<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, 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 January 31, 2000
- --------------------------------------- -------------------------------
Common Stock, par value $0.50 per share 14,047,890
<PAGE> 2
QUANEX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C> <C>
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - January 31, 2000 and
October 31, 1999.............................................................. 1
Consolidated Statements of Income - Three Months
Ended January 31, 2000 and 1999 .............................................. 2
Consolidated Statements of Cash Flow - Three months
Ended January 31, 2000 and 1999 .............................................. 3
Notes to Consolidated Financial Statements....................................... 4 - 6
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition .................................................. 7 - 12
Item 3: Quantitative and Qualitative Disclosure about Market
Risk ................................................................................ 13
Part II. Other Information
Item 5: Other Information.................................................................... 13
Item 6: Exhibits and Reports on Form 8-K..................................................... 13
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 31, October 31,
2000 1999
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ....................... $ 21,955 $ 25,874
Accounts and notes receivable, net ......... 91,816 87,204
Inventories ................................ 97,594 78,463
Deferred income taxes ...................... 11,884 19,146
Prepaid expenses ........................... 1,621 1,700
------------ ------------
Total current assets ............... 224,870 212,387
Property, plant and equipment ................ 774,699 753,811
Less accumulated depreciation and amortization (358,156) (346,970)
------------ ------------
Property, plant and equipment, net ........... 416,543 406,841
Goodwill, net ................................ 47,715 48,990
Other assets ................................. 23,812 22,228
------------ ------------
$ 712,940 $ 690,446
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 79,004 $ 70,187
Accrued payable - acquisition .............. 13,462 -
Accrued expenses ........................... 47,615 54,305
Current maturities of long-term debt ....... 9,226 10,545
Income taxes payable ....................... 3,176 1,103
------------ ------------
Total current liabilities .......... 152,483 136,140
Long-term debt ............................... 188,121 179,121
Deferred pension credits ..................... 7,004 6,691
Deferred postretirement welfare benefits ..... 7,452 7,490
Deferred income taxes ........................ 43,531 43,910
Other liabilities ............................ 14,711 16,033
------------ ------------
Total liabilities .................. 413,302 389,385
Stockholders' equity:
Preferred stock, no par value .............. - -
Common stock, $.50 par value ............... 7,097 7,135
Common stock held by rabbi trust ........... (3,331) (2,322)
Additional paid-in capital ................. 110,684 110,317
Retained earnings .......................... 186,261 186,867
Unearned compensation ...................... (171) (171)
Accumulated other comprehensive income ..... (902) (765)
------------ ------------
Total stockholders' equity ......... 299,638 301,061
------------ ------------
$ 712,940 $ 690,446
============ ============
</TABLE>
1
<PAGE> 4
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
------------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Net sales ................................... $ 199,294 $ 183,103
Cost and expenses:
Cost of sales ............................. 165,643 148,735
Selling, general and administrative
expense.................................. 13,282 14,302
Depreciation and amortization ............. 12,162 11,572
------------ ------------
Operating income ............................ 8,207 8,494
Other income (expense):
Interest expense .......................... (3,330) (3,681)
Capitalized interest ...................... 544 346
Other, net ................................ 1,002 794
------------ ------------
Income before income taxes .................. 6,423 5,953
Income tax expense .......................... (2,248) (2,084)
------------ ------------
Net income .................................. $ 4,175 $ 3,869
============ ============
Earnings per common share:
Basic:
Total basic net earnings ........... $ 0.29 $ 0.27
============ ============
Diluted:
Total diluted net earnings ......... $ 0.29 $ 0.27
============ ============
Weighted average shares outstanding:
Basic .................................... 14,172 14,224
============ ============
Diluted .................................. 14,360 14,234
============ ============
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,
------------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income ................................................................ $ 4,175 $ 3,869
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization ........................................ 12,300 11,712
Deferred income taxes ................................................ 30 (603)
Deferred pension and postretirement benefits ......................... 273 454
Changes in assets and liabilities net of effects from acquisitions and
dispositions:
Decrease in accounts and notes receivable ............................ 811 6,153
Decrease (increase) in inventory ..................................... (6,103) 4,615
Increase/(decrease) in accounts payable .............................. 4,150 (9,636)
Decrease in accrued expenses ......................................... (9,642) (8,686)
Other, net (including income tax refund) ............................. 8,107 (231)
------------ ------------
Cash provided by operating activities ........................... 14,101 7,647
Investment activities:
Acquisition of Golden Aluminum, net of cash acquired ...................... (6,406) -
Capital expenditures, net of retirements .................................. (14,458) (14,530)
Other, net ................................................................ (892) (239)
------------ ------------
Cash used by investment activities .............................. (21,756) (14,769)
------------ ------------
Cash used by operating and
investment activities ........................................ (7,655) (7,122)
Financing activities:
Bank borrowings, net ...................................................... 9,169 3,694
Purchase of subordinated debentures ....................................... - (400)
Purchase of Quanex common stock ........................................... (3,785) -
Common dividends paid ..................................................... (2,296) (2,280)
Issuance of common stock, net ............................................. 620 1,276
Other, net ................................................................ (24) (26)
------------ ------------
Cash provided by financing activities ........................... 3,684 2,264
Effect of exchange rate changes on cash and equivalents ..................... 52 (16)
------------ ------------
Decrease in cash and equivalents ............................................ (3,919) (4,874)
Cash and equivalents at beginning of period ................................. 25,874 26,279
------------ ------------
Cash and equivalents at end of period ....................................... $ 21,955 $ 21,405
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest .................................. $ 4,390 $ 4,934
Cash paid (received) during the period for income taxes ................... $ (7,007) $ 2,048
Supplemental disclosures of non-cash investing activity:
The Company acquired the assets of Golden Aluminum in the
first quarter of fiscal 2000. In conjunction with the
acquisition, the following transaction took place:
Purchase price of Golden Aluminum ......................................... $ 21,462 $ 0
Cash paid in first fiscal quarter ......................................... (8,000) -
------------ ------------
Payable balance for acquisition as of January 31, 2000 .................... $ 13,462 $ 0
Golden Aluminum cash acquired ............................................. $ 1,594 $ 0
</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 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
<TABLE>
<CAPTION>
Inventories consist of the following: January 31, October 31,
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
Raw materials .......................... $ 30,200 $ 24,617
Finished goods and work
in process............................. 60,510 46,958
---------- ----------
90,710 71,575
Other .................................. 6,884 6,888
---------- ----------
$ 97,594 $ 78,463
========== ==========
</TABLE>
The values of inventories in the consolidated balance sheets are based on
the following accounting methods:
<TABLE>
<S> <C> <C>
LIFO .................................. $ 63,433 $ 58,968
FIFO .................................. 34,161 19,495
---------- ----------
$ 97,594 $ 78,463
========== ==========
</TABLE>
With respect to inventories valued using the LIFO method, replacement
cost exceeded the LIFO value by approximately $12 million and $11 million
at January 31, 2000, and October 31, 1999, respectively.
3. Acquisition
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 $8
million plus working capital value which is estimated 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
Corporation.
Operations at Nichols Aluminum-Golden include melting and casting
aluminum into sheet made from a blend of primary P1020 ingot and selected
grades of recycled 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 packaging, metal components for computer disks, and home
accessory products.
4
<PAGE> 7
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. 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
January 31, 2000 January 31, 1999
---------------------------------------------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
BASIC EPS
<S> <C> <C> <C> <C> <C> <C>
Total basic net earnings $ 4,175 14,172 $ 0.29 $ 3,869 14,224 $ 0.27
EFFECT OF DILUTIVE SECURITIES
Effect of common stock Equiv
arising from stock options - 62 - 10
Effect of common stock held
by rabbi trust - 126 - -
Effect of conversion of
subordinated debentures(1) - - - -
DILUTED EPS
Total diluted net earnings $ 4,175 14,360 $ 0.29 $ 3,869 14,234 $ 0.27
</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 earnings per share.
5. Comprehensive Income (Dollars in thousands)
Total comprehensive income for the three months ended January 31, 2000 and
1999 is $4,038 and $3,228, 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.
6. Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(In thousands) January 31, October 31,
2000 1999
-------------------------------
<S> <C> <C>
"Bank Agreement Revolver" .............................................. $ 85,000 $ 75,000
Convertible subordinated debentures .................................... 73,720 73,720
Piper Impact Europe "Credit Facility" .................................. 20,267 22,703
Industrial Revenue and Economic Development Bonds,
unsecured, payable in annual installments through the year 2005, bearing
interest ranging from 6.50% to 8.375%...................................
3,275 3,275
State of Alabama Industrial Development Bonds .......................... 4,755 4,755
Scott County, Iowa Industrial Waste Recycling Revenue Bonds ............ 3,000 3,000
Other .................................................................. 7,330 7,213
------------ ------------
$ 197,347 $ 189,666
Less maturities due within one year included in current
liabilities ............................................................ 9,226 10,545
------------ ------------
$ 188,121 $ 179,121
============ ============
</TABLE>
5
<PAGE> 8
7. Industry Segment Information
<TABLE>
<CAPTION>
Three Months Ended Engineered Aluminum Mill Engineered Corporate
January 31, 2000 Steel Bars Sheet Products Products and Other(1) Consolidated
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies $ 78,315 $ 75,762 $ 45,217 $ - $199,294
Intersegment(2) 1,427 3,958 - (5,385) -
-------- -------- -------- -------- --------
Total $ 79,742 $ 79,720 $ 45,217 $ (5,385) $199,294
======== ======== ======== ======== ========
Operating income (loss) $ 11,835 $ 2,203 $ (1,626) $ (4,205) $ 8,207
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Engineered Aluminum Mill Engineered Corporate
January 31, 1999 Steel Bars Sheet Products Products and Other(1) Consolidated
- ----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies $ 63,996 $ 66,444 $ 52,663 $ - $183,103
Intersegment(2) 1,101 4,976 1 (6,078) -
-------- -------- -------- -------- --------
Total $ 65,097 $ 71,420 $ 52,664 $ (6,078) $183,103
======== ======== ======== ======== ========
Operating income (loss) $ 11,303 $ 2,165 $ (222) $ (4,752) $ 8,494
======== ======== ======== ======== ========
</TABLE>
(1) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(2) Intersegment sales are conducted on an arm's length basis.
8. 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
first fiscal quarter ended January 31, 2000, the Company repurchased and
retired approximately 157,000 shares at a cost of nearly $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 first fiscal quarter ended January
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>
9. Subsequent Event
Subsequent to the fiscal quarter ended January 31, 2000, the Company
accepted unsolicited block offers to buy back approximately $4.9 million
principal amount of convertible subordinated debentures for approximately
$4.6 million in cash.
6
<PAGE> 9
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 January 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 and
changes in estimates of costs for known environmental remediation projects and
situations, world-wide political stability and economic growth, the Company's
successful implementation of its internal operating plans, performance issues
with key customers, suppliers and subcontractors, and regulatory changes and
legal proceedings. Accordingly, there can be no assurance that the
forward-looking statements contained herein will occur or that objectives will
be achieved.
RESULTS OF OPERATIONS
Overview
Summary Information as % of Sales: (Dollars in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
2000 1999
Dollar % of Dollar % of
Amount Sales Amount Sales
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales $199.3 100% $183.1 100%
Cost of Sales 165.6 83 148.7 81
Sell., gen. and admin. 13.3 7 14.3 8
Deprec. and amort. 12.2 6 11.6 6
------ ------ ------ ------
Operating Income 8.2 4% 8.5 5%
Interest Expense (3.3) (1) (3.7) (2)
Capitalized Interest .5 0 .3 0
Other, net 1.0 0 .8 0
Income tax expense (2.2) (1) (2.0) (1)
------ ------ ------ ------
Net Income $ 4.2 2% $ 3.9 2%
====== ======
</TABLE>
The Company achieved record first quarter sales and income from continuing
operations for the three month period ending January 31, 2000. The Company's
engineered steel bar and aluminum mill sheet products businesses posted record
first-quarter operating income and significantly higher sales compared with the
same period last year. These results reflect operational improvements and
seasonally strong markets with customers in the transportation and construction
industries.
7
<PAGE> 10
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 and machined 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,
-----------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Engineered Steel Bars:
Net sales ....................... $ 79,742 $ 65,097
Operating income ................ 11,835 11,303
Deprec. and amort. .............. 4,926 4,056
Identifiable assets ............. $ 250,439 $ 222,581
Aluminum Mill Sheet Products:
Net sales ....................... $ 79,720 $ 71,420
Operating income ................ 2,203 2,165
Deprec. and amort. .............. 3,341 3,130
Identifiable assets ............. $ 230,421 $ 194,408
Engineered Products:
Net sales ....................... $ 45,217 $ 52,664
Operating loss .................. (1,626) (222)
Deprec. and amort. .............. 3,844 4,354
Identifiable assets ............. $ 205,624 $ 216,036
</TABLE>
================================================================================
The engineered steel bar business earned record quarterly operating income
for the third consecutive quarter. Demand for MACSTEEL products is high and the
backlog for orders looks strong. However, scrap markets are a little tighter and
pricing pressures resulting from global sourcing continue, contributing to
reduced spreads from a year ago. Sales of MACPLUS, a premium, value-added
cold-finished steel bar, are at record levels. Increased volumes are being
realized from the completion of Phase IV expansion projects late last fiscal
year, which boosted cold-finishing capacity at both of MACSTEEL's engineered bar
mills.
The aluminum mill sheet business is building on its record-setting
performance from last year with best-ever first quarter results for sales and
operating income for the three-months ended January 31, 2000. With the
acquisition from Alcoa, Inc. of a high quality, value-added aluminum sheet
casting and rolling mill based in Fort Lupton, Colorado, Nichols Aluminum is
well positioned for further growth. See Note 3 to the financial statements for
further discussion of the acquisition.
Lower sales at Piper Impact due to the reduced demand for aluminum
automotive air bag components was the major contributor to the first quarter
loss posted by the Engineered Products Group. However, the Engineered Products
Group is aggressively pursuing new business, and is encouraged by the sales
growth
8
<PAGE> 11
activity underway. New applications for specialized roll-forming and
impact-extrusion technologies are being developed. Several prototypes have been
delivered and trials are taking place with both new and existing customers.
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 engineered products business which is experiencing product mix change
resulting in lower sales. 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 Engineered Products 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 engineered products business and whether the
fiscal 1999 improvement in the price spreads of aluminum mill sheet products can
be sustained.
Fiscal Quarter ended January 31, 2000 vs. 1999
Net Sales - Consolidated net sales for the three months ended January 31, 2000,
were $199.3 million representing an increase of $16.2 million, or 9%, when
compared to consolidated net sales for the same period in 1999. For the three
months ended January 31, 2000, increased net sales in the engineered steel bar
and aluminum mill sheet businesses were partially offset by lower net sales at
the Company's engineered products businesses.
Net sales from the Company's engineered steel bar business for the three
months ended January 31, 2000, were $79.7 million representing an increase of
$14.6 million, or 22% when compared to the same period last year. This increase
was principally due to increased sales volume from seasonally 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 period.
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 months ended January 31, 2000, were $79.7 million representing an increase
of $8.3 million, or 12% when compared to the same period last year. This
increase was due to increased volume from the seasonally strong construction
market and increased selling price resulting from sales of more value-added
painted product as well as market driven price increases.
Net sales from the Company's engineered products business for the three
months ended January 31, 2000, were $45.2 million representing a decrease of
$7.4 million, or 14% when compared to the same period last year. The decrease in
the three month period ended January 31, 2000 is largely due to the reduced
demand for aluminum automotive air bag components at the Piper facilities.
Operating income - Consolidated operating income for the three months ended
January 31, 2000, was $8.2 million representing a decrease of $287 thousand, or
3% when compared to the same period last year. The decrease in the three month
period ended January 31, 2000 was largely due to increased operating losses at
the engineered products business, partially offset by increased operating income
at the engineered steel bar and aluminum mill sheet products business.
Operating income from the Company's engineered steel bar business for the
three months ended January 31, 2000, was $11.8 million representing an increase
of $.5 million, or 5% when compared to the same period last year. The
9
<PAGE> 12
increase in the three months ended January 31, 2000 compared to 1999 was due to
higher net sales from increased volumes and more value-added product sales;
however these sales were at a lower spread than the same prior year period due
largely to the pricing pressures. Depreciation expense for the three months
ended January 31, 2000 was also higher than the same prior year period due to
recently completed capital projects. Additionally, the prior year's three months
ended January 31, 1999 included approximately $2 million of non-recurring
benefits realized as a result of an insurance recovery and a litigation
settlement.
Operating income from the Company's aluminum mill sheet products business
for the three months ended January 31, 2000, was $2.2 million representing only
a slight increase of $38 thousand compared to the same period last year. This
increase was largely due to higher sales which were largely offset by higher
material costs as aluminum scrap prices increased reducing spreads.
Operating loss from the Company's engineered products business for the
three months ended January 31, 2000, was $1.6 million compared to an operating
loss of $222 thousand for the same prior year period. The declining results were
largely due to lower net sales at the Piper Impact facilities, but were
partially offset by increased operating income at the Fabricated Products
division. Fabricated Products achieved increased operating income despite lower
net sales for the first quarter ended January 31, 2000 as compared to the same
prior year period as a result of selling a larger proportion of value-added,
higher margin products as well as having lower depreciation expense.
In addition to the three operating segments mentioned above, operating
expenses for corporate and other for the three months ended January 31, 2000 was
$4.2 million compared to $4.8 million for the same period 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 declined by $1.0 million, or
7% for the three months ended January 31, 2000, as compared to the same period
of last year. This decline is largely due to the fact that the prior year
included items such as relocation expenses and consulting expenses for system
implementations which did not recur in the first fiscal quarter of 2000.
Depreciation and amortization increased by $.6 million, or 5% for the three
months ended January 31, 2000, 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,
partially offset by lower depreciation and amortization at the engineered
products business.
Interest expense declined by $.4 million or 10% to $3.3 million for the
three months ended January 31, 2000 as compared to the same fiscal period of
1999. The decline was due largely to the lower outstanding debt balance during
the three month period ended January 31, 2000 as compared to the same prior year
period.
Capitalized interest increased by $198 thousand for the three months ended
January 31, 2000, as compared to the same period of 1999 due to the Phase V
expansion project at MACSTEEL which is currently underway.
Other, net increased $208 thousand for the three months ended January 31,
2000, as compared to the same period of 1999 primarily as a result of increased
investment income.
Net income increased $306 thousand to $4.2 million for the three months
ended January 31, 2000, compared to $3.9 million for the same period of 1999.
10
<PAGE> 13
The increase was due largely to lower interest expense and higher capitalized
interest and "other, net", offset partially by lower operating income.
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"). There have been no significant changes
to the terms of the Company's debt structure during the three month period ended
January 31, 2000. See Note 6 to the financial statements for detail regarding
the outstanding borrowings under the Company's various facilities.
At January 31, 2000, the Company had commitments of approximately $10
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.
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.
During the first fiscal quarter ended January 31, 2000, the Company repurchased
approximately 157,000 shares at a cost of nearly $3.8 million. Funds for the
program have been and will be provided from the Company's available working
capital and bank credit line.
Subsequent to the fiscal quarter ended January 31, 2000, the Company
accepted unsolicited block offers to buy back approximately $4.9 million
principal amount of convertible subordinated debentures for approximately $4.6
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 dividends.
Operating Activities
Cash provided by operating activities during the three months ended January 31,
2000 was $14.1 million. This represents an increase of $6.5 million, or 84%,
compared to the three months ended January 31, 1999. This increase is primarily
a result of a $7.0 million tax refund received during the three month period
ended January 31, 2000 compared to $2.0 million paid for the same period of
1999. The increased cash flow due to taxes was partially offset by cash used in
meeting increased working capital requirements.
Investment Activities
Net cash used by investment activities during the three months ended January 31,
2000 was $21.8 million compared to $14.8 million for the same period of 1999.
Fiscal 2000 cash from investing activities includes cash paid for the
acquisition of Golden Aluminum totaling $6.4 million, net of cash acquired.
Capital expenditures and other investment activities increased $581 thousand in
the three month period ended January 31, 2000 as compared to the same period of
1999. The Company estimates that fiscal 2000 capital expenditures will
approximate $50 to $55 million.
Financing Activities
Net cash provided by financing activities for the three months ended January 31,
2000 was $3.7 million, compared to $2.3 million for the same prior year period.
The Company borrowed $9.2 million during the first three months of fiscal 2000,
as compared to borrowing of $3.7 million during the same period last year. Also,
during the three months ended January 31, 2000, the Company paid $3.8 million to
repurchase approximately 157,000 shares of its own common stock.
11
<PAGE> 14
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 defers the effective date of SFAS No. 133 until the Company's year ending
October 31, 2001. The Company will be analyzing SFAS No. 133 to determine what,
if any, impact or additional disclosure requirements this pronouncement will
have.
YEAR 2000
Subsequent to January 1, 2000, the Company continued to monitor all critical
systems for any potential delayed complications or disruptions from the Year
2000 issues, including those relating to the leap year and its dealings with
customers, suppliers and other third parties. No material problems were
encountered. The Company believes that no significant additional efforts
associated with the Year 2000 issues are required in the future.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS QUARTERLY REPORT ON
FORM 10-Q 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.
12
<PAGE> 15
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 all 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 January 31, 2000, there was an
unrealized gain related to the interest rate swap agreements amounting to $0.7
million. 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 utilizes 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, has a notional value of 30 million guilders. By establishing
minimum and maximum exchange rates, this agreement limits the potential
devaluation of the Company's initial investment in its subsidiary while also
limiting any potential appreciation. If, at the expiration date of the
agreement, the Dutch guilder/US dollar exchange rate is within the range of 1.80
to 2.05, this agreement will expire at no cost to either party. At October 31,
1999, the Company booked a gain to stockholder's equity of $378 thousand. At
January 31, 2000, the Company booked an additional $881 thousand gain to
stockholder's equity for a total gain of $1.3 million. A hypothetical 10%
increase in the January 31, 2000 exchange rate would result in a positive
adjustment to stockholders' equity of approximately $1.2 million. In contrast,
a hypothetical 10% decrease would result in a negative adjustment to
stockholder's equity of approximately $1.3 million. However, it should be noted
that any change in the value of this agreement, real or hypothetical, would be
significantly offset by an inverse change in the value of the underlying hedged
position.
Other than the items mentioned above, there were no other material quantitative
or qualitative changes during the first three months of fiscal 2000 in the
Company's market risk sensitive instruments.
PART II. OTHER INFORMATION
Item 5 - Other Information
As of January 23, 2000, a three year agreement was ratified by the United Steel
Workers representing 253 employees at MACSTEEL's Arkansas plant.
Item 6 - Exhibits and Reports on Form 8-K.
Exhibit 10.1 Amendment to Quanex Corporation 1997 Key Employee
Stock Option Plan, dated December 9, 1999.
* Exhibit 10.2 Amendment to Quanex Corporation 1996 Employee Stock
Option and Restricted Stock Plan, effective February
23, 2000.
* Exhibit 10.3 Quanex Corporation Non-Employee Director Retirement
Plan as amended as of May 25, 1995.
Exhibit 27 Financial Data Schedule - January 31, 2000.
* Management Compensation or Incentive Plan
No reports on Form 8-K were filed by the Company during the quarter for which
this report is being filed.
13
<PAGE> 16
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------ -----------------------
<S> <C>
Exhibit 10.1 Amendment to Quanex Corporation 1997 Key Employee
Stock Option Plan, dated December 9, 1999.
* Exhibit 10.2 Amendment to Quanex Corporation 1996 Employee Stock
Option and Restricted Stock Plan, effective February
23, 2000.
* Exhibit 10.3 Quanex Corporation Non-Employee Director Retirement
Plan as amended as of May 25, 1995.
Exhibit 27 Financial Data Schedule - January 31, 2000.
* Management Compensation or Incentive Plan
</TABLE>
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUANEX CORPORATION
/s/ Viren M. Parikh
-------------------------------------
Viren M. Parikh
Controller (Chief Accounting Officer)
Date March 7, 2000
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO
THE QUANEX CORPORATION
1997 KEY EMPLOYEE STOCK OPTION PLAN
THIS AGREEMENT by Quanex Corporation (the "Company"),
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company previously adopted the plan
agreement known as the "Quanex Corporation 1997 Key Employee Stock Option Plan"
(the "Plan"); and
WHEREAS, the Board of Directors of the Company retained the right in
Article XI of the Plan to amend the Plan from time to time; and
WHEREAS, the Board of Directors of the Company has approved the following
amendment to the Plan;
NOW, THEREFORE, effective January 1, 2000, the Board of Directors of the
Company agrees that Section 6.2 of the Plan is hereby amended, effective with
respect to all Options issued in the future under this Plan, as follows:
6.2 DURATION OF OPTIONS. No Option shall be exercisable after ten years
from the date the Option is granted. An Option may terminate prior to the
normal expiration date as specified below.
(a) General Rule for Severance of Employment. Except as may be
otherwise expressly provided herein, all Options shall terminate on
the earlier of the date of the expiration of the Option or one day
less than three months after the date of the severance of the
employment relationship between the Company and all Affiliates and the
Optionee, whether with or without cause, for any reason other than the
death, Disability or, Retirement of the Optionee, during which period
the Optionee shall be entitled to exercise the Option in respect of
the number of shares that the Optionee would have been entitled to
purchase had the Optionee exercised the Option on the date of such
severance of employment. Whether authorized leave of absence, or
absence on military or government service shall constitute severance
of the employment relationship between the Company and all
<PAGE> 2
Affiliates and the Optionee, shall be determined by the Committee at the
time thereof.
(b) Death, Disability or Retirement of Optionee. In the event of the
death, Disability or Retirement of Optionee, before the date of expiration
of such Option, such Option shall continue fully in effect, including
provisions providing for subsequent vesting of such Option, for period of
not more than three years commencing on the date of the Optionee's death,
Disability or Retirement and shall terminate on the earlier of the date of
the expiration of such year period or the date of expiration of the Option.
After the death of the Optionee, his executors, administrators or any
person or persons to whom his Option may be transferred by will or by the
laws of descent and distribution, shall have the right, at any time prior
to the termination of the Option to exercise the Option in respect to the
number of shares that the Optionee would have been entitled to exercise if
he were still alive.
Notwithstanding the foregoing provisions of this Section, the Committee may
provide for a different option termination date in the Option Agreement with
respect to any Option.
Dated: December 9, 1999.
<PAGE> 1
EXHIBIT 10.2
AMENDMENT
TO THE QUANEX CORPORATION
1996 EMPLOYEE STOCK OPTION AND RESTRICTED STOCK PLAN
THIS AGREEMENT by Quanex Corporation (the "Company"),
W I T N E S S E T H:
WHEREAS, the Company maintains the Plan known as the "Quanex
Corporation 1996 Employee Stock Option and Restricted Stock Plan" (the "Plan");
WHEREAS, the Company retained the right in Section 12 of the Plan to
amend the Plan from time to time; and
WHEREAS, the directors of the Company have approved resolutions to
amend the Plan to increase the number of shares of the Company's Common Stock,
$.50 par value, by 600,000 shares;
NOW THEREFORE, effective February 23, 2000, the Company agrees that,
subject to and contingent upon the approval of this Agreement by the Company's
stockholders, Section 3 of the Plan is hereby amended in its entirety to read
as follows:
SECTION 3. STOCK SUBJECT TO THE PLAN
The total amount of the Common Stock with respect to which Awards
may be granted shall not exceed in the aggregate 1,350,000 shares. The
class and aggregate number of shares which may be subject to the Options
granted under the Plan shall be subject to adjustment under Section 7. The
class and aggregate number of shares which may be subject to the
Restricted Stock Awards granted under the Plan shall also be subject to
adjustment under Section 8. Shares may be treasury shares or authorized
but unissued shares. If any Award under the Plan shall expire or terminate
for any reason without having been exercised in full, or if any Award
shall be forfeited, the shares subject to the unexercised or forfeited
portion of such Award shall again be available for the purposes of the
Plan.
<PAGE> 1
EXHIBIT 10.3
QUANEX CORPORATION
NON-EMPLOYEE DIRECTOR RETIREMENT PLAN
To promote the interest of Quanex Corporation (the "Company") and to
assist the Company in obtaining and retaining qualified persons to act as
directors of the Company, the Company has adopted the following Non-Employee
Director Retirement Plan (the "Plan").
1. Eligibility. Each person, other than full-time employees of the
Company, serving on or after the Effective Date of this Plan, as a director
subject to reelection by the holders of Common Stock of the Company, and each
person serving as a director at the request of the Board of Directors, shall be
entitled to participate in this Plan.
2. Retirement Benefit. Any director who is eligible to participate in
this Plan and has served on the Board of Directors of the Company (not including
time served when a full-time employee of the Company) for at least an aggregate
of ten full years shall be entitled to a retirement payment as provided herein.
Subject to Sections 3 and 4 below, the Company shall pay to the director
annually a sum (the "Retirement Amount") equal to the base annual director
retainer fee paid at the time the person is no longer a director of the Company.
The base annual director retainer fee shall not include fees paid for attendance
at meetings or other purposes. The Retirement Amount shall be paid annually on
the anniversary date of the retirement of the person as a director or at such
earlier time as the Company may select. In addition, the Company may elect to
pay the Retirement Amount in installments provided the Retirement Amount shall
be paid in full by each anniversary date.
3. Termination of Payment. The Company shall pay the Retirement Amount
annually for a period equal to the aggregate length of time the director served
on the Board of Directors (not including time served when a full-time employee
of the Company), such period to be rounded up to the next full year, provided
that the Company's obligation shall earlier terminate (i) upon the death of the
director, (ii) upon the termination of this Plan as to all then current and
retired directors, in which case payment shall be made to all eligible retired
directors for the year in which the termination of this Plan occurs and two
additional years, and (iii) upon a determination by the Board of Directors that
the retired director is serving as a director, officer or employee of a
competitor of the Company and the continuation of such relationship after 15
days written notice of such determination to the retired director.
4. Consultation. At any time payments are being made to a person
pursuant to this Plan, such person agrees to be available to consult with and
advise the Board of Directors of the Company from time to time upon reasonable
notice; provided that the Company shall pay all out of pocket expenses of such
person, such person shall not be obligated to travel and such consultations
shall not require more of such person's time than that required when serving as
a director.
5. Effective Date. This Plan shall be effective on February 20, 1992,
and shall remain in effect until termination by a resolution of the Board of
Directors of the Company. Except as provided in Section 3, upon termination of
this Plan, no person shall be entitled to any further benefits hereunder.
Approved by the Board of Directors - 2/20/92
Amended by the Board of Directors - 5/25/95
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JANUARY 31, 2000 AND THE INCOME STATEMENT FOR THE THREE MONTHS ENDED
JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 21,955
<SECURITIES> 0
<RECEIVABLES> 91,816
<ALLOWANCES> 0
<INVENTORY> 97,594
<CURRENT-ASSETS> 224,870
<PP&E> 774,699
<DEPRECIATION> (358,156)
<TOTAL-ASSETS> 712,940
<CURRENT-LIABILITIES> 152,483
<BONDS> 188,121
0
0
<COMMON> 7,097
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<TOTAL-LIABILITY-AND-EQUITY> 712,940
<SALES> 199,294
<TOTAL-REVENUES> 199,294
<CGS> 165,643
<TOTAL-COSTS> 165,643
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