SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 West Loop South, Suite 1500, Houston, Texas 77027
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 961-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1996
- --------------------------------------- -------------------------------
Common Stock, par value $0.50 per share 13,526,891
QUANEX CORPORATION
INDEX
Page No.
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - July 31, 1996 and
October 31, 1995 .................................. 1
Consolidated Statements of Income - Three and Nine
Months Ended July 31, 1996 and 1995................ 2
Consolidated Statements of Cash Flow - Nine Months
Ended July 31, 1996 and 1995 ...................... 3
Notes to Consolidated Financial Statements ............ 4-6
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition .................... 7-12
Part II. Other Information
Item 5: Other Information ..................................... 13
Item 6: Exhibits and Reports on Form 8-K ...................... 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
July 31, October 31,
1996 1995
---------- ----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and equivalents ............................$ 31,533 $ 45,213
Accounts and notes receivable, net .............. 89,214 104,240
Inventories ..................................... 94,104 84,676
Deferred income taxes ........................... 6,779 6,848
Prepaid expenses ................................ 1,061 1,398
---------- ----------
Total current assets .................... 222,691 242,375
Property, plant and equipment ..................... 548,324 525,325
Less accumulated depreciation and amortization ....(293,488) (266,761)
---------- ----------
Property, plant and equipment, net ................ 254,836 258,564
Goodwill, net ..................................... 31,349 32,064
Other assets ...................................... 16,929 13,744
---------- ----------
$525,805 $546,747
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................... $ - $ 10,000
Accounts payable ................................ 84,438 91,730
Income taxes payable ............................ 3,127 423
Accrued expenses ................................ 37,578 42,087
Current maturities of long-term debt ............ - 20,968
---------- ----------
Total current liabilities ............... 125,143 165,208
Long-term debt .................................... 118,195 111,894
Deferred pension credits .......................... 16,110 16,656
Deferred postretirement welfare benefits .......... 54,833 53,185
Deferred income taxes ............................. 27,461 29,278
---------- ----------
Total liabilities ....................... 341,742 376,221
Stockholders' equity:
Common stock, $.50 par value .................... 6,763 6,743
Additional paid-in capital ...................... 93,165 92,406
Retained earnings ............................... 87,144 74,426
Unearned compensation ........................... (277) (317)
Adjustment for minimum pension liability ........ (2,732) (2,732)
---------- ----------
Total stockholders' equity .............. 184,063 170,526
---------- ----------
$525,805 $546,747
========== ==========
(1)
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
July 31 July 31
---------------- ----------------
1996 1995 1996 1995
------- ------- ------ -------
(Unaudited)
Net sales............................ $225,463 $228,172 $632,576 $662,405
Cost and expenses:
Cost of sales...................... 193,109 198,016 551,209 579,805
Selling, general and
administrative expense.......... 15,422 11,130 39,586 35,996
------- ------- ------- -------
Operating income..................... 16,932 19,026 41,781 46,604
Other income (expense):
Interest expense................... (2,313) (2,522) (7,453) (7,672)
Capitalized interest............... 160 - 287 1,867
Other, net......................... 988 52 2,151 714
Income before income taxes and ------- ------- ------- -------
extraordinary charge............ 15,767 16,556 36,766 41,513
Income tax expense................... (6,622) (6,953) (15,442) (17,435)
------- ------- ------- -------
Income before extraordinary charge... 9,145 9,603 21,324 24,078
Extraordinary charge - early
extinguishment of debt.......... - - (2,522) (2,021)
------- ------- ------- -------
Net income........................... 9,145 9,603 18,802 22,057
Preferred dividends.................. - (990) - (3,957)
Net income attributable to ------- ------- ------- -------
common stockholders............. $ 9,145 $ 8,613 $ 18,802 $ 18,100
======= ======= ======= =======
Earnings per common share:
Primary before
extraordinary charge........... $ 0.67 $ 0.63 $ 1.57 $ 1.48
Extraordinary charge.............. - - (0.19) (0.15)
------- ------- ------- -------
Total primary net earnings..... $ 0.67 $ 0.63 $ 1.38 $ 1.33
======= ======= ======= =======
Fully diluted before
extraordinary charge........... $ 0.61 $ 0.59 $ 1.47 $ 1.48
Extraordinary charge.............. - - (0.15) (0.15)
------- ------- ------- -------
Total assuming full dilution... $ 0.61 $ 0.59 $ 1.32 $ 1.33
======= ======= ======= =======
Weighted average shares outstanding:
Primary........................... 13,659 13,642 13,630 13,598
======= ======= ======= =======
Assuming full dilution............ 16,355 16,382 16,326 13,598
======= ======= ======= =======
(2)
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Nine Months Ended
July 31,
--------------------
1996 1995
------ ------
(Unaudited)
Operating activities:
Net income..............................................$18,802 $22,057
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization........................ 27,800 24,672
Deferred income taxes................................ (1,817) 3,953
Deferred pension costs............................... (546) (921)
Deferred postretirement welfare benefits............. 1,648 1,936
------ ------
45,887 51,697
Changes in assets and liabilities net of effects from
acquisitions and dispositions:
Decrease (increase) in accounts and notes receivable 15,283 (12,336)
Increase in inventory............................... (9,428) (8,074)
Increase (decrease) in accounts payable............. (7,292) 3,940
Increase (decrease) in accrued expenses............. (4,509) 3,693
Other, net.......................................... 3,110 (765)
------ ------
Cash provided by operating activities.......... 43,051 38,155
Investment activities:
Capital expenditures, net of retirements............... (22,715) (21,052)
Decrease in short-term investments..................... - 54,070
Other, net............................................. (4,084) (672)
------ ------
Cash provided (used) by investment activities.. (26,799) 32,346
Cash provided by operating and ------ ------
investment activities..................... 16,252 70,501
Financing activities:
Notes payable borrowings (repayments).................. (10,000) 10,000
Purchase of Senior Notes............................... (44,667) (59,500)
Bank borrowings (repayments), net. .................... 30,000 -
Common dividends paid.................................. (6,084) (5,908)
Preferred dividends paid............................... - (4,451)
Other, net............................................. 819 1,043
------ ------
Cash used by financing activities.............. (29,932) (58,816)
Decrease in cash and equivalents......................... (13,680) 11,685
Cash and equivalents at beginning of period.............. 45,213 34,041
------ ------
Cash and equivalents at end of period.................... $31,533 $45,726
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................. $ 9,941 $ 6,518
Income taxes............................................. $12,651 $12,209
(3)
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
- ----------------------
The interim consolidated financial statements of Quanex Corporation and
subsidiaries 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 1995 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
1996 classifications.
2. Inventories
- --------------
Inventories consist of the following: July 31, October 31,
1996 1995
------- -------
(In thousands)
Inventories valued at lower of cost
(principally LIFO method) or market:
Raw materials .................................. $29,498 $27,655
Finished goods and work in process ............. 55,195 48,071
------- -------
84,693 75,726
Other ............................................. 9,411 8,950
-------- -------
$94,104 $84,676
======== =======
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $19 million at July 31, 1996 and $24
million at October 31, 1995
3. Long-Term Debt and Financing Arrangements
- --------------------------------------------
On June 30, 1995, the Company exercised its right under the terms of its
Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for
an aggregate of $84,920,000 of its 6.88% Convertible Subordinated Debentures due
June 30, 2007 ("Debentures"). Interest is payable semi-annually on June 30 and
December 31 of each year. The Debentures are subject to mandatory annual sinking
fund payments sufficient to redeem 25% of the Debentures issued on each of June
30, 2005 and June 30, 2006, to retire a total of 50% of the Debentures before
maturity. The Debentures are subordinate to all senior indebtedness of the
Company and are convertible, at the option of the holder, into shares of the
Company's common stock at a conversion price of $31.50 per share.
In December 1995, the Company acquired all of its outstanding 10.77% Senior
Notes for a purchase price equal to 107.5% of the principal amount plus accrued
interest. The acquisition and related expenses resulted in an after-tax
extraordinary charge of approximately $2.5 million ($4.3 million before tax) in
the first quarter of 1996.
On July 23, 1996, the Company replaced its $75 million Revolving Credit and
Letter of Credit Agreement with an unsecured $250 million Revolving Credit and
Term Loan Agreement ("Bank Agreement"). The Bank Agreement consists of a
revolving line of credit ("Revolver") and up to two term loans not to exceed
$100 million in the aggregate and repayable at a time selected by the Company to
be no later than July 23, 2004. Any term loan elections reduce the amount
available under the Revolver. The Bank Agreement expires July 23, 2001, and
provides for up to $25 million for standby letters of credit, limited to the
undrawn amount available under the Revolver. All borrowings under the Revolver
bear interest, at the option of the Company, at either a) the prime rate or the
federal funds rate plus one percent, whichever is higher, or b) a Eurodollar
based rate. At July 31, 1996, the Company had $30.0 million outstanding under
the Revolver and no term loans outstanding.
(4)
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Industry Segment Information
- --------------------------------
Quanex is principally a specialty metals producer. The Company's operations
primarily consist of four segments: hot rolled steel bars, cold finished steel
bars, steel tubes, and aluminum products.
Cold Corporate
Three Months Ended Hot Rolled Finished Steel Aluminum and Consoli-
July 31, 1996 Steel Bars Steel Bars Tubes Products Other(1) dated
------------------ ---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Units shipped:
To unaffiliated companies 129.2 Tons 45.1 Tons 21.2 Tons 70,293 Lbs.
Intersegment............ 5.6 - - -
------- ------- ------- -------
Total.................... 134.8 Tons 45.1 Tons 21.2 Tons 70,293 Lbs.
======= ======= ======= =======
Net Sales:
To unaffiliated companies $70,142 $39,179 $26,704 $89,438 - $225,463
Intersegment(2)......... 3,028 - - - $(3,028) -
------- ------- ------- ------- ------- -------
Total.................... $73,170 $39,179 $26,704 $89,438 $(3,028) $225,463
======= ======= ======= ======= ======= =======
Operating income (loss).. $ 9,324 $ 2,404 $ 597 $ 7,807 $(3,200) $ 16,932
======= ======= ======= ======= ======= =======
Cold Corporate
Three Months Ended Hot Rolled Finished Steel Aluminum and Consoli-
July 31, 1995 Steel Bars Steel Bars Tubes Products Other(1) dated
------------------ ---------- ---------- ---------- ---------- ---------- ----------
Units shipped:
To unaffiliated companies 120.8 Tons 44.1 Tons 21.5 Tons 59,824 Lbs.
Intersegment............ 5.1 - - -
------- ------- ------- -------
Total.................... 125.9 Tons 44.1 Tons 21.5 Tons 59,824 Lbs.
======= ======= ======= =======
Net Sales:
To unaffiliated companies $70,244 $41,198 $27,478 $89,252 - $228,172
Intersegment(2)......... 2,982 - -1 - $(2,981) -
------- ------- ------- ------- ------- -------
Total.................... $73,226 $41,198 $27,477 $89,252 $(2,981) $228,172
======= ======= ======= ======= ======= =======
Operating income (loss).. $11,980 $ 2,685 $ 1,212 $ 6,264 $(3,115) $ 19,026
======= ======= ======= ======= ======= =======
Cold Corporate
Nine Months Ended Hot Rolled Finished Steel Aluminum and Consoli-
July 31, 1996 Steel Bars Steel Bars Tubes Products Other(1) dated
---------------- ---------- ---------- ---------- ---------- ---------- ----------
Units shipped:
To unaffiliated companies 360.1 Tons 132.9 Tons 68.3 Tons 179,759 Lbs.
Intersegment............ 19.7 - - -
------- ------- ------- -------
Total.................... 379.8 Tons 132.9 Tons 68.3 Tons 179,759 Lbs.
======= ======= ======= =======
Net Sales:
To unaffiliated companies $196,625 $120,829 $88,515 $226,607 - $632,576
Intersegment(2)......... 11,186 - - - $(11,186) -
------- ------- ------- ------- ------- -------
Total.................... $207,811 $120,829 $88,515 $226,607 $(11,186) $632,576
======= ======= ======= ======= ======= =======
Operating income (loss).. $ 26,999 $ 7,876 $ 4,934 $ 13,224 $(11,252) $ 41,781
======= ======= ======= ======= ======= =======
Cold Corporate
Nine Months Ended Hot Rolled Finished Steel Aluminum and Consoli-
July 31, 1995 Steel Bars Steel Bars Tubes Products Other(1) dated
---------------- ---------- ---------- ---------- ---------- ---------- ----------
Units shipped:
To unaffiliated companies 352.9 Tons 145.1 Tons 69.5 Tons 169,333 Lbs.
Intersegment............ 17.7 - - -
------- ------- ------- -------
Total.................... 370.6 Tons 145.1 Tons 69.5 Tons 169,333 Lbs.
======= ======= ======= =======
Net Sales:
To unaffiliated companies $196,895 $134,152 $87,814 $243,544 - $662,405
Intersegment(2)......... 10,158 - - - $(10,158) -
------- ------- ------- ------- ------- -------
Total.................... $207,053 $134,152 $87,814 $243,544 $(10,158) $662,405
======= ======= ======= ======= ======= =======
Operating income (loss).. $ 29,014 $ 9,424 $ 6,076 $ 15,711 $(13,621) $ 46,604
======= ======= ======= ======= ======= =======
(1) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
(5)
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Subsequent Event
- -------------------
On August 9, 1996, the Company completed the acquisition of substantially all of
the assets of Piper Impact, Inc. ("Piper"). Piper is a manufacturer of
custom-designed, impact-extruded aluminum and steel parts for the
transportation, electronics and defense markets. Piper Impact's net sales for
the years ended December 31, 1995 and 1994, were $106.9 million and $95.3
million, respectively. Piper Impact has production facilities in New Albany,
Mississippi and Park City, Utah. Piper Impact assets, net of various
liabilities, were acquired for approximately $130 million in cash, cash
equivalents, and notes. To finance the acquisition, the Company entered into an
unsecured revolving credit/term loan facility with a group of five banks which
provides for the borrowing of up to $250 million. This agreement replaced the
Company's $75 million revolving credit facility (See Note 3).
(6)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition
RESULTS OF OPERATIONS
The Company classifies its operations into four business segments: hot
rolled steel bars, cold finished steel bars, steel tubes and aluminum products.
The Company's products are marketed to the industrial machinery and capital
equipment industries, the transportation industry, the energy processing
industry and the home building and remodeling industries.
A record-breaking performance by the Company's aluminum products group
contributed to record third quarter earnings attributable to common shareholders
of $9.1 million, or 67 cents per common share, on net sales of $225.5 million.
These results compare with prior year third quarter earnings attributable to
common shareholders of $8.6 million, or 63 cents per common share, on net sales
of $228.2 million. With higher volumes and lower conversion costs at its
aluminum mini-mill, the Company's aluminum products group capitalized on
improved building products markets and stronger overall demand to achieve its
best-ever quarterly operating earnings and shipping volumes during the three
month period ended July 31, 1996.
The Company's hot rolled steel bar business experienced lower operating
income for the third quarter of fiscal 1996 compared to the record third quarter
of fiscal 1995. The results for the third quarter of 1995 reflect unusually high
surcharges for molybdenum, chrome and scrap, which did not apply in the third
quarter of 1996. Also, operating income was impacted in the third quarter of
1996 by increased depreciation related to the completed Phase II expansion
project, an extended summer maintenance shutdown taken during the third quarter
of 1996 for preliminary work on the Phase III expansion project, and by higher
accruals to the allowance for doubtful accounts.
The Company's cold finished steel bar business results for the third
quarter were affected by lower average selling prices as compared to the third
quarter of fiscal 1995. Slightly higher volume, resulting from improved market
share, helped to offset lower selling prices.
The Company's steel tube business results for the third quarter were
affected by higher conversion costs as compared to the third quarter of fiscal
1995. The third quarter is seasonally the weakest quarter in the Company's steel
tube business.
The Company's aluminum products business was affected in the third
quarter by improved demand and lower conversion costs. The aluminum business
achieved record operating income in the third quarter of fiscal 1996.
Year-to-date results have been affected by weaker margins between selling prices
and raw material costs. These margins, referred to herein as "price spreads",
are a key financial performance indicator in the aluminum products business.
The Company currently expects that overall business levels for the
fourth quarter of fiscal 1996 should be similar to those experienced during the
same period of fiscal 1995. However, the acquisition of Piper Impact (see note
5) will affect the fourth quarter and is expected to result in higher sales and
be accretive to earnings. Improved financial results will be dependent upon,
among other things, the strength of the economy, improvements in the markets
which the Company serves and improvement in the price spreads of aluminum
products.
During the first quarter of fiscal 1996, the Company acquired its
remaining 10.77% Senior Notes for a purchase price equal to 107.5% of the
principal amount plus accrued interest. The purchase resulted in an
extraordinary charge of $2.5 million.
(7)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
The following table sets forth selected operating data for the Company's four
businesses:
Three Months Ended Nine Months Ended
July 31, July 31,
1996 1995 1996 1995
(In thousands)
Hot Rolled Steel Bars:
Units shipped (Tons)............ 134.8 125.9 379.8 370.6
Net Sales....................... $ 73,170 $ 73,226 $207,811 $207,053
Operating income................ $ 9,324 $ 11,980 $ 26,999 $ 29,014
Depreciation and amortization... $ 4,590 $ 3,870 $ 13,770 $ 11,610
Identifiable assets............. $164,209 $167,424 $164,209 $167,424
Cold Finished Steel Bars:
Units shipped (Tons)............ 45.1 44.1 132.9 145.1
Net Sales....................... $ 39,179 $ 41,198 $120,829 $134,152
Operating income................ $ 2,404 $ 2,685 $ 7,876 $ 9,424
Depreciation and amortization... $ 400 $ 346 $ 1,239 $ 1,039
Identifiable assets............. $ 54,957 $ 49,705 $ 54,957 $ 49,705
Steel Tubes:
Units shipped (Tons)............ 21.2 21.5 68.3 69.5
Net Sales....................... $ 26,704 $ 27,477 $ 88,515 $ 87,814
Operating income................ $ 597 $ 1,212 $ 4,934 $ 6,076
Depreciation and amortization... $ 552 $ 490 $ 1,730 $ 1,525
Identifiable assets............. $ 41,675 $ 40,850 $ 41,675 $ 40,850
Aluminum Products:
Units shipped (Pounds).......... 70,293 59,824 179,759 169,333
Net Sales....................... $ 89,438 $ 89,252 $226,607 $243,544
Operating income................ $ 7,807 $ 6,264 $ 13,224 $ 15,711
Depreciation and amortization... $ 3,621 $ 3,199 $ 10,558 $ 9,916
Identifiable assets............. $225,143 $242,816 $225,143 $242,816
Consolidated net sales for the three and nine months ended July 31,
1996, were $225.5 million and $632.6 million, respectively, representing
decreases of $2.7 million, or 1%, and $29.8 million, or 5%, respectively, when
compared to the same periods last year. The reduction in net sales was primarily
attributable to lower selling prices compared to fiscal 1995.
Net sales from the Company's hot rolled steel bar business for the
three and nine months ended July 31, 1996, were $73.2 million and $207.8
million, respectively, representing a decrease of $56 thousand and an increase
of $758 thousand, respectively, when compared to the same periods last year.
Average selling price for the third quarter declined approximately 7% which is
attributable to unusually high molybdenum, chrome and scrap surcharges in the
prior year period. The sales decrease resulting from lower average selling
prices was offset by higher volume resulting from improved market share and the
additional capacity added during fiscal year 1995.
Net sales from the Company's cold finished steel bar business for the
three and nine months ended July 31, 1996, were $39.2 million and $120.8
million, respectively, representing decreases of $2.0 million, or 5%, and $13.3
million, or 10%, respectively, when compared to the same periods last year. The
decrease is principally attributable to lower selling prices for the three month
period and a combination of lower volume and lower selling prices for the nine
month period. Cold finished steel bar business remained below the all-time
record levels experienced during fiscal 1995.
(8)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Net sales from the Company's steel tube business for the three and nine
months ended July 31, 1996, were $26.7 million and $88.5 million, respectively,
representing a decrease of $773 thousand and an increase of $701 thousand,
respectively, when compared to the same periods last year. Typically the third
fiscal quarter is seasonally the weakest.
Net sales from the Company's aluminum products business for the three
and nine months ended July 31, 1996, were $89.4 million and $226.6 million,
respectively, representing an increase of $186 thousand and a decrease of $16.9
million, or 7%, respectively, when compared to the same periods last year.
Average selling price for the third quarter of fiscal 1996 was down
approximately 15% as compared to the third quarter of fiscal 1995. Year-to-date
average selling prices decreased by approximately 12% as compared to the same
prior year period. Record volume in the third quarter offset the lower selling
prices.
Consolidated operating income for the three and nine months ended July
31, 1996, was $16.9 million and $41.8 million, respectively, representing
decreases of $2.1 million, or 11%, and $4.8 million, or 10%, respectively, when
compared to the same periods last year.
Operating income from the Company's hot rolled steel bar business for
the three and nine months ended July 31, 1996, was $9.3 million and $27.0
million, respectively, representing decreases of $2.7 million, or 22%, and $2.0
million, or 7%, respectively, when compared to the same periods last year. The
decreases resulted principally from unusually high surcharges last year for
molybdenum, chrome and scrap, which did not apply in the third quarter of 1996.
Also, operating income was impacted in the third quarter of 1996 by increased
depreciation related to the completed Phase II expansion project, an extended
summer maintenance shutdown taken during the third quarter of 1996 for
preliminary work on the Phase III expansion project, and by higher accruals to
the allowance for doubtful accounts..
Operating income from the Company's cold finished steel bar business
for the three and nine months ended July 31, 1996, was $2.4 million and $7.9
million, respectively, representing decreases of $281 thousand, or 10%, and $1.5
million, or 16%, respectively, when compared to the same periods last year. The
decrease is attributable to lower volume and net sales. However, 1995
represented a record for third quarter operating income.
Operating income from the Company's steel tube business for the three
and nine months ended July 31, 1996, was $597 thousand and $4.9 million,
respectively, representing decreases of $615 thousand and $1.1 million,
respectively, when compared to the same periods last year. The decrease resulted
primarily from higher conversion costs and slightly lower volume. The quarter
and year-to-date were also marginally affected by start-up costs at the
NitroSteel division which is a small division acquired by the Company in early
fiscal 1995.
Operating income from the Company's aluminum products business for the
three and nine months ended July 31, 1996, was $7.8 million and $13.2 million,
respectively, representing an increase of $1.5 million, or 25%, and a decrease
of $2.5 million, or 16%, respectively, when compared to the same periods last
year. Higher volume and lower conversion costs contributed to a record third
quarter in fiscal 1996. Year-to-date results have been negatively affected by
lower price spreads.
(9)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Selling, general and administrative expenses increased by $4.3 million,
or 39%, and $3.6 million, or 10%, respectively, for the three and nine months
ended July 31, 1996, as compared to the same periods of 1995. The increase is
primarily due to higher accruals to the allowance for doubtful accounts in the
hot rolled steel bar and the aluminum products businesses.
Interest expense was relatively flat as compared to the same periods of
1995. Increased interest related to the Company's $84.9 million of 6.88%
Convertible Subordinated Debentures that were issued in June 1995 in exchange
for the Company's outstanding preferred stock was offset by the early
extinguishment of a portion of the Company's senior debt in the first quarter of
fiscal 1995 and the early extinguishment of the remaining senior debt in the
first fiscal quarter of 1996.
Capitalized interest increased by $160 thousand and decreased by $1.6
million, respectively, as compared to the quarter and year-to-date of fiscal
1995. The increase in the quarter reflects ongoing construction related to the
Phase III MacSteel Expansion Project. The year-to-date decrease is associated
with the completion in March 1995 of the Phase II MacSteel Ultra Clean Steel
Program.
Net income attributable to common shareholders for the three and nine
months ended July 31, 1996, was $9.1 million and $18.8 million, respectively, as
compared to $8.6 million and $18.1 million, respectively, for the same 1995
periods, after deducting preferred dividends of $990 thousand from the three
month period and $4.0 million from the nine month period of fiscal 1995.
Included in the nine months ended July 31, 1996 and 1995, were extraordinary
charges of $2.5 million and $2.0 million, respectively, relating to early
extinguishment of debt. Included in "Other, net" for the nine months ended July
31, 1996, was a $2.3 million pretax gain which represents the final recovery of
a business interruption claim related to a fire at the Company's Lincolnshire,
Illinois facility that occurred in 1993. Also included in "Other, net" for the
nine months ended July 31, 1996, was $1.5 million resulting from a loss on
abandonment of idle assets. Included in "Other, net" for the nine months ended
July 31, 1995 was a $1.1 million pretax gain related to a life insurance policy
on a deceased former officer. Also included in "Other, net" was investment
income of $605 thousand and $1.2 million, respectively, for the three and nine
months ended July 31, 1996, as compared to investment income of $416 thousand
and $336 thousand, respectively, for the same 1995 periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash on hand, cash flow
from operations, and borrowings under an unsecured $250 million Revolving Credit
and Term Loan Agreement ("Bank Agreement"). The Bank Agreement replaced the
Company's former $75 million Revolving Credit and Letter of Credit Agreement,
effective July 23, 1996. The Bank Agreement consists of a revolving line of
credit ("Revolver") and up to two term loans not to exceed $100 million in the
aggregate and repayable at a date selected by the Company to be no later than
July 23, 2004. Any term loan elections reduce the amount available under the
Revolver. The Bank Agreement expires July 23, 2001, and provides for up to $25
million for standby letters of credit, limited to the undrawn amount available
under the Revolver. All borrowings under the Revolver bear interest, at the
option of the Company, at either a) the prime rate or the federal funds rate
plus one percent, whichever is higher, or b) a Eurodollar based rate. The Bank
Agreement contains customary affirmative and negative covenants and requirements
to maintain a minimum consolidated tangible net worth, as defined. The Bank
Agreement limits the payment of dividends and certain restricted investments.
Under the Bank Agreement, at July 31, 1996, there were $30.0 million of
outstanding borrowings. Additional borrowings under the Bank Agreement will be
used to fund the acquisition of Piper Impact (See Note 5).
(10)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
In December 1995, the Company acquired all of its outstanding 10.77%
Senior Notes for a purchase price equal to 107.5% of the principal amount plus
accrued interest. The acquisition and related expenses resulted in an after-tax
extraordinary charge of approximately $2.5 million in the first quarter of 1996.
The acquisition was funded with cash and additional borrowings under the Bank
Agreement.
On June 30, 1995, the Company exercised its right under the terms of
the Preferred Stock to exchange such stock for $84,920,000 principal amount of
Debentures. Interest on the Debentures is payable semi-annually on June 30 and
December 31 of each year. The Debentures are subject to mandatory annual sinking
fund payments sufficient to redeem 25% of the Debentures issued on each of June
30, 2005 and June 30, 2006, to retire a total of 50% of the Debentures before
maturity. The Debentures are subordinate to all senior indebtedness of the
Company and are convertible, at the option of the holder, into shares of the
Company's common stock at a conversion price of $31.50 per share.
At July 31, 1996, the Company had commitments of $15 million for the
purchase or construction of capital assets. The Company's $52 million (not
including approximately $9 million in capitalized interest) Phase II MacSteel
Ultra Clean Steel Program, which increased capacity by approximately 50,000
tons, was completed in fiscal 1995. In December 1995, the Company's Board of
Directors approved Phase III of the MacSteel expansion project. Phase III is
designed to improve melting and casting capabilities and is expected to increase
capacity by approximately 70,000 tons. The project also includes significant
upgrades to pollution control systems to ensure compliance with new EPA
standards under the Clean Air Act. Phase III is expected to cost approximately
$60 million and should be completed during fiscal year 1998. The Company plans
to fund this capital investment through cash flow from operations and, if
necessary, additional borrowings.
On August 9, 1996, the Company completed the acquisition of
substantially all of the assets of Piper Impact, Inc. ("Piper"). Piper's assets,
net of various liabilities, were acquired for approximately $130 million in
cash, cash equivalents, and notes. To finance the acquisition, the Company
entered into an unsecured revolving credit/term loan facility with a group of
five banks which provides for the borrowing of up to $250 million. This
agreement replaced the Company's $75 million revolving credit facility (See Note
3). Subsequent to the acquisition, the Company's Board of Directors approved
additional capital expenditures at Piper totalling approximately $55 million.
These expenditures will provide the capacity needed to supply major new customer
programs phasing in over the next two years.
In management's opinion, the Company currently has sufficient funds and
adequate financial sources available to meet its anticipated liquidity needs.
Management believes that cash flow from operations, cash balances and available
borrowings, including the above referenced anticipated increase in the revolving
credit facility, should be sufficient for the foreseeable future to finance
anticipated working capital requirements, capital expenditures, debt service
requirements and dividends.
Operating Activities
Cash provided by operating activities during the nine months ended July
31, 1996, was $43.1 million as compared to $38.2 million during the nine months
ended July 31, 1995. The increase was principally due to lower working capital
requirements.
Investment Activities
Net cash used by investment activities during the nine months ended
July 31, 1996, was $26.8 million as compared to net cash provided by investment
activities of $32.3 million for the same 1995 period. The decrease in cash
provided by investment activities was principally due to decreases in short-term
investments during the nine months ended July 31, 1995. Capital expenditures,
net of retirements, for the nine months ended July 31, 1996, were $22.7 million
as compared to $21.1 million for the same 1995 period. The Company estimates
that fiscal 1996 capital expenditures will approximate $50 to $60 million,
exclusive of the Piper assets purchased.
(11)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Financing Activities
Cash used by financing activities for the nine months ended July 31,
1996, was $29.9 million, principally consisting of $44.7 million for the early
extinguishment of long-term debt, a $10.0 million reduction in notes payable and
$6.1 million in common dividends. These uses of funds were partly offset by
long-term bank borrowings under the Revolver of $30.0 million.
(12)
Item 5 - Other Information.
- ---------------------------
None
Item 6 - Exhibits and Reports on Form 8-K.
11 Statement re computation of per share earnings.
27 Financial Data Schedule.
A current report on Form 8-K, dated August 9, 1996, was
filed by the Company on August 21, 1996, reporting under
Item 2 thereof the acquisition of Piper Impact, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUANEX CORPORATION
/s/ Viren M. Parikh
-------------------
Viren M. Parikh
Controller (Chief Accounting Officer)
Date September 12, 1996
- ------------------------
(13)
EXHIBIT 11
QUANEX CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
July 31, July 31,
----------------- -----------------
1996 1995 1996 1995
------ ------ ------ ------
(Unaudited) (Unaudited)
Income before extraordinary charge................$ 9,145 $ 9,603 $ 21,324 $ 24,078
Extraordinary charge - early extinguishment of debt - - (2,522) (2,021)
------ ------ ------ ------
Net income........................................ 9,145 9,603 18,802 22,057
Preferred dividend requirements................... - (990) - (3,957)
Net income attributable to ------ ------ ------ ------
common stockholders.............................$ 9,145 $ 8,613 $ 18,802 $ 18,100
====== ====== ====== ======
Weighted average shares
outstanding-primary............................. 13,659 13,642 13,630 13,598
====== ====== ====== ======
Earnings per common share:
Primary:
Earnings before extraordinary charge........... 0.67 0.63 1.57 1.48
Extraordinary charge........................... - - (0.19) (0.15)
------ ------ ------ ------
Earnings per common share.................... 0.67 0.63 1.38 1.33
====== ====== ====== ======
Income before extraordinary charge................$ 9,145 $ 9,603 $ 21,324 $ 24,078
Interest on 6.88% convertible subordinated
debentures and amortization of related issuance
costs, net of applicable income taxes.......... 892 302 2,676 302
------ ------ ------ ------
Adjusted income before extraordinary charge 10,037 9,905 24,000 24,380
Extraordinary charge - early extinguishment of debt - - (2,522) (2,021)
------ ------ ------ ------
Adjusted net income after extraordinary charge.... 10,037 9,905 21,478 22,359
====== ====== ====== ======
Weighted average shares
outstanding-primary............................. 13,659 13,642 13,630 13,598
Effect of common stock equivalents
arising from stock options...................... - 2 - 39
Preferred stock assumed converted
to common stock................................. - 2,738 - 2,738
Subordinated debentures assumed converted
to common stock................................. 2,696 - 2,696 -
Weighted average shares ------ ------ ------ ------
outstanding-fully diluted....................... 16,355 16,382 16,326 16,375
====== ====== ====== ======
Earnings per common share:
Assuming full dilution:
Earnings before extraordinary charge........... 0.61 0.59 1.47 1.49
Extraordinary charge........................... - - (0.15) (0.12)
------ ------ ------ ------
Earnings per common share.................... 0.61 0.59 1.32 1.37
====== ====== ====== ======
5
1,000
9-MOS
OCT-31-1996
NOV-01-1995
JUL-31-1996
31,533
0
89,214
0
94,104
222,691
548,324
293,488
525,805
125,143
118,195
0
0
6,763
177,300
525,805
632,576
632,576
551,209
551,209
0
0
7,453
36,766
15,442
21,324
0
2,522
0
18,802
1.380
1.320
