<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 April 30, 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.
<TABLE>
<CAPTION>
Class Outstanding at April 30, 2000
--------------------------------------- -----------------------------
<S> <C>
Common Stock, par value $0.50 per share 13,683,014
</TABLE>
<PAGE> 2
QUANEX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - April 30, 2000 and
October 31, 1999.............................................................. 1
Consolidated Statements of Income - Three and Six Months
Ended April 30, 2000 and 1999 ................................................ 2
Consolidated Statements of Cash Flow - Six months
Ended April 30, 2000 and 1999 ................................................ 3
Notes to Consolidated Financial Statements....................................... 4 - 8
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition .................................................. 9 - 14
Item 3: Quantitative and Qualitative Disclosure about Market
Risk................................................................................. 15
Part II. Other Information
Item 4: Submission of Matters to a Vote of Security Holders.................................. 16
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>
April 30, October 31,
2000 1999
--------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents .................................... $ 23,340 $ 25,874
Accounts and notes receivable, net ...................... 115,504 87,204
Inventories ............................................. 104,199 78,463
Deferred income taxes ................................... 11,742 19,146
Prepaid expenses ........................................ 2,224 1,700
--------- -----------
Total current assets ............................ 257,009 212,387
Property, plant and equipment ............................. 786,424 753,811
Less accumulated depreciation and amortization ............ (370,440) (346,970)
--------- -----------
Property, plant and equipment, net ........................ 415,984 406,841
Goodwill, net ............................................. 57,895 48,990
Other assets .............................................. 25,443 22,228
--------- -----------
$ 756,331 $ 690,446
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 85,085 $ 70,187
Accrued expenses ........................................ 51,948 54,305
Current maturities of long-term debt .................... 9,131 10,545
Income taxes payable .................................... 3,783 1,103
--------- -----------
Total current liabilities ....................... 149,947 136,140
Long-term debt ............................................ 236,874 179,121
Deferred pension credits .................................. 7,217 6,691
Deferred postretirement welfare benefits .................. 7,598 7,490
Deferred income taxes ..................................... 43,540 43,910
Other liabilities ......................................... 14,583 16,033
--------- -----------
Total liabilities ............................... 459,759 389,385
Stockholders' equity:
Preferred stock, no par value ........................... -- --
Common stock, $.50 par value ............................ 7,097 7,135
Common stock held by rabbi trust ........................ (3,337) (2,322)
Additional paid-in capital .............................. 110,689 110,317
Retained earnings ....................................... 193,423 186,867
Unearned compensation ................................... (171) (171)
Accumulated other comprehensive income .................. (710) (765)
--------- -----------
306,991 301,061
Less: Treasury Stock, at cost ...................... (10,419) --
--------- -----------
Total stockholders' equity ...................... 296,572 301,061
--------- -----------
$ 756,331 $ 690,446
========= ===========
</TABLE>
1
<PAGE> 4
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales ............................................. $ 243,271 $ 202,879 $ 442,565 $ 385,982
Cost and expenses:
Cost of sales ....................................... 200,655 160,147 366,298 308,882
Selling, general and administrative expense ......... 12,856 13,187 26,138 27,489
Depreciation and amortization ....................... 12,909 11,405 25,071 22,977
--------- --------- --------- ---------
Operating income ...................................... 16,851 18,140 25,058 26,634
Other income (expense):
Interest expense .................................... (4,020) (3,605) (7,350) (7,286)
Capitalized interest ................................ 647 475 1,191 821
Other, net .......................................... 307 31 1,309 825
--------- --------- --------- ---------
Income before income taxes and extraordinary gain ..... 13,785 15,041 20,208 20,994
Income tax expense .................................... (4,756) (5,264) (7,004) (7,348)
--------- --------- --------- ---------
Income before extraordinary gain ...................... 9,029 9,777 13,204 13,646
Extraordinary gain - early extinguishment of debt ..... 358 415 358 415
--------- --------- --------- ---------
Net income ............................................ $ 9,387 $ 10,192 $ 13,562 $ 14,061
========= ========= ========= =========
Earnings per common share:
Basic:
Income before extraordinary gain ................ $ 0.66 $ 0.69 $ 0.95 $ 0.96
Extraordinary gain .............................. 0.02 0.03 0.02 0.03
--------- --------- --------- ---------
Total basic net earnings ..................... $ 0.68 $ 0.72 $ 0.97 $ 0.99
========= ========= ========= =========
Diluted:
Income before extraordinary gain ................ $ 0.61 $ 0.64 $ 0.91 $ 0.93
Extraordinary gain .............................. 0.02 0.02 0.02 0.02
--------- --------- --------- ---------
Total diluted net earnings ................... $ 0.63 $ 0.66 $ 0.93 $ 0.95
========= ========= ========= =========
Weighted average shares outstanding:
Basic .............................................. 13,774 14,249 13,975 14,236
========= ========= ========= =========
Diluted ............................................ 16,118 16,818 16,406 16,846
========= ========= ========= =========
Common stock dividends per share ...................... $ 0.16 $ 0.16 $ 0.32 $ 0.32
</TABLE>
2
<PAGE> 5
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
--------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income ............................................................................ $ 13,562 $ 14,061
Adjustments to reconcile net income
to cash provided by operating activities:
Extraordinary gain on early extinguishment of debt ............................... (551) (638)
Depreciation and amortization .................................................... 25,340 23,254
Deferred income taxes ............................................................ 159 (589)
Deferred pension and postretirement benefits ..................................... 636 (79)
Changes in assets and liabilities net of effects from acquisitions and
dispositions:
Decrease (increase) in accounts and notes receivable ............................. (21,989) 4,969
Decrease (increase) in inventory ................................................. (11,004) 6,294
Increase (decrease) in accounts payable .......................................... 9,634 (6,729)
Increase (decrease) in accrued expenses .......................................... (6,330) 168
Other, net (including income tax refund) ......................................... 8,060 (1,638)
-------- --------
Cash provided by continuing operations ...................................... 17,517 39,073
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 .............................................. (24,770) (30,338)
Other, net ............................................................................ (1,727) (753)
-------- --------
Cash used by investment activities .......................................... (61,948) (31,091)
-------- --------
Cash used by operating and
investment activities .................................................... (44,431) 7,982
Financing activities:
Bank borrowings, net .................................................................. 69,473 11,108
Purchase of subordinated debentures ................................................... (9,586) (8,799)
Purchase of Quanex common stock ....................................................... (14,204) --
Common dividends paid ................................................................. (4,521) (4,560)
Issuance of common stock, net ......................................................... 619 1,283
Other, net ............................................................................ (51) (29)
-------- --------
Cash provided by financing activities ....................................... 41,730 (997)
Effect of exchange rate changes on cash and equivalents ................................. 167 (41)
-------- --------
Decrease in cash and equivalents ........................................................ (2,534) 6,944
Cash and equivalents at beginning of period ............................................. 25,874 26,279
-------- --------
Cash and equivalents at end of period ................................................... $ 23,340 $ 33,223
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest .............................................. $ 6,440 $ 6,963
Cash paid (received) during the period for income taxes................................ $ (2,753) $ 7,174
</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
<TABLE>
<CAPTION>
Inventories consist of the following: April 30, October 31,
2000 1999
--------- -----------
(In thousands)
<S> <C> <C>
Raw materials ............................................................... $ 30,105 $ 24,617
Finished goods and work in process........................................... 67,437 46,958
--------- -----------
97,542 71,575
Other........................................................................ 6,657 6,888
--------- -----------
$ 104,199 $ 78,463
========= ===========
The values of inventories in the consolidated balance sheets are based on the
following accounting methods:
LIFO............................................................................ $ 63,708 $ 58,968
FIFO............................................................................ 40,491 19,495
--------- -----------
$ 104,199 $ 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 April
30, 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 $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 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
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 Fabricated Products Division, which is part
of the Company's Engineered Products Group. Based on preliminary purchase
accounting, goodwill associated with Imperial is approximately $10 million.
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
April 30, 2000 April 30, 1999
-------------------------------------- ------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income before extra. gain $ 9,029 13,774 $ 0.66 $ 9,777 14,249 $ 0.69
Extra. Gain - early debt ext. 358 .02 415 .03
----------- ------ ----------- ------
Total basic net earnings $ 9,387 $ 0.68 $ 10,192 $ 0.72
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equiv.
arising from stock options -- 6 -- 5
Effect of common stock held
by rabbi trust -- 147 -- --
Effect of conversion of
subordinated debentures 813 2,191 950 2,564
DILUTED EPS
Income before extra. gain $ 9,842 16,118 $ 0.61 $ 10,727 16,818 $ 0.64
Extra. Gain - early debt ext. 358 .02 415 .02
----------- ------ ----------- ------
Total basic net earnings $ 10,200 $ 0.63 $ 11,142 $ 0.66
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended For the Six Months Ended
April 30, 2000 April 30, 1999
-------------------------------------- ------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------- ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income before extra. gain $ 13,204 13,975 $ 0.95 $ 13,646 14,236 $ 0.96
Extra. Gain - early debt ext. 358 .02 415 .03
----------- ------- ----------- ------
Total basic net earnings $ 13,562 $ 0.97 $ 14,061 $ 0.99
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equiv.
arising from stock options -- 29 -- 8
Effect of common stock held
by rabbi trust -- 136 -- --
Effect of conversion of
subordinated debentures 1,680 2,266 1,928 2,602
DILUTED EPS
Income before extra. gain $ 14,884 16,406 $ 0.91 $ 15,574 16,846 $ 0.93
Extra. Gain - early debt ext. 358 .02 415 .02
----------- ------- ----------- ------
Total basic net earnings $ 15,242 $ 0.93 $ 15,989 $ 0.95
</TABLE>
5
<PAGE> 8
5. Comprehensive Income
Total comprehensive income for the three and six months ended April 30, 2000 is
$9,579 and $13,617, respectively. Total comprehensive income for the three and
six months ended April 30, 1999 is $9,086 and $12,314, 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) April 30, October 31,
2000 1999
------------- -------------
<S> <C> <C>
Bank Agreement Revolver ........................................ $ 145,000 $ 75,000
Convertible subordinated debentures ............................ 63,337 73,720
Piper Impact Europe Credit Facility ............................ 19,180 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 .... 3,000 3,000
Other .......................................................... 7,458 7,213
------------- -------------
$ 246,005 $ 189,666
Less maturities due within one year included in current
liabilities .................................................... 9,131 10,545
------------- -------------
$ 236,874 $ 179,121
============= =============
</TABLE>
6
<PAGE> 9
7. Industry Segment Information
<TABLE>
<CAPTION>
Three Months Ended Engineered Aluminum Mill Engineered Corporate
April 30, 2000 Steel Bars Sheet Products(3) Products(4) and Other(1) Consolidated
------------------------------- -------------- ----------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies $ 87,514 $ 106,642 $ 49,115 $ -- $ 243,271
Intersegment(2) 691 5,206 -- (5,897) --
-------------- ----------------- -------------- -------------- --------------
Total $ 88,205 $ 111,848 $ 49,115 $ (5,897) $ 243,271
============== ================= ============== ============== ==============
Operating income (loss) $ 15,902 $ 6,582 $ (1,325) $ (4,308) $ 16,851
============== ================= ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Engineered Aluminum Mill Engineered Corporate
April 30, 2000 Steel Bars Sheet Products Products and Other(1) Consolidated
------------------------------- -------------- ----------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies $ 72,951 $ 72,005 $ 57,923 $ -- $ 202,879
Intersegment(2) 1,908 4,862 0 (6,770) --
-------------- ----------------- -------------- -------------- --------------
Total $ 74,859 $ 76,867 $ 57,923 $ (6,770) $ 202,879
============== ================= ============== ============== ==============
Operating income (loss) $ 14,314 $ 3,034 $ 3,059 $ (2,267) $ 18,140
============== ================= ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Engineered Aluminum Mill Engineered Corporate
April 30, 2000 Steel Bars Sheet Products(3) Products(4) and Other(1) Consolidated
------------------------------- -------------- ----------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies $ 165,829 $ 182,404 $ 94,332 $ -- $ 442,565
Intersegment(2) 2,118 9,164 -- (11,282) --
-------------- ----------------- -------------- -------------- --------------
Total $ 167,947 $ 191,568 $ 94,332 $ (11,282) $ 442,565
============== ================= ============== ============== ==============
Operating income (loss) $ 27,737 $ 8,785 $ (2,951) $ (8,513) $ 25,058
============== ================= ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Engineered Aluminum Mill Engineered Corporate
April 30, 1999 Steel Bars Sheet Products Products and Other(1) Consolidated
------------------------------- -------------- ----------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies $ 136,947 $ 138,449 $ 110,586 $ -- $ 385,982
Intersegment(2) 3,009 9,838 1 (12,848) --
-------------- ----------------- -------------- -------------- --------------
Total $ 139,956 $ 148,287 $ 110,587 $ (12,848) $ 385,982
============== ================= ============== ============== ==============
Operating income (loss) $ 25,617 $ 5,199 $ 2,837 $ (7,019) $ 26,634
============== ================= ============== ============== ==============
</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)
7
<PAGE> 10
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 six months
ended April 30, 2000, the Company repurchased 668,500 shares at a cost of $14.2
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 six months ended April 30, 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>
$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 $10.4 million at April 30, 2000 is reflected as a
reduction of stockholders' equity in the balance sheet.
9. Extraordinary Item
During the first six 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. An after tax extraordinary
gain of $358 thousand was recorded on this transaction. The principal amount of
bonds outstanding as of April 30, 2000 was $63,337,300.
8
<PAGE> 11
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 April 30, 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 APRIL 30, SIX MONTHS ENDED APRIL 30,
2000 1999 2000 1999
Dollar % of Dollar % of Dollar % of Dollar % of
Amount Sales Amount Sales Amount Sales Amount Sales
-------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 243.3 100% $ 202.9 100% $ 442.6 100% $ 386.0 100%
Cost of Sales 200.6 83 160.2 79 366.3 83 308.9 80
Sell., gen. and admin 12.9 5 13.2 6 26.1 6 27.5 7
Deprec. and amort. 12.9 5 11.4 6 25.1 5 23.0 6
-------- ----- -------- ----- -------- ----- -------- -----
Operating Income 16.9 7% 18.1 9% 25.1 6% 26.6 7%
Interest Expense (4.0) (2) (3.6) (2) (7.4) (2) (7.3) (2)
Capitalized Interest .6 0 .5 0 1.2 0 .8 0
Other, net .3 0 0 0 1.3 0 .8 0
Income tax expense (4.8) (2) (5.2) (2) (7.0) (1) (7.3) (1)
-------- ----- -------- ----- -------- ----- -------- -----
Income from continuing operations $ 9.0 3% $ 9.8 5% $ 13.2 3% $ 13.6 4%
======== ======== ======== ========
</TABLE>
The Company achieved record second quarter sales. However, the income from
continuing operations for the second quarter and the six-month period ending
April 30, 2000 was slightly lower than the same periods of fiscal 1999. The
Company's aluminum mill sheet products business posted record second quarter
sales and operating income. Also, the engineered steel bar business earned
higher operating income on significantly higher sales compared with the same
periods last year. These increases in earnings were offset by losses experienced
at Piper Impact in the engineered products business.
9
<PAGE> 12
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 Six Months Ended
April 30, April 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Engineered Steel Bars:
Net sales ............................ $ 88,205 $ 74,859 $ 167,947 $ 139,956
Operating income ..................... 15,902 14,314 27,737 25,617
Deprec. and amort. ................... 4,924 4,056 9,850 8,112
Identifiable assets .................. $ 262,832 $ 224,556 $ 262,832 $ 224,556
Aluminum Mill Sheet Products:(1)
Net sales ............................ $ 111,848 $ 76,867 $ 191,568 $ 148,287
Operating income ..................... 6,582 3,034 8,785 5,199
Deprec. and amort. ................... 3,454 3,128 6,795 6,258
Identifiable assets .................. $ 244,768 $ 194,393 $ 244,768 $ 194,393
Engineered Products:(2)
Net sales ............................ $ 49,115 $ 57,923 $ 94,332 $ 110,587
Operating income (loss) .............. (1,325) 3,059 (2,951) 2,837
Deprec. and amort. ................... 4,455 4,187 8,299 8,541
Identifiable assets .................. $ 219,045 $ 213,273 $ 219,045 $ 213,273
</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)
================================================================================
During the second quarter, the engineered steel bar business earned higher
operating income on significantly higher sales compared with the same period
during the prior year. Demand for MACSTEEL products is high and the backlog for
orders looks strong. However, 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 Phase IV expansion projects, completed late
last fiscal year, which boosted cold-finishing capacity at both of MACSTEEL's
engineered bar mills. Additionally, benefits amounting to $2.0 million were
recorded in the first quarter of fiscal 1999 resulting from a business
interruption insurance recovery and an electrode settlement.
The aluminum mill sheet business posted the best-ever second quarter
operating income with the record-setting volume and sales achieved during the
three month and six month periods ended April 30, 2000. The second quarter
results benefited from the acquisition of Nichols Aluminum - Golden completed on
January 25, 2000. With strong markets, especially markets for painted aluminum
sheet, solid backlogs and apparently successful integration of Nichols Aluminum
- Golden, we believe this division is well positioned for future growth and
another record year.
10
<PAGE> 13
The Engineered Products Group posted another quarter of loss. Lower sales
for aluminum air bag components and the higher costs associated with new
products development as well as cellular manufacturing implementation at Piper
Impact reversed the gains achieved from the Fabricated Products Division's solid
performance. 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 at Piper Impact, management
will continue to monitor its operations and evaluate various alternatives to
determine their impact on the financial results for the remainder of fiscal year
2000.
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 lower sales and
continuing losses at Piper Impact. 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 and Six months ended April 30, 2000 vs. 1999
Net Sales - Consolidated net sales for the three and six months ended April 30,
2000, were $243.3 and $442.6 million, respectively, representing an increase of
$40.4 million, or 20%, and $56.6 million or 15%, when compared to consolidated
net sales for the same periods in 1999. Increased net sales in the engineered
steel bar and aluminum mill sheet businesses were partially offset by lower net
sales in the Company's engineered products business.
Net sales from the Company's engineered steel bar business for the three
and six months ended April 30, 2000, were $88.2 million and $167.9 million,
respectively, representing an increase of $13.3 million, or 18%, and $28.0
million or 20%, 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 six months ended April 30, 2000, were $111.8 and $191.6 million,
respectively, representing an increase of $35.0 million, or 46%, and $43.3
million, or 29%, 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
six months ended April 30, 2000, were $49.1 and $94.3 million, respectively,
representing a decrease of $8.8 million, or 15%, and $16.3 million, or 15%, when
compared to the same periods last year. The decrease was largely due to the
reduced demand for aluminum automotive air bag components at the Piper Impact
facilities, partially offset by increased sales of value-added products at the
Fabricated Products division, including the contribution from Imperial, which
was acquired in April 2000.
11
<PAGE> 14
Operating income - Consolidated operating income for the three and six
months ended April 30, 2000, was $16.9 and $25.1 million, respectively,
representing a decrease of $1.3 million, or 7%, and $1.6 million, or 6%, when
compared to the same periods last year. Although the aluminum mill sheet
products and the engineered steel bar businesses had higher operating income,
the losses experienced at the engineered products business, primarily resulting
from lower sales and higher costs associated with development and tooling of new
products at Piper Impact, contributed to these decreases in operating income.
Operating income from the Company's engineered steel bar business for the
three and six months ended April 30, 2000, was $15.9 and $27.7 million,
respectively, representing an increase of $1.6 million, or 11%, and $2.1
million, or 8%, when compared to the same periods last year. These increases
were due to higher net sales from increased volume and more value-added product
sales; however these sales were at a lower spread than the same prior year
periods due largely to pricing pressures. Depreciation expense for the three and
six months ended April 30, 2000 was also higher than the same prior year periods
due to the recent completion of certain capital products.
Operating income from the Company's aluminum mill sheet products business
for the three and six months ended April 30, 2000, was $6.6 and $8.8 million,
respectively, representing an increase of $3.5 million, or 117%, and $3.6
million, or 69%, 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 losses from the Company's engineered products business for the
three and six months ended April 30, 2000, were $1.3 and $3.0 million,
respectively, compared to an operating income of $3.1 and $2.8 million for the
same prior year periods. The declining results were largely due to the losses
from significantly lower net sales realized at the Piper Impact facilities,
partially offset by increased operating earnings at the Fabricated Products
division. Fabricated Products division achieved increased operating income for
the three and six months ended April 30, 2000 as compared to the same prior year
periods as a result of selling a larger proportion of value-added, higher margin
products as well as some benefit realized from the acquisition of Imperial.
In addition to the three operating segments mentioned above, operating
expenses for corporate and other, for the three and six months ended April 30,
2000, were $4.3 and $8.5 million, respectively, compared to $2.3 and $7.0
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 declined by $0.3 million, or
3%, and $1.4 million or 5%, respectively, for the three and six months ended
April 30, 2000, as compared to the same periods of last year. These declines
were largely due to the fact that the first quarter of 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 fiscal 2000.
In addition, in the second quarter of fiscal 2000, the Company recorded an
adjustment to allowance for doubtful accounts to recognize changes in the credit
exposure of certain customers.
12
<PAGE> 15
Depreciation and amortization increased by $1.5 million, or 13% and $2.1
million, or 9%, respectively, for the three and six months ended April 30, 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 $0.4 million or 12% for the three months
ended April 30, 2000 as compared to the same fiscal period of 1999. The increase
was primarily due to the additional borrowings made during the period to finance
the acquisitions. (See Note 3 to the financial statements)
Capitalized interest increased by $172 and $370 thousand for the three and
six months ended April 30, 2000, as compared to the same periods of 1999 due to
the Phase V expansion project at MACSTEEL which is currently underway.
Other, net increased $276 and $484 thousand for the three and six months
ended April 30, 2000, as compared to the same periods of 1999 primarily as a
result of increased investment income.
Net income was $9.4 and $13.6 million for the three and six months ended
April 30, 2000, compared to $10.2 and $14.1 million for the same periods of
1999. The decrease was due largely to lower operating income and increased
interest expense offset partially by higher capitalized interest and increased
investment 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"). At April 30, 2000, the Company had $145
million borrowed under the Bank Agreement. This represents a $70 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 668,500 shares of the
Company's common stock in connection with the Stock Repurchase Program announced
in December 1999 (see Note 8 to the financial statements). There have been no
significant changes to the terms of the Company's debt structure during the six
month period ended April 30, 2000. (See Note 6 to the financial statements for
detail regarding the outstanding borrowings under the Company's various
facilities)
At April 30, 2000, the Company had commitments of approximately $5.3
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 six 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 dividends.
13
<PAGE> 16
Operating Activities
Cash provided by operating activities during the six months ended April 30, 2000
decreased by $21.6 million compared to the same six 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 six months ended April 30,
2000 was $61.9 million compared to $31.1 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 Products, Inc. totaling
$35.5 million, net of cash acquired. Capital expenditures and other investment
activities decreased $4.6 million in the six month period ended April 30, 2000
as compared to the same period of 1999. This decrease was primarily caused by a
decrease in capital expenditures at the Company's aluminum mill sheet products
business. The Company estimates that fiscal 2000 capital expenditures will total
approximately $55 to $60 million.
Financing Activities
Net cash provided by financing activities for the six months ended April 30,
2000 was $41.7 million, compared to cash used of $1.0 million for the same
prior year period. The Company borrowed $69.5 million during the first six
months of fiscal 2000, compared to $11.1 million during the same period last
year. During the six months ended April 30, 2000, the Company paid $14.2
million to repurchase 668,500 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
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.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") introduced a
new currency, the Euro, 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.
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<PAGE> 17
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 April 30, 2000, there was an unrealized
gain related to the interest rate swap agreements amounting to $0.6 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. As of
April 30, 2000, the Company had booked an additional $1.9 million gain to
stockholder's equity for a total gain of $2.3 million. A hypothetical 10%
increase in the April 30, 2000 exchange rate would result in a positive
adjustment to stockholders' equity of approximately $1.1 million. In contrast, a
hypothetical 10% decrease would result in a negative adjustment to stockholder's
equity of approximately $1.4 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.
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. Firm
price commitments associated with these futures contracts do not extend beyond
November 2001. 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 April 30, 2000, the Company had open futures contracts at fair
values of $23.4 million and an unrealized loss of $801 thousand on such
contracts. At October 31, 1999 and April 30, 2000, these contracts covered a
notional volume of 7,716,170 and 34,722,772 pounds of aluminum, respectively.
Other than the items mentioned above, there were no other material
quantitative or qualitative changes during the first six months of fiscal 2000
in the Company's market risk sensitive instruments.
15
<PAGE> 18
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On February 23, 2000, the Company held its Annual Meeting of Stockholders (the
"Annual Meeting").
At the Annual Meeting, Vernon E. Oechsle and Donald G. Barger, Jr. were
elected as directors for a three-year term. The following sets forth the number
of shares that voted for and for which votes were withheld of each of such
persons:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
Vernon E. Oechsle 12,819,058 321,451
Donald G. Barger 12,821,603 318,906
</TABLE>
In addition, at the Annual Meeting, the stockholders of the Company
approved a proposal to amend the Company's 1996 Employee Stock Option and
Restricted Stock Plan to increase the number of shares of the Company's Common
Stock, with respect to which option and restricted stock awards may be granted
under the plan, by 600,000 to allow for the grant of additional options and
restricted stock awards under the plan. The proposal was approved with
10,943,951 votes cast for approval, 2,118,562 votes cast against, and 77,973
abstentions.
16
<PAGE> 19
Item 6 - Exhibits and Reports on Form 8-K.
Exhibit 10.1 First Amendment to Nichols 401(k) Savings Plan, dated
February 23, 2000.
Exhibit 10.2 Second Amendment to Nichols 401(k) Savings Plan, dated April
16, 2000.
Exhibit 10.3 Second [sic] Amendment to the Quanex Corporation Hourly
Bargaining Unit Employee Savings Plan, dated January 25,
2000.
Exhibit 27 Financial Data Schedule - April 30, 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 June 5, 2000
-------------------
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<PAGE> 21
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------ -----------------------
<S> <C>
Exhibit 10.1 First Amendment to Nichols 401(k) Savings Plan, dated
February 23, 2000.
Exhibit 10.2 Second Amendment to Nichols 401(k) Savings Plan, dated April
16, 2000.
Exhibit 10.3 Second [sic] Amendment to the Quanex Corporation Hourly
Bargaining Unit Employee Savings Plan, dated January 25,
2000.
Exhibit 27 Financial Data Schedule - April 30, 2000.
</TABLE>
