheet products business for the
three and nine months ended July 31, 2000, were $110.8 and $302.4 million,
respectively, representing an increase of $34.2 million, or 45%, and $77.5
million, or 34%, when compared to the same periods last year. This increase was
due to increased volume from the seasonally strong construction market,
increased selling price resulting from sales of more value-added painted product
and the acquisition of Nichols Aluminum - Golden in January 2000.
Net sales from the Company's engineered products business for the three and
nine months ended July 31, 2000, were $32.3 and $73.4 million, respectively,
representing an increase of $3.6 million, or 13%, and $6.0 million, or 9%, when
compared to the same periods last year. The increase was largely due to the
contribution from Imperial, which was acquired in April 2000.
Net sales from the Company's Piper Impact business for the three and nine
months ended July 31, 2000, were $28.2 and $81.4 million, respectively,
representing a decrease of $3.4 million, or 11%, and $22.1 million, or 21%, when
compared to the same periods last year. The decrease was largely due to the
reduced demand for aluminum automotive airbag components and competitive pricing
pressures.
Operating income - Consolidated operating income for the three and nine
months ended July 31, 2000, was $4.6 and $29.6 million, respectively,
representing a decrease of $17.3 million, or 79%, and $18.9 million, or 39%,
when compared to the same periods last year. The decrease resulted primarily
from the $14.3 million loss on the sale of Piper Impact Europe and the
significant operating losses at Piper Impact.
Operating income from the Company's engineered steel bar business for the
three and nine months ended July 31, 2000, was $14.5 and $42.2 million,
respectively, representing a decrease of $2.3 million, or 14%, and $228
thousand, or 1%, when compared to the same periods last year. This lower
operating income resulted despite higher net sales. The major factors in such
decrease were lower realized spread as a result of higher material costs and
pricing pressures as well as higher costs associated with outside processing as
compared to the same prior year periods. Depreciation expense for the three and
nine months ended July 31, 2000 was also higher than the same prior year periods
due to the recent completion of certain capital projects.
Operating income from the Company's aluminum mill sheet products business
for the three and nine months ended July 31, 2000, was $6.6 and $15.4 million,
respectively, representing an increase of $2.6 million, or 65%, and $6.2
million, or 67%, when compared to the same periods last year. These increases
were largely due to significantly higher sales attributable to increased volume
and sale of more value-added products, stable spreads and contribution from
Nichols Aluminum - Golden, which was acquired in January 2000.
Operating income from the Company's engineered products business for the
three and nine months ended July 31, 2000, were $4.9 and $9.2 million,
respectively, compared to an operating income of $5.2 and $8.7 million for the
same prior year periods. This business experienced increased operating income
for the first six months of fiscal 2000, resulting from increased sales of value
added, higher margin products. However, the lower operating income realized in
the third quarter ended July 31, 2000 was primarily due to the higher operating
costs partly offset by the benefits realized from the acquisition of Imperial.
13
<PAGE> 16
Operating losses from the Company's Piper Impact business for the three
and nine months ended July 31, 2000 were $18.1 and $25.4 million, respectively
compared to operating losses of $339 and $947 thousand for the same prior year
periods. Included in the current year loss is the one-time charge of $14.3
million for the sale of Piper Impact Europe which was sold on July 19, 2000.
Additionally, reduced sales of aluminum automotive airbag components and higher
material and operating costs contributed to the operating losses for the three
and nine months ended July 31, 2000.
In addition to the four operating segments mentioned above, operating
expenses for corporate and other, for the three and nine months ended July 31,
2000, were $3.2 and $11.7 million, respectively, compared to $3.8 and $10.8
million, respectively, for the same periods last year. Included in corporate and
other are the corporate office expenses, impact of LIFO valuation method of
inventory accounting and intersegment eliminations. (See Note 2 to the financial
statements regarding LIFO valuation method of inventory accounting)
Selling, general and administrative expenses increased by $2.1 million, or
17%, and $730 thousand or 2%, respectively, for the three and nine months ended
July 31, 2000, as compared to the same periods of last year. These increases
were largely due to the acquisition of Nichols Aluminum - Golden and Imperial as
well as higher sales volume compared with the same periods last year. This
increase was partially offset by a reduction of allowance for doubtful accounts
in the second quarter of fiscal 2000 to recognize changes in the credit exposure
of certain customers.
Depreciation and amortization increased by $0.7 million, or 6% and $2.8
million, or 8%, respectively, for the three and nine months ended July 31, 2000,
as compared to the same periods 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.
Interest expense increased by $554 thousand or 15% and $618 thousand or 6%
respectively, for the three and nine months ended July 31, 2000 as compared to
the same fiscal period of 1999. The increase was primarily due to the additional
borrowings made during the fiscal year to finance the acquisitions. (See Note 3
to the financial statements)
Capitalized interest increased by $116 and $486 thousand for the three and
nine months ended July 31, 2000, as compared to the same periods of 1999 due to
the Phase V expansion project at MACSTEEL(R) which is currently underway.
Other, net increased $15 and $499 thousand for the three and nine months
ended July 31, 2000, as compared to the same periods of 1999 primarily as a
result of increased investment income.
Net income was $0.7 and $14.3 million for the three and nine months ended
July 31, 2000, compared to $12.3 and $26.4 million for the same periods of 1999.
Included in these results is the one-time $14.3 million pretax ($9.3 million
after tax) loss on the sale of Piper Impact Europe. Additionally, lower ongoing
operating income and increased interest expense contributed to the lower
results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash on hand, cash flow from
operations, and borrowings under its $250 million unsecured Revolving Credit and
Term Loan Agreement ("Bank Agreement"). At July 31, 2000, the Company had $130
million borrowed under the Bank Agreement. This represents a $55 million
increase over October 31, 1999 borrowing levels. The borrowings were primarily
used to finance the acquisitions of Nichols Aluminum-Golden and Imperial (see
Note 3 to the financial statements) and to repurchase 762,700 shares of the
Company's common stock in connection with the Stock Repurchase Program announced
in December 1999 (see Note 9 to the financial statements). There have been no
14
<PAGE> 17
significant changes to the terms of the Company's debt structure during the nine
month period ended July 31, 2000. (See Note 7 to the financial statements for
detail regarding the outstanding borrowings under the Company's various
facilities)
At July 31, 2000, the Company had commitments of approximately $13 million
for the purchase or construction of capital assets. The Company plans to fund
these capital expenditures through cash flow from operations and, if necessary,
additional borrowings.
During the first nine months of fiscal 2000, the Company accepted
unsolicited block offers to buy back $10.4 million principal amount of the 6.88%
Convertible Subordinated Debentures for $9.6 million in cash.
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 common stock dividends.
Operating Activities
Cash provided by operating activities during the nine months ended July 31, 2000
decreased by $6.0 million compared to the same nine month period of 1999. The
decrease was primarily a result of higher working capital requirements at the
engineered steel bar business and the aluminum mill sheet products business due
to significant increase in sales.
The above decrease was partially offset by the $7.0 million of tax refund,
received during the first quarter of fiscal 2000, resulting from overpayment of
estimated taxes in fiscal 1999.
Investment Activities
Net cash used by investment activities during the nine months ended July 31,
2000 was $69.4 million compared to $44.7 million for the same period of 1999.
Fiscal 2000 cash used by investment activities included cash paid for the
acquisitions of Nichols Aluminum - Golden and Imperial totaling $35.5 million,
net of cash acquired. Capital expenditures and other investment activities
decreased $10.8 million in the nine month period ended July 31, 2000 as compared
to the same period of 1999. The Company estimates that fiscal 2000 capital
expenditures will total approximately $50 to $55 million.
Financing Activities
Net cash provided by financing activities for the nine months ended July
31, 2000 was $21.6 million, compared to $16 thousand for the same prior year
period. The Company's net borrowings were $53.2 million during the first nine
months of fiscal 2000, compared to $14.2 million during the same period last
year. During the nine months ended July 31, 2000, the Company paid $15.9 million
to repurchase 762,700 shares of it's own common stock.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
which deferred the effective date of SFAS No. 133 until the Company's year
ending October 31, 2001. In June 2000, the FASB issued SFAS No. 138 "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an amendment
of FASB Statement No. 133". The Company is currently analyzing SFAS No. 133 and
138 to determine what impact or additional disclosure requirements this
pronouncement will have.
15
<PAGE> 18
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101. SAB No. 101 provides the staff's views in
applying Generally Accepted Accounting Principles ("GAAP") to revenue
recognition in financial statements. It does not change any of the existing
rules on revenue recognition. All registrants are expected to apply the
accounting and disclosures described in this bulletin. The staff, however, will
not object if registrants that have not applied this accounting do not restate
prior financial statements provided they report a change in accounting principle
in accordance with APB Opinion No. 20, Accounting Changes, no later than the
first fiscal quarter of the fiscal year beginning after December 15, 1999. The
Company will be analyzing SAB No. 101 to determine what, if any, impact or
additional disclosure requirements are necessary. Any such impact, will be
addressed and reflected in the first fiscal quarter of the Company's year ending
October 31, 2001 in accordance with SAB No. 101.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company holds certain floating-rate obligations. The exposure of these
obligations to increases in short-term interest rates is limited by interest
rate swap agreements entered into by the Company. These swap agreements
effectively fix the interest rate on most of the Company's variable rate debt,
thus limiting the potential impact that increasing interest rates would have on
earnings. At October 31, 1999 the unrealized losses related to the interest rate
swap agreements were $2.0 million. As of July 31, 2000, there was an unrealized
gain related to the interest rate swap agreements amounting to $85 thousand. It
should be noted that any change in value of these contracts, real or
hypothetical, would be significantly offset by an inverse change in the value of
the underlying hedged item.
In addition, the Company utilized a range forward zero-cost agreement to
protect its initial equity investment in its Netherlands subsidiary, Piper
Impact Europe. This agreement, which was entered into with a major financial
institution, had a notional value of 30 million guilders. By establishing
minimum and maximum exchange rates, this agreement limited the potential
devaluation of the Company's initial investment in its subsidiary while also
limiting any potential appreciation. During the third quarter ended July 31,
2000, the Company sold the Piper Impact Europe subsidiary. As such, this range
forward agreement was cashed in, realizing a gain of approximately $1.7 million.
This gain was offset against the loss on the sale of Piper Impact Europe as the
investment in Piper Impact Europe was the underlying hedged item.
The Company uses futures 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. 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, 1999, the Company had open futures contracts at fair values of $5.3 million
and an unrealized loss of $117 thousand on such contracts. As of July 31, 2000,
the Company had open futures contracts at fair values of $15.1 million and an
unrealized gain of approximately $1 thousand on such contracts. At October 31,
1999 and July 31, 2000, these contracts covered a notional volume of 7,716,170
and 27,282,173 pounds of aluminum, respectively.
Other than the items mentioned above, there were no other material
quantitative or qualitative changes during the first nine months of fiscal 2000
in the Company's market risk sensitive instruments.
16
<PAGE> 19
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
By letter dated August 24, 2000, United States Environmental Protection Agency
Region V notified the Company's MACSTEEL(R)- Michigan Division that the Agency
intends to file an administrative complaint for civil penalties totaling
$137,500.00 in connection with alleged wastewater permit violations at the
Jackson plant from September 1995 through October 1999. Those alleged violations
appear also to have been the basis for an administrative order issued on or
about September 27, 1999 to the MACSTEEL(R)- Michigan Division. The MACSTEEL(R)-
Michigan Division has implemented several measures designed to improve its
wastewater treatment system and currently intends to enter into negotiations
with the Agency as to the planned complaint and proposed penalty.
Item 6 - Exhibits and Reports on Form 8-K.
Exhibit 27 Financial Data Schedule - July 31, 2000.
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 September 8, 2000
<PAGE> 21
Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C>
Exhibit 27 Financial Data Schedule - July 31, 2000.
</TABLE>
