1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to___________.
Commission File Number 1-5725
QUANEX CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1872178
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 West Loop South, Suite 1500, Houston, Texas 77027
------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 961-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1998
- --------------------------------------- -------------------------------
Common Stock, par value $0.50 per share 14,107,046
2
QUANEX CORPORATION
INDEX
Page No.
Part I. Financial Information: --------
Item 1: Financial Statements
Consolidated Balance Sheets - January 31, 1998 and
October 31, 1997............................................................. 1
Consolidated Statements of Income - Three months
Ended January 31, 1998 and 1997 ............................................. 2
Consolidated Statements of Cash Flow - Three months
Ended January 31, 1998 and 1997 ............................................. 3
Notes to Consolidated Financial Statements...................................... 4-8
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition .......................................... 9-15
Part II. Other Information
Item 6: Exhibits and Reports on Form 8-K................................................ 16
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
January 31, October 31,
1998 1997
----------- -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and equivalents ....................... $ 43,080 $ 26,851
Accounts and notes receivable, net ......... 70,294 80,089
Inventories ................................ 66,665 73,035
Deferred income taxes ...................... 7,628 5,601
Prepaid expenses ........................... 2,532 1,320
--------- ---------
Total current assets ............... 190,199 186,896
Property, plant and equipment ................ 651,201 642,854
Less accumulated depreciation
and amortization............................ (273,406) (263,783)
--------- ---------
Property, plant and equipment, net ........... 377,795 379,071
Goodwill, net ................................ 95,705 91,496
Net assets of discontinued operations ........ -- 13,554
Other assets ................................. 15,774 14,688
--------- ---------
$ 679,473 $ 685,705
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... 65,321 71,317
Income taxes payable ....................... 7,565 8,503
Accrued expenses ........................... 38,199 43,208
Current maturities of long-term debt ....... 9,586 11,050
--------- ---------
Total current liabilities .......... 120,671 134,078
Long-term debt ............................... 191,482 201,858
Deferred pension credits ..................... 6,610 6,627
Deferred postretirement welfare benefits ..... 6,863 6,835
Deferred income taxes ........................ 51,197 48,111
Other liabilities ............................ 19,248 19,373
--------- ---------
Total liabilities .................. 396,071 416,882
Stockholders' equity:
Common stock, $.50 par value ............... 7,054 7,025
Additional paid-in capital ................. 106,681 105,146
Retained earnings .......................... 170,171 156,528
Foreign currency translation adjustment .... (206) 422
Adjustment for minimum pension liability ... (298) (298)
--------- ---------
Total stockholders' equity ......... 283,402 268,823
--------- ---------
$ 679,473 $ 685,705
========= =========
(1)
4
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
January 31,
------------------
1998 1997
----- ----
(Unaudited)
Net sales ................................... $ 180,982 $ 167,955
Cost and expenses:
Cost of sales ............................. 154,282 138,497
Selling, general and administrative
expense.................................... 11,340 10,814
Depreciation and amortization ............. 10,567 9,613
--------- ---------
Operating income ............................ 4,793 9,031
Other income (expense):
Interest expense .......................... (3,744) (4,851)
Capitalized interest ...................... 1,477 618
Other, net ................................ 1,001 391
--------- ---------
Income from continuing operations
before income taxes .................... 3,527 5,189
Income tax expense .......................... (1,234) (1,817)
--------- ---------
Income from continuing operations ........... 2,293 3,372
Income from discontinued operations, net of
income taxes ........................... -- 954
Gain on sale of discontinued operations, net
of income taxes ........................ 13,606 --
--------- ---------
Net income .................................. $ 15,899 $ 4,326
========= =========
Earnings per common share:
Basic:
Continuing operations ................. $ 0.16 $ 0.25
Discontinued operations ............... -- 0.07
Gain on sale of discontinued
operations............................. 0.97 --
--------- ---------
Total basic net earnings ........... $ 1.13 $ 0.32
========= =========
Diluted:
Continuing operations ................. $ 0.16 $ 0.24
Discontinued operations ............... -- 0.07
Gain on sale of discontinued
operations............................. 0.95 --
--------- ---------
Total diluted net earnings ......... $ 1.11 $ 0.31
========= =========
Weighted average shares outstanding:
Basic .................................... 14,085 13,646
========= =========
Diluted .................................. 14,284 13,932
========= =========
(2)
5
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Three Months Ended
January 31,
----------------------
1998 1997
-------- -------
(Unaudited)
Operating activities:
Net income ................................................................ $ 15,899 $ 4,326
Adjustments to reconcile net income
to cash provided by operating activities:
Income from discontinued operations .................................. -- (954)
Gain on sale of discontinued operations .............................. (13,606) --
Depreciation and amortization ........................................ 10,708 9,763
Deferred income taxes ................................................ 3,086 (1,271)
Deferred pension costs ............................................... (17) 142
Deferred postretirement welfare benefits ............................. 28 140
-------- --------
16,098 12,146
Changes in assets and liabilities net of effects from acquisitions and
dispositions:
Decrease in accounts and notes receivable ............................ 10,812 6,933
Decrease in inventory ................................................ 3,615 1,310
Decrease in accounts payable ......................................... (5,579) (7,543)
Decrease in accrued expenses ......................................... (8,786) (9,133)
Other, net ........................................................... (4,358) 514
-------- --------
Cash provided by continuing operations .......................... 11,802 4,227
Cash used in discontinued operations ............................ -- (9,976)
-------- --------
Cash provided (used) by operating activities .................... 11,802 (5,749)
Investment activities:
Proceeds from the sale of discontinued operations ......................... 31,434 --
Capital expenditures of continuing operations,
net of retirements ................................................... (13,774) (17,819)
Capital expenditures of discontinued operations ........................... -- (504)
Other, net ................................................................ (1,297) (5,780)
-------- --------
Cash provided by (used in) investment activities ................ 16,363 (24,103)
Cash provided (used) by operating and -------- --------
investment activities ........................................ 28,165 (29,852)
Financing activities:
Bank borrowings (repayments), net ......................................... (11,244) 30,000
Common dividends paid ..................................................... (2,256) (2,051)
Issuance of common stock under benefit plans .............................. 1,564 2,289
Other, net ................................................................ -- 831
-------- --------
Cash provided (used) in financing activities .................... (11,936) 31,069
Increase in cash and equivalents ............................................ 16,229 1,217
Cash and equivalents at beginning of period ................................. 26,851 35,962
-------- --------
Cash and equivalents at end of period ....................................... $ 43,080 $ 37,179
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .................................................................... $ 5,183 $ 6,448
Income taxes ................................................................ $ 1,245 $ 1,140
(3)
6
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 1997 Annual Report on
Form 10-K, as amended, which is incorporated by reference. Certain amounts
for prior periods have been reclassified in the accompanying consolidated
financial statements to conform to 1998 classifications.
2. Inventories
Inventories consist of the following: January 31, October 31,
1998 1997
--------------------------
(In thousands)
Raw materials ................................... $21,262 $19,432
Finished goods and work in process .............. 38,970 47,739
------- -------
60,232 67,171
Other ........................................... 6,433 5,864
------- -------
$66,665 $73,035
======= =======
The values of inventories in the consolidated balance sheets are based on the
following accounting methods:
LIFO .............................. $44,985 $51,517
FIFO .............................. 21,680 21,518
------- -------
$66,665 $73,035
======= =======
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $19 million at January 31, 1998, and
$16 million at October 31, 1997.
3. Acquisition
On October 29, 1997, the Company, through its Dutch subsidiary, Piper Impact
Europe B.V. ("Piper Europe"), acquired the net assets of Advanced Metal
Forming C.V., a Dutch limited partnership, for approximately $30 million.
Based on preliminary purchase accounting, the goodwill associated with Piper
Europe is approximately NLG 26 million or $13 million as of January 31, 1998.
Piper Europe produces aluminum impact extrusions and precision steel
stampings for the automotive and electronics industries in Europe and North
America. Piper Europe employs approximately 260 people, and its manufacturing
facilities are located near Zwolle in The Netherlands.
(4)
7
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Long-Term Debt and Financing Arrangements
The Company has an unsecured $250 million Revolving Credit and Term Loan
Agreement ("Bank Agreement"). The Bank Agreement consists of a revolving line
of credit ("Revolver"). In July 1997, the term loan provisions of the Bank
Agreement expired. The Bank Agreement expires July 23, 2002, 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
January 31, 1998, the Company had $90 million outstanding under the Revolver.
On October 28, 1997, Piper Europe executed a stand-alone secured credit
facility ("Credit Facility") providing up to 50 million Dutch Guilders ("NLG").
At January 31, 1998, 1 NLG was equal to 0.485 U.S. dollars. The Credit Facility
consists of a Roll-Over Term Loan, a Medium Term Loan and an Overdraft
Facility. The Roll-Over Term Loan provides NLG 15 million for loan periods of
1, 2, 3, 6, or 12 months with repayment of outstanding borrowings on October
27, 2002. Interest is payable on the repayment date at the Amsterdam Interbank
Offering Rate (AIBOR) plus 90 basis points. In the case of a loan period of
twelve months, interest is payable six months after the beginning of the loan
period and on the repayment date. The Medium Term Loan provides NLG 15 million
at 6.375% payable quarterly in arrears from March 1, 1998, with quarterly
repayments of principal in equal amounts of NLG 500 thousand commencing January
1, 1999 through April 1, 2006. The Overdraft Facility provides an aggregate
amount of NLG 20 million to cover overdrafts or up to NLG 15 million of loans
for a period of one year, subject to annual renewal. Overdrafts bear interest
at the Bank's published rate for overdraft facilities plus 1% per annum. Loans
under the Overdraft Facility bear interest at AIBOR plus 45 to 55 basis points.
The terms of Overdraft Facility loans are selected by Piper Europe to be a
period of 1, 2, 3, 6, or 12 months. Interest on overdrafts are paid quarterly
in arrears. Interest on loans under the Overdraft Facility is payable on the
repayment date, however, in the case of a loan period of twelve months,
interest is payable six months after the beginning of the loan period and on
the repayment date. At January 31, 1998, Piper Europe had NLG 32.3 million
outstanding under the Credit Facility.
(5)
8
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Discontinued Operations
In April 1997, the Company completed the sale of its LaSalle Steel Company
("LaSalle") subsidiary. The Company recorded an after tax gain on the sale of
$36.3 million in the second quarter of fiscal 1997. In the first quarter of
1998, an additional after tax gain of $833 thousand was recorded as a result
of post-closing adjustments. LaSalle's results of operations have been
reclassified as discontinued operations in the prior period and prior periods
have been restated. For business segment reporting purposes, LaSalle's data
was previously classified as "Cold Finished Steel Bars".
In December 1997, the Company completed the sale of its tubing operations,
comprised of Michigan Seamless Tube, Gulf States Tube and the Tube Group
Administrative Office ("Tubing Operations"). The sale was effective November
1, 1997. The Company recorded a net gain on the sale of $12.8 million in the
first quarter of fiscal 1998. Included in the gain is an accrual for the
Company's best estimate of potential environmental clean-up costs at one of
the discontinued operating facilities. Results of these operations have been
reclassified as discontinued operations in the prior period and prior periods
have been restated. For business segment reporting purposes, Tubing
Operations were previously classified as "Steel Tubes".
Net sales and income from discontinued operations are as follows:
January 31,
1997
(In Thousands)
Net sales.................................. $ 65,227
========
Income before income taxes................. 1,467
Income tax expense......................... (513)
--------
Income from discontinued operations........ $ 954
========
October 31,
1997
(In Thousands)
Net Assets of Discontinued Operations
-------------------------------------
Current assets............................. $ 24,388
Property, plant and equipment, net......... 17,357
Other assets............................... 2,784
Current liabilities........................ (11,241)
Deferred pension credits................... (4,373)
Deferred postretirement welfare benefits... (22,406)
Deferred income taxes...................... 6,718
Adjustment for minimum pension liability... 327
--------
Net assets of discontinued operations... $ 13,554
========
(6)
9
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128- "Earnings per Share" ("SFAS 128") which
establishes new standards for computing, presenting and disclosing earnings per
share ("EPS"). This statement requires presentation of EPS as basic and diluted
earnings and restatement of all prior-period EPS data presented herein.
The following tables present information necessary to calculate basic and
diluted earnings per share per FAS 128 for the periods indicated (in thousands
except per share amounts):
For the Quarter Ended
January 31, 1998
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
BASIC EPS
Income from continuing operations $ 2,293 14,085 $ 0.16
Income from discontinued operations - -
Gain on sale of discont. operations 13,606 0.97
------- ------
Total basic net earnings $15,899 $ 1.13
======= ======
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equivalents
arising from stock options - 199
DILUTED EPS
Income from continuing operations $ 2,293 14,284 $ 0.16
Income from discontinued operations - -
Gain on sale of discont. operations 13,606 0.95
------- ------
Total diluted net earnings $15,899 $ 1.11
======= ======
For the Quarter Ended
January 31, 1997
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
BASIC EPS
Income from continuing operations $ 3,372 13,646 $ 0.25
Income from discontinued operations 954 0.07
Gain on sale of discont. operations - -
------- ------
Total basic net earnings $ 4,326 $ 0.32
======= ======
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equivalents
arising from stock options - 286
DILUTED EPS
Income from continuing operations $ 3,372 13,932 $ 0.24
Income from discontinued operations 954 0.07
Gain on sale of discont. operations - -
------- ------
Total diluted net earnings $ 4,326 $ 0.31
======= ======
Conversion of the Company's 6.88% convertible subordinated debentures into
common stock was not considered in the computation of diluted EPS because it
was antidilutive for the periods presented above.
(7)
10
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Industry Segment Information
Quanex is principally a specialized metals and metal products
producer. The Company's continuing operations primarily consists of
two segments: engineered steel bars and aluminum products.
Corporate
Three Months Ended Engineered Aluminum and
January 31, 1998 Steel Bars Products Other(1) Consolidated
--------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies $ 79,197 $ 101,785 $ -- $ 180,982
Intersegment(2).......... 894 -- (894) --
--------- --------- --------- ---------
Total .................... $ 80,091 $ 101,785 $ (894) $ 180,982
========= ========= ========= =========
Operating income (loss) .. $ 11,759 $ (2,641) $ (4,325) $ 4,793
========= ========= ========= =========
Corporate
Three Months Ended Engineered Aluminum and
January 31, 1997 Steel Bars Products Other(1) Consolidated
--------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies $ 68,195 $ 99,760 $ -- $ 167,955
Intersegment(2).......... 4,292 -- (4,292)(3) --
--------- --------- --------- ---------
Total .................... $ 72,487 $ 99,760 $ (4,292) $ 167,955
========= ========= ========= =========
Operating income (loss) .. $ 9,640 $ 3,214 $ (3,823) $ 9,031
========= ========= ========= =========
(1)Included in "Corporate and Other" are intersegment eliminations and corporate
expenses.
(2)Intersegment sales are conducted on an arm's-length basis.
(3)Includes intersegment sales of $3.6 million to discontinued operations.
(8)
11
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition
RESULTS OF OPERATIONS
The Company classifies its operations into two business segments:
engineered steel bars and aluminum products. The Company's products are
marketed to the transportation industry, the commercial and residential
building and remodeling industries and the industrial machinery and capital
equipment industries.
In April 1997, the Company completed the sale of its LaSalle Steel
Company ("LaSalle") subsidiary. LaSalle's results of operations have been
classified as discontinued operations and prior periods have been restated. For
business segment reporting purposes, LaSalle's data was previously classified
as "Cold Finished Steel Bars".
In October 1997, the Company, through its Dutch subsidiary, Piper
Europe, purchased the net assets of Advanced Metal Forming C.V., a Dutch
limited partnership, for approximately $30 million. The Company's balance sheet
as of October 31, 1997 includes Piper Europe.
In December 1997, the Company completed the sale of its tubing
operations ("Tubing Operations"), comprised of Michigan Seamless Tube, Gulf
States Tube and the Tube Group Administrative Office. The sale was effective
November 1, 1997. Results of these operations have been reclassified as
discontinued operations in the prior period and prior periods have been
restated. For business segment reporting purposes, Tubing Operations were
previously classified as "Steel Tubes". Two small divisions, Heat Treat
Division and Nitro Steel Division, which were previously included with this
segment, were retained by the Company and are now included in the engineered
steel bars segment.
The Company's engineered steel bars business reflected record earnings
and sales for the first quarter of 1998. These results were due primarily to
higher sales volume, but also reflect the benefits realized from the Company's
capital expenditure programs, which have allowed the Company to increase
production, enhance quality and manage manufacturing costs.
The Company's aluminum products business experienced an operating loss
in the first quarter of 1998 despite higher sales than the same period last
year. The Nichols Aluminum division was affected by seasonal and
weather-related slowdowns in the homebuilding business and weakened margins
with the short-term entry of can stock producers into it's markets. These
margins, referred to herein as "price spreads", are a key financial performance
indicator in the aluminum products business. Piper Impact continued to
experience high start-up costs during the first quarter of 1998 at its new
plant due to vendor delays in the delivery of key new equipment.
The Company currently expects that overall business levels for the
remainder of fiscal 1998 should be similar to those experienced during 1997.
Start-up costs at Piper Impact's new plant are expected to improve with the use
of key new equipment. Aluminum products pricing pressures and weaker margins,
if they continue, could impact operating results for the remainder of fiscal
1998. The sale of LaSalle in April 1997 and the Tubing Operations in December
1997 will affect income for the remainder of fiscal 1998 by the difference
between the amount LaSalle and the Tubing Operations would have earned and the
reduction in interest expense as a result of the repayment of debt with the net
proceeds from the sale. Domestic and global market factors will impact the
Company and any slowdown in the U.S. economy could affect demand and pricing
for many of the Company's products. Improved financial results will be
dependent upon, among other things, whether the continued strength of the
economy can be sustained, improvements in the markets which the Company serves
and improvement in the price spreads of aluminum products.
(9)
12
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 two
business segments:
Three Months Ended
January 31,
------------------
1998 1997
-------- ------
(In thousands)
Engineered Steel Bars:
Net Sales....................... $ 80,091 $ 72,487
Operating income................ $ 11,759 $ 9,640
Depreciation and amortization... $ 3,377 $ 3,520
Identifiable assets............. $196,607 $173,735
Aluminum Products:
Net Sales....................... $101,785 $ 99,760
Operating income................ $ (2,641) $ 3,214
Depreciation and amortization... $ 7,156 $ 6,070
Identifiable assets............. $431,965 $405,124
Consolidated net sales for the three months ended January 31, 1998,
were $181.0 million representing an increase of $13.0 million, or 8%, when
compared to consolidated net sales for the same period last year. The
improvement reflects improved sales volume in the Company's engineered steel
bar business, sales by Piper Europe and $3.6 million of sales to discontinued
operations reflected as inter-segment sales in the first quarter of last year.
Net sales from the Company's engineered steel bar business for the
three months ended January 31, 1998, were $80.1 million representing an
increase of $7.6 million, or 10%, when compared to the same period last year.
The improvements were primarily due to sales volume increases of 9% for the
three months ended January 31, 1998, as compared to the same prior year period.
The engineered steel bar business sales volume increase is principally due to
the continued market strength in the durable goods market, particularly
transportation and capital goods, and increased production capacity resulting
from capital expansion programs.
Net sales from the Company's aluminum products business for the three
months ended January 31, 1998, were $101.8 million representing an increase of
$2.0 million, or 2%, when compared to the same period last year. Included in
the net sales for the first quarter 1998 are $5.9 million of sales by Piper
Europe.
Consolidated operating income for the three months ended January 31,
1998 was $4.8 million representing a decrease of $4.2 million, or 47%, when
compared to the same period last year. The decrease was due to lower operating
earnings from the aluminum products business partly offset by improved earnings
in the engineered steel bar business.
Operating income from the Company's engineered steel bar business for
the three months ended January 31, 1998, was $11.8 million representing an
increase of $2.1 million, or 22%, when compared to the same period last year.
This improvement was attributable to higher sales due to increased capacity and
strong demand.
(10)
13
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Operating loss from the Company's aluminum products business for the
three months ended January 31, 1998, was $2.6 million compared to operating
income of $3.2 million for the same period last year. The earnings decline in
this segment is a result of weakened margins at Nichols Aluminum due to the
short-term entry of can stock producers into it's markets as well as continued
start-up costs, including higher labor and training expenses and the temporary
use of less efficient production processes, at Piper Impact's new plant in New
Albany, Mississippi.
Selling, general and administrative expenses increased by $526,000, or
5%, for the three months ended January 31, 1998, as compared to the same period
of last year. These changes principally reflect the inclusion of Piper Europe
in 1998.
Depreciation and amortization increased by $954,000, or 10%, for the
three months ended January 31, 1998 as compared to the same period of last
year. The increase is principally due to increased depreciation at Piper Impact
and the inclusion of Piper Europe.
Interest expense decreased by $1.1 million for the three months ended
January 31, 1998, as compared to the same period of 1997 as a result of
reducing bank borrowings with proceeds received from the sale of LaSalle and
the Tubing Operations.
Capitalized interest increased by $859,000 for the three months ended
January 31, 1998, as compared to the same period of 1997 primarily due to Phase
III of the MACSTEEL expansion project and the construction of the new Piper
Impact plant in New Albany, Mississippi.
"Other, net" increased $610,000 for the three months ended January 31,
1998, as compared to the same period of 1997 primarily as a result of increased
investment income.
Income from continuing operations declined $1.1 million, or 32%, as
compared to the same period of 1997. The decline was principally due to reduced
operating earnings from the Company's aluminum products segment.
Net income was $15.9 million for the three months ended January 31,
1998, compared to $4.3 million for the same period of 1997. Included in net
income for the first quarter 1998 was $13.6 million of gain on the sale of
discontinued operations, net of taxes.
(11)
14
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash on hand, cash flow from
operations, and borrowings under an unsecured $250 million Revolving Credit and
Term Loan Agreement ("Bank Agreement"). The Bank Agreement consists of a
revolving line of credit ("Revolver"). In July 1997, the term loan provisions
of the Bank Agreement expired. The maturity date of the Bank Agreement,
however, was extended by one year to July 23, 2002. The Bank Agreement also
provides for up to $25 million for 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 (i) the Prime Rate or the
Federal Funds Rate plus one percent, whichever is higher, or (ii) a
Eurodollar-based Rate. In the fourth quarter of fiscal 1996, the Company
entered into interest rate swap agreements, which effectively converted $100
million of its variable rate debt under the Bank Agreement to fixed rate. Under
these agreements, payments are made each quarter based on a fixed rate ($50
million at 7.025%, and $50 million at 6.755%) and payments are received each
quarter on a LIBOR based variable rate (5.625% at January 31, 1998).
Differentials to be paid or received under the agreements are recognized as
interest expense. Payments under the swap agreements are tied to the interest
periods for the borrowings under the Bank Agreement. The swap agreements mature
July 29, 2003. 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 January 31, 1998,
there were $90 million of outstanding Revolver borrowings.
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.
On April 18, 1997, the Company completed the sale of LaSalle for
approximately $65 million in cash. The proceeds were used to pay down the
Company's Revolver.
(12)
15
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
On October 29, 1997, the Company acquired, through its Dutch subsidiary,
Piper Europe, substantially all of the assets of Advance Metal Forming C.V., a
Dutch limited partnership, for approximately $30 million. The acquisition was
financed with existing cash and bank borrowings of 35 million Dutch Guilders.
Piper Europe's primary source of funds is a stand-alone secured credit facility
("Credit Facility") providing up to 50 million Dutch Guilders ("NLG"). At
January 31, 1998, 1 NLG was equal to 0.485 dollars. The Credit Facility
consists of a Roll-Over Term Loan, a Medium Term Loan and an Overdraft
Facility. The Roll-Over Term Loan provides NLG 15 million for loan periods of
1, 2, 3, 6, or 12 months with repayment of outstanding borrowings on October
27, 2002. Interest is payable on the repayment date at the Amsterdam Interbank
Offering Rate (AIBOR) plus 90 basis points. In the case of a loan period of
twelve months, interest is payable six months after the beginning of the loan
period and on the repayment date. The Medium Term Loan provides NLG 15 million
at 6.375% payable quarterly in arrears from March 1, 1998, with quarterly
repayments of principal in equal amounts of NLG 500 thousand commencing January
1, 1999 through April 1, 2006. The Overdraft Facility provides an aggregate
amount of NLG 20 million to cover overdrafts or up to NLG 15 million of loans
for a period of one year, subject to annual renewal. Overdrafts bear interest
at the Bank's published rate for overdraft facilities plus 1% per annum. Loans
under the Overdraft Facility bear interest at AIBOR plus 45 to 55 basis points.
The terms of Overdraft Facility loans are selected by Piper Europe to be a
period of 1, 2, 3, 6, or 12 months. Interest on overdrafts are paid quarterly
in arrears. At January 31, 1998, Piper Europe had NLG 32.3 million outstanding
under the Credit Facility.
On December 3, 1997, the Company completed the sale of its Tubing
Operations for approximately $30 million in cash. The proceeds were used to
improve the Company's debt structure and for investment in the Company's
value-added businesses.
On December 22, 1997, the Company renewed its letter of intent to
purchase Decatur Aluminum Corp., a Decatur, Alabama based aluminum sheet
manufacturer. The acquisition of Decatur Aluminum is subject to certain
conditions, including the receipt of necessary governmental approvals, due
diligence and the negotiation of a definitive agreement.
At January 31, 1998, the Company had commitments of $19 million for the
purchase or construction of capital assets, primarily relating to the Company's
continued expansions at MacSteel and Piper. The Company plans to fund these
capital expenditures through cash flow from operations and, if necessary,
additional borrowings.
The Company believes that it has sufficient funds and adequate
financial sources available to meet its anticipated liquidity needs. The
Company also believes that cash flow from operations, cash balances and
available borrowings will be sufficient for the foreseeable future to finance
anticipated working capital requirements, capital expenditures, debt service
requirements, environmental expenditures and dividends.
Operating Activities
Cash provided by operating activities during the three months ended
January 31, 1998, was $11.8 million as compared to a cash use of $5.7 million
during the three months ended January 31, 1997. The increase was principally
due to lower working capital requirements from continuing operations, and the
elimination of cash used by discontinued operations.
(13)
16
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Investment Activities
Net cash provided by investment activities during the three months
ended January 31, 1998, was $16.4 million as compared to cash used in
investment activities of $24.1 million for the same 1997 period. The increase
in cash provided by investment activities was principally due to proceeds from
the sale of discontinued operations, decreased capital expenditures and the
non-recurring payment of the remaining notes related to the Piper acquisition
in the 1997 period. The Company estimates that fiscal 1998 capital expenditures
will be approximately $70 to $80 million.
Financing Activities
Cash used in financing activities for the three months ended January
31, 1998, was $11.9 million, primarily consisting of $10.0 million of
repayments of bank borrowings. Cash provided in financing activities for the
three months ended January 31, 1997, was $31.1 million, principally consisting
of additional bank borrowings.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is effective for the Company's year ending October 31, 1999.
SFAS No. 130 establishes standards for the reporting and displaying of
comprehensive income and its components. The Company will be analyzing SFAS No.
130 during 1998 to determine what, if any, additional disclosures will be
required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which is effective for the
Company's year ended October 31, 1999. This statement establishes standards for
the reporting of information about operating segments. The Company will be
analyzing SFAS No. 131 during 1998 to determine what, if any, additional
disclosures will be required.
In February 1998, the FASB issued SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits", which is
effective for fiscal years beginning after December 15, 1997. This statement
defines new disclosure requirements for pension and other postretirement
benefits in an effort to facilitate financial analysis by adding useful
information and deleting disclosures that the FASB considers no longer useful.
The Company will be analyzing SFAS No.132 during 1998 to determine what
additional disclosures will be required.
(14)
17
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
PRIVATE SECURITIES LITIGATION REFORM ACT
Certain forward looking information contained herein is being provided in
accordance with the provisions of the Private Securities Litigation Reform Act.
Such information is subject to certain assumptions and beliefs based on current
information known to the Company and is subject to factors that could result in
actual results differing materially from those anticipated in the forward
looking statements contained in this report. Such factors include domestic and
international economic activity, prevailing prices of steel and aluminum scrap
and other raw material costs, interest rates, the continuation of
countervailing import duties on certain of the Company's competitors,
construction delays, market conditions for the Company's customers, any
material changes in purchases by the principal customers of AMSCO and Piper
Impact, environmental regulations and changes in estimates of costs for known
environmental remediation projects and situations, world-wide political
stability and economic growth, the Company's successful implementation of its
internal operating plans, performance issues with key customers, suppliers and
subcontractors, and regulatory changes and legal proceedings. Accordingly,
there can be no assurance that the forward-looking statements contained herein
will occur or that objectives will be achieved.
YEAR 2000
In response to the Year 2000 issue, the Company initiated a project in
early 1997 to identify, evaluate and implement changes to its existing
computerized business systems. The Company is addressing the issue through a
combination of modifications to existing programs and conversions to Year 2000
compliant software. In addition, the Company will be communicating with its
major customers, suppliers, and other service providers to determine whether
they are actively involved in projects to ensure that their products and
business systems will be Year 2000 compliant. Although the Company currently
anticipates that it will not incur material expenditures or disruption of
operations relating to year 2000 processing issues, if the Company or its
customers or vendors are unable to resolve, in a timely manner, any significant
processing issues that may arise, such inability could have an adverse effect on
the Company's business, financial condition and results of operations.
Accordingly, the Company plans to devote the necessary resources to resolve all
significant year 2000 issues in a timely manner.
(15)
18
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.
Exhibit 11 - Statement re computation of earnings per share.
Exhibit 27 - Financial Data Schedule.
A Report on Form 8-K was filed by the Company on December 17, 1997,
regarding the completion of the sale of its Tubing Operations and
containing certain pro forma financial statements of the Company and notes
thereto regarding the sale.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUANEX CORPORATION
/s/ Viren M. Parikh
-------------------------------------
Viren M. Parikh
Controller (Chief Accounting Officer)
Date: March 13, 1998
(16)
19
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
- -------- -----------
Exhibit 11 - Statement re computation of earnings per share.
Exhibit 27 - Financial Data Schedule.
1
EXHIBIT 11
QUANEX CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
Three Months Ended
January 31,
---------------------
1998 1997
------ ------
(Unaudited)
Income from continuing operations ............... $ 2,293 $ 3,372
Income from discontinued operations, net of
income taxes ................................. -- 954
Gain on sale of discontinued operations, net
of income taxes ............................ 13,606 --
------- -------
Net income ...................................... $15,899 $ 4,326
======= =======
Weighted average shares
outstanding-basic ............................. 14,085 13,646
======= =======
Earnings per common share:
Basic:
Income from continuing operations ........... $ 0.16 $ 0.25
Income from discontinued operations ......... -- 0.07
Gain on sale of discontinued operations ..... 0.97 --
------- -------
Earnings per common share ................. $ 1.13 $ 0.32
======= =======
Income from continuing operations ............... $ 2,293 $ 3,372
Income from discontinued operations, net of
income taxes ................................. -- 954
Gain on sale of discontinued operations, net
of income taxes ............................ 13,606 --
------- -------
Net income ...................................... $15,899 $ 4,326
Interest on 6.88% convertible subordinated
debentures and amortization of related issuance
costs, net of applicable income taxes ......... 999(1) 999(1)
------- -------
Adjusted net income ............................. $15,899 $ 4,326
======= =======
Weighted average shares
outstanding-basic ............................. 14,085 13,646
Effect of common stock equivalents
arising from stock options .................... 199 286
Subordinated debentures assumed
converted to common stock ..................... 2,696(1) 2,696(1)
------- -------
Weighted average shares
outstanding-diluted ........................... 14,284 13,932
======= =======
Earnings per common share:
Diluted:
Income from continuing operations ........... $ 0.16 $ 0.24
Income from discontinued operations ......... -- 0.07
Gain on sale of discontinued operations ..... $ 0.95 --
------- -------
Earnings per common share ................. $ 1.11 $ 0.31
======= =======
(1) The conversion of the 6.88% subordinated debentures would be antidilutive
for the periods presented and therefore, it is not included in the
computation of diluted earnings per share.
5
1,000
3-MOS
OCT-31-1998
NOV-01-1997
JAN-31-1998
43,080
0
70,294
0
66,665
190,199
651,201
273,406
679,473
120,671
191,482
0
0
7,054
276,348
679,473
180,982
180,982
154,282
154,282
0
0
3,744
3,527
1,234
2,293
0
13,606
0
15,899
1.130
1.110
