1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
Annual Report on Form 10-K
on
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 1-5725
QUANEX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 38-1872178
State or other jurisdiction of incorporation or (I.R.S. Employer
organization Identification No.)
1900 WEST LOOP SOUTH, SUITE 1500 77027
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (713) 961-4600
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.50 Par Value New York Stock Exchange, Inc.
Rights to Purchase Series A Junior Participating
Preferred Stock New York Stock Exchange, Inc.
6.88% Convertible Subordinated Debentures New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates as of December 31, 1997, computed by reference to the closing
price for the Common Stock on the New York Stock Exchange, Inc. on that date,
was $396,630,084. Such calculation assumes only the registrant's officers and
directors were affiliates of the registrant.
At December 31, 1997, there were outstanding 14,102,403 shares of the
registrant's Common Stock, $.50 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement, to be filed with
the Commission within 120 days of October 31, 1997, for its Annual Meeting of
Stockholders to be held on February 26, 1998, are incorporated herein by
reference in Items 10, 11, 12, and 13 of Part III of this Annual Report.
2
EXPLANATORY NOTE
This Form 10-K/A amends Item 8 of Quanex Corporation's Annual Report on Form
10-K for the year ended October 31, 1997.
3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Quanex Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Quanex
Corporation and subsidiaries as of October 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 1997. Our audits also
included the financial statement schedule listed in the index on page 41. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Quanex Corporation and subsidiaries
as of October 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Houston, Texas
December 11, 1997
RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Quanex Corporation and
subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles and include amounts that are based on
management's best judgments and estimates.
Quanex's system of internal controls is designed to provide reasonable
assurance, at justifiable cost, as to the reliability of financial records and
reporting and the protection of assets. The system of controls provides for
appropriate division of responsibility and the application of policies and
procedures that are consistent with high standards of accounting and
administration. Internal controls are monitored through recurring internal audit
programs and are updated as our businesses and business conditions change.
The Audit Committee, composed solely of outside directors, determines that
management is fulfilling its financial responsibilities by meeting periodically
with management, Deloitte & Touche LLP, and Quanex's internal auditors, to
review internal accounting control and financial reporting matters. The internal
and independent auditors have free and complete access to the Audit Committee.
We believe that Quanex's system of internal controls, combined with the
activities of the internal and independent auditors and the Audit Committee,
provides reasonable assurance of the integrity of our financial reporting.
/s/ VERSON E. OECHSLE /s/ WAYNE M. ROSE
Vernon E. Oechsle Wayne M. Rose
President and Vice President and
Chief Executive Officer Chief Financial Officer
18
4
Quanex Corporation
CONSOLIDATED BALANCE SHEETS
October 31, 1997 1996
- -------------------------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and equivalents...................................... $ 26,851 $ 35,962
Accounts and notes receivable, less allowance for doubtful
accounts of $10,338,000 in 1997 and $7,703,000 in
1996................................................... 80,089 78,439
Inventories............................................... 73,035 78,828
Deferred income taxes..................................... 5,601 9,302
Prepaid expenses.......................................... 1,320 110
--------- ---------
Total current assets.............................. 186,896 202,641
Property, plant and equipment, net.......................... 379,071 319,165
Net assets of discontinued operations....................... 13,554 18,830
Goodwill, net............................................... 91,496 84,343
Other assets................................................ 14,688 13,969
--------- ---------
$ 685,705 $ 638,948
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ -- $ 5,575
Accounts payable.......................................... 71,317 67,037
Accrued expense........................................... 43,208 37,984
Current maturities of long-term debt...................... 11,050 --
Income taxes payable...................................... 8,503 3,807
--------- ---------
Total current liabilities......................... 134,078 114,403
Long-term debt.............................................. 201,858 253,513
Deferred pension credits.................................... 6,627 7,110
Deferred postretirement welfare benefits.................... 6,835 6,459
Deferred income taxes....................................... 48,111 40,454
Other liabilities........................................... 19,373 20,000
--------- ---------
Total liabilities................................. 416,882 441,939
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized; issued & outstanding -- none in 1997 and
1996................................................... -- --
Common stock, $.50 par value, 50,000,000 shares
authorized in 1997 and 25,000,000 shares authorized in
1996; 14,050,411 shares in 1997 and 13,590,400 shares
in 1996 issued and outstanding......................... 7,025 6,795
Additional paid-in capital................................ 105,146 94,251
Retained earnings......................................... 156,528 96,623
Cumulative foreign currency translation adjustment........ 422 --
Unearned compensation..................................... -- (185)
Adjustment for minimum pension liability.................. (298) (475)
--------- ---------
Total stockholders' equity........................ 268,823 197,009
--------- ---------
$ 685,705 $ 638,948
========= =========
See notes to consolidated financial statements.
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5
Quanex Corporation
CONSOLIDATED STATEMENTS OF INCOME
Years Ended October 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------
(In thousands, except per share
amounts)
Net sales................................................... $746,093 $620,069 $603,985
Costs and expenses:
Cost of sales............................................. 609,989 492,594 493,994
Selling, general and administrative....................... 43,798 44,959 33,746
Depreciation and amortization............................. 37,298 36,083 28,785
-------- -------- --------
Operating income............................................ 55,008 46,433 47,460
Other income (expense):
Interest expense.......................................... (17,541) (11,929) (10,742)
Capitalized interest...................................... 3,539 569 1,872
Other, net................................................ 1,637 4,544 1,721
-------- -------- --------
Income from continuing operations before income taxes and
extraordinary charge...................................... 42,643 39,617 40,311
Income tax expense.......................................... (14,925) (16,639) (16,931)
-------- -------- --------
Income from continuing operations and before extraordinary
charge.................................................... 27,718 22,978 23,380
Income from discontinued operations, net of income taxes.... 5,176 9,912 10,480
Gain on sale of discontinued operations, net of income
taxes..................................................... 36,290 -- --
-------- -------- --------
Income before extraordinary charge.......................... 69,184 32,890 33,860
Extraordinary charge -- early extinguishment of debt, net of
income taxes.............................................. -- (2,522) (2,021)
-------- -------- --------
Net income.................................................. 69,184 30,368 31,839
Preferred dividends......................................... -- -- (3,957)
-------- -------- --------
Net income attributable to common stockholders.............. $ 69,184 $ 30,368 $ 27,882
======== ======== ========
Earnings per common share:
Primary:
Continuing operations.................................. $ 1.98 $ 1.68 $ 1.43
Discontinued operations................................ 0.37 0.73 0.77
Gain on sale of discontinued operations................ 2.58 -- --
Extraordinary charge................................... -- (0.19) (0.15)
-------- -------- --------
Total primary net earnings........................ $ 4.93 $ 2.22 $ 2.05
======== ======== ========
Fully diluted:
Continuing operations.................................. $ 1.90 $ 1.60 $ 1.43
Discontinued operations................................ 0.31 0.60 0.77
Gain on sale of discontinued operations................ 2.17 -- --
Extraordinary charge................................... -- (0.15) (0.15)
-------- -------- --------
Total assuming full dilution...................... $ 4.38 $ 2.05 $ 2.05
======== ======== ========
Weighted average number of shares outstanding
Primary................................................ 14,029 13,658 13,580
Assuming full dilution................................. 16,725 16,585 13,580
See notes to consolidated financial statements.
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Quanex Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
Total
Preferred Stock Common Stock Additional Stock-
Years Ended October 31, 1997, ------------------- --------------------- Paid-in Retained holders'
1996, and 1995 Shares Amount Shares Amount Capital Earnings Other Equity
- -------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1994... 345,000 $ 86,250 13,377,724 $6,688 $ 86,323 $ 55,081 $(459) $233,883
Net income.................. -- -- -- -- -- 31,839 -- 31,839
Common dividends ($.59 per
share).................... -- -- -- -- -- (7,932) -- (7,932)
Preferred dividends......... -- -- -- -- -- (4,451) -- (4,451)
Conversion of preferred
stock to subordinated
debentures................ (339,681) (84,920) -- -- 3,350 -- -- (81,570)
Conversion of preferred
stock to common stock..... (5,319) (1,330) 42,211 21 1,309 -- -- --
Adjustment for minimum
pension liability......... -- -- -- -- -- -- (355) (355)
Unearned compensation....... -- -- -- -- -- -- 53 53
Other....................... -- -- 65,377 34 1,424 (111) -- 1,347
-------- -------- ---------- ------ -------- -------- ----- --------
Balance at October 31, 1995... -- -- 13,485,312 6,743 92,406 74,426 (761) 172,814
Net income.................. -- -- -- -- -- 30,368 30,368
Common dividends ($.60 per
share).................... -- -- -- -- -- (8,115) -- (8,115)
Adjustment for minimum
pension liability......... -- -- -- -- -- -- (31) (31)
Unearned compensation....... -- -- -- -- -- -- 132 132
Other....................... -- -- 105,088 52 1,845 (56) -- 1,841
-------- -------- ---------- ------ -------- -------- ----- --------
Balance at October 31, 1996... -- -- 13,590,400 6,795 94,251 96,623 (660) 197,009
Net income.................. -- -- -- -- -- 69,184 69,184
Common dividends ($.61 per
share).................... -- -- -- -- -- (8,422) -- (8,422)
Adjustment for minimum
pension liability......... -- -- -- -- -- -- 177 177
Unearned compensation....... -- -- -- -- -- -- 185 185
Foreign currency translation
adjustment................ 422 422
Other....................... -- -- 460,011 230 10,895 (857) -- 10,268
-------- -------- ---------- ------ -------- -------- ----- --------
Balance at October 31, 1997... -- $ -- 14,050,411 $7,025 $105,146 $156,528 $ 124 $268,823
======== ======== ========== ====== ======== ======== ===== ========
See notes to consolidated financial statements.
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Quanex Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended October 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES:
Net Income................................................ $ 69,184 $ 30,368 $ 31,839
Adjustments to reconcile net income to cash provided by
operating activities:
Income from discontinued operations.................. (5,176) (9,912) (10,480)
Gain on sale of discontinued operations.............. (36,290) -- --
Depreciation and amortization........................ 37,865 36,654 29,410
Deferred income taxes................................ 7,545 2,533 6,668
Deferred pension costs............................... (183) 318 76
Deferred postretirement welfare benefits............. 376 417 254
-------- --------- --------
73,321 60,378 57,767
Changes in assets and liabilities net of effects from
acquisitions and dispositions:
Decrease (increase) in accounts and notes
receivable.......................................... 2,957 7,798 (19,630)
Decrease (increase) in inventory..................... 8,898 (17,568) (3)
Increase (decrease) in accounts payable.............. 112 (4,848) 12,863
Increase in accrued expenses......................... 2,919 2,907 3,926
Other, net........................................... (8,868) 900 (3,656)
-------- --------- --------
Cash provided by continuing operations............ 79,339 49,567 51,267
Cash provided by discontinued operations.......... 89 16,073 15,885
-------- --------- --------
Cash provided by operating activities............. 79,428 65,640 67,152
INVESTMENT ACTIVITIES:
Acquisition of Advanced Metal Forming, C.V., net of cash
and equivalents acquired............................... (33,584) -- --
Acquisition of Piper Impact, Inc., net of cash and
equivalents acquired................................... (5,575) (123,264) --
Net proceeds from sale of LaSalle Steel Company........... 63,900 -- --
Capital expenditures, net of retirements.................. (68,916) (34,699) (21,615)
Capital expenditures of discontinued operations........... (3,868) (11,089) (4,986)
Decrease in short-term investments........................ -- -- 54,070
Other, net................................................ (1,550) (5,120) (1,878)
-------- --------- --------
Cash provided (used) by investment activities..... (49,593) (174,172) 25,591
-------- --------- --------
Cash provided (used) by operating and investment
activities...................................... 29,835 (108,532) 92,743
FINANCING ACTIVITIES:
Bank borrowings (repayments), net......................... (41,828) 160,000 --
Notes payable borrowings (repayments)..................... -- (10,000) 10,000
Purchase of Senior Notes.................................. -- (44,667) (59,500)
Repayments of long-term debt.............................. -- -- (20,958)
Common dividends paid..................................... (8,422) (8,115) (7,932)
Preferred dividends paid.................................. -- -- (4,451)
Stock options exercised................................... 8,357 1,179 454
Other, net................................................ 2,525 905 846
-------- --------- --------
Cash provided (used) by financing activities...... (39,368) 99,302 (81,541)
-------- --------- --------
Effect of exchange rate changes on cash and equivalents..... 422 -- --
-------- --------- --------
Increase (decrease) in cash and equivalents................. (9,111) (9,230) 11,202
Cash and equivalents at beginning of period................. 35,962 45,192 33,990
-------- --------- --------
Cash and equivalents at end of period....................... $ 26,851 $ 35,962 $ 45,192
======== ========= ========
See notes to consolidated financial statements.
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Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Quanex Corporation
and its subsidiaries (the "Company"), all of which are wholly owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
SCOPE OF OPERATIONS
The Company operates primarily in two industry segments: the manufacturing of
engineered steel bars and aluminum products. The Company's products include
engineered steel bars, aluminum sheet, aluminum fabricated products and impact
extrusions. The Company's manufacturing operations are conducted primarily in
the United States.
REVENUES
The company recognizes revenues when products are shipped and the title and risk
of ownership pass to the customer.
STATEMENTS OF CASH FLOWS
The Company generally considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. Similar
investments with original maturities beyond three months are considered
short-term investments. For fiscal years 1997, 1996 and 1995 cash paid for
income taxes was $13,906,000, $19,551,000, and $17,572,000, respectively. These
amounts are before refunds of $471,000, $204,000, and $47,000, respectively.
Cash paid for interest for fiscal 1997, 1996 and 1995 was $17,964,000,
$12,084,000, and $10,324,000, respectively. Non-cash investing and financing
activities in fiscal 1995 included the exchange of $84,920,000 of the Company's
Cumulative Convertible Exchangeable Preferred Stock for the Company's 6.88%
Convertible Subordinated Debentures due June 30, 2007, and the conversion of
$1,330,000 of the Company's Cumulative Convertible Exchangeable Preferred Stock
to the Company's common stock. (See Note 2 regarding acquisitions)
INVENTORIES
Inventories are valued at the lower of cost or market. The accounting methods
used in valuing the Company's inventories are described in Note 5.
LONG-LIVED ASSETS
Goodwill represents the excess of the purchase price over the fair value of
acquired companies and is being amortized on a straight line basis over forty
years for the goodwill resulting from the acquisition of Nichols Homeshield in
1989, and over twenty-five years for the goodwill resulting from the
acquisitions of Piper Impact, Inc. in 1996 and Piper Impact Europe B.V. in 1997
(See Note 2). At October 31, 1997 and 1996, accumulated amortization was
$10,398,000 and $7,297,000, respectively. The Company evaluates any possible
impairment of goodwill using estimates of undiscounted future cash flows.
Property, plant and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives of certain categories are as follows:
Years
--------
Land improvements........................................... 10 to 25
Buildings................................................... 10 to 40
Machinery and equipment..................................... 3 to 20
23
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- --------------------------------------------------------------------------------
During 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of". The
statement establishes accounting standards related to the impairment of
long-lived assets, such as property, plant, equipment and intangibles. The
Company adopted statement No. 121 in fiscal 1997 and did not experience any
material impact on its financial position or results of operations.
HEDGING
The Company uses futures and option contracts to hedge a portion of its exposure
to price fluctuations of aluminum. Hedging gains and losses are recognized
concurrently with the related sales transactions. The Company enters into
interest rate agreements which effectively exchange variable interest rate debt
for fixed interest rate debt. The agreements are used to reduce the exposure to
increasing interest rates. The Company enters into these agreements with major
financial institutions. The Company does not use derivative financial
instruments for trading or speculative purposes. (See Note 15)
EARNINGS PER SHARE DATA
Primary earnings per share is computed by deducting preferred dividends from net
income in order to determine net income attributable to common stockholders.
This amount is then divided by the weighted average number of common shares
outstanding and common stock equivalents.
Fully diluted earnings per-share amounts assume conversion of the Company's
6.88% Convertible Subordinated Debentures, the elimination of the related
interest and amortization of issuance costs, net of tax, and the issuance of
common stock for all other potentially dilutive common stock equivalents
outstanding.
In February 1997, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 128 -- "Earnings per Share" ("SFAS 128")
which specifies the computation, presentation and disclosure requirements for
Earnings Per Share ("EPS"). SFAS 128 replaces the presentation of primary and
fully diluted EPS pursuant to Accounting Principles Board Opinion No.
15 -- "Earnings per Share" ("APB 15") with the presentation of basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. The Company is required to
adopt SFAS 128 with its January 31, 1998 financial statements and restate all
prior-period EPS disclosure.
Under SFAS 128, the Company's pro forma basic and diluted EPS would have been:
1997 1996 1995
----- ------ ------
Basic EPS:
Continuing operations..................................... $2.01 $ 1.70 $ 1.44
Discontinued operations................................... 0.37 0.73 0.78
Gain on sale of discontinued operations................... 2.63 -- --
Extraordinary charge...................................... -- (0.19) (0.15)
----- ------ ------
Total Basic EPS................................... $5.01 $ 2.24 $ 2.07
Diluted EPS:
Continuing operations..................................... $1.90 $ 1.60 $ 1.51
Discontinued operations................................... 0.31 0.60 0.64
Gain on sale of discontinued operations................... 2.17 -- --
Extraordinary charge...................................... -- (0.15) (0.12)
----- ------ ------
Total Diluted EPS................................. $4.38 $ 2.05 $ 2.03
===== ====== ======
FOREIGN CURRENCY TRANSLATION
Gains and losses resulting from translation of the Company's foreign
subsidiary's operations are included as a separate component of stockholder's
equity.
USE OF ESTIMATES
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the
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- --------------------------------------------------------------------------------
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts for prior periods have been reclassified in the accompanying
consolidated financial statements to conform to 1997 presentations.
2. ACQUISITIONS
On August 9, 1996, the Company acquired the assets, net of various liabilities,
of Piper Impact, Inc. ("Piper Impact"). Piper Impact is a manufacturer of
custom-designed, impact-extruded aluminum and steel parts for the
transportation, electronics and defense markets, with production facilities in
New Albany, Mississippi and Park City, Utah.
Piper Impact's net assets were acquired for approximately $130 million in
cash, cash equivalents, and notes. The acquisition was accounted for using the
purchase method of accounting. The purchase price was allocated to the assets
and liabilities of Piper Impact based on their estimated fair values. The
goodwill associated with the Piper Impact acquisition approximated $56 million,
which is being amortized on a straight-line basis over twenty-five years. To
finance the acquisition, the Company entered into an unsecured revolving
credit/term loan facility which provides for the borrowing of up to $250
million. (See Note 8)
Liabilities assumed included an estimated $20 million related to costs for
further investigation and specified environmental remediation. These cost
estimates include charges for additional studies, remediation, renovations to
affected facilities and equipment, and other compliance expenditures. The
estimated range of costs is $15 million to $25 million of which the accrual
represents management's best estimate of total costs expected to be incurred.
Actual expenditures could differ from current estimates as additional studies
are completed, requiring revisions to the remediation and restoration plan.
The unaudited pro-forma consolidated results of operations of the Company are
shown below as if the acquisition had occurred at the beginning of the fiscal
periods indicated. These results are not necessarily indicative of the results
which would actually have occurred if the purchase had taken place at the
beginning of the periods, nor are they necessarily indicative of future results.
Pro Forma
--------------------
October 31,
--------------------
1996 1995
--------------------
(In thousands,
except per
share amounts)
(Unaudited)
Net sales................................................... $708,492 $710,357
Income before extraordinary charge.......................... 27,751 28,801
Preferred dividends......................................... -- 3,957
Net income attributable to common shareholders before
extraordinary charge...................................... 27,751 24,844
Earnings per share before extraordinary charge:
Primary................................................... $ 2.03 $ 1.83
Fully diluted............................................. $ 1.89 $ 1.83
25
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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. The Company's
balance sheet as of October 31, 1997 includes Piper Europe. The income statement
for the twelve months ended October 31, 1997 does not include Piper Europe.
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.
3. 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
$36,290,000 in the second quarter of fiscal 1997. 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 reported as the segment "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 Company will record a gain on
the sale of approximately $13,000,000 in the first quarter of fiscal 1998.
Results of these operations have been classified as discontinued and prior
periods have been restated. For business segment reporting purposes, Tubing
Operations were previously classified as "Steel Tubes". (See Note 17)
Net sales and income from discontinued operations are as follows:
Years Ended October 31,
--------------------------------
1997 1996 1995
--------------------------------
(In thousands)
Net sales................................................... $187,123 $275,641 $287,210
Operating income............................................ 7,962 17,090 18,069
Income tax expense.......................................... (2,786) (7,178) (7,589)
Income from discontinued operations......................... $ 5,176 $ 9,912 $ 10,480
October 31,
--------------------
1997 1996
--------------------
(In thousands)
Net Assets of Discontinued Operations
Current assets.............................................. $ 24,388 $ 60,697
Property, plant and equipment, net.......................... 17,357 32,381
Other assets................................................ 2,784 5,010
Current liabilities......................................... (11,241) (38,663)
Deferred pension credits.................................... (4,373) (10,183)
Deferred postretirement welfare benefits.................... (22,406) (49,169)
Deferred income taxes....................................... 6,718 16,421
Adjustment for minimum pension liability.................... 327 2,336
-------- --------
Net assets of discontinued operations..................... $ 13,554 $ 18,830
======== ========
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- --------------------------------------------------------------------------------
4. INCOME TAXES
Income tax expense (benefit) consists of the following:
Years Ended October 31,
-----------------------------
1997 1996 1995
-----------------------------
(In thousands)
Current:
Federal................................................... $ 846 $12,914 $11,147
State..................................................... 2,829 2,865 562
------- ------- -------
3,675 15,779 11,709
Deferred.................................................... 11,250 860 5,222
------- ------- -------
Income taxes from continuing operations..................... 14,925 16,639 16,931
Income taxes from discontinued operations................... 2,786 7,178 7,589
Income taxes from sale of discontinued operations........... 13,178 -- --
Reduction of taxes from extinguishment of debt.............. -- (1,826) (1,463)
------- ------- -------
Totals................................................. $30,889 $21,991 $23,057
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax liability are as
follows:
October 31,
------------------
1997 1996
------------------
(In thousands)
Deferred tax liability:
Property, plant and equipment............................. $43,092 $34,843
Inventory................................................. 412 (587)
Other..................................................... 12,735 12,791
------- -------
56,239 47,047
------- -------
Deferred tax assets:
Postretirement benefit obligation......................... 2,969 2,762
Other employee benefit obligations........................ 8,143 7,041
Other accrued liabilities................................. 2,617 6,092
------- -------
13,729 15,895
------- -------
Net deferred tax liability.................................. $42,510 $31,152
======= =======
Deferred income tax liability -- non-current................ $48,111 $40,454
Deferred tax assets -- current.............................. (5,601) (9,302)
------- -------
Net deferred tax liability........................ $42,510 $31,152
======= =======
Income tax expense differs from the amount computed by applying the statutory
federal income tax rate to income from continuing operations before income taxes
for the following reasons:
Years Ended October 31,
-----------------------------
1997 1996 1995
-----------------------------
(In thousands)
Income tax expense at statutory tax rate.................... $14,925 $13,866 $14,109
Increase (decrease) in taxes resulting from:
State income taxes, net of federal effect................. 1,655 2,148 2,220
Goodwill.................................................. 334 334 334
Other items, net.......................................... (1,989) 291 268
------- ------- -------
$14,925 $16,639 $16,931
======= ======= =======
The Company reached a settlement with the Internal Revenue Service with respect
to its tax audit of fiscal years 1992 through 1994. During 1997, the Company
made a payment of $2,016,000 of tax and related interest. Adequate provisions
had been made in prior years and the settlement did not have a material effect
on earnings for fiscal 1997.
27
13
- --------------------------------------------------------------------------------
5. INVENTORIES
Inventories consist of the following:
October 31,
------------------
1997 1996
------------------
(In thousands)
Raw materials............................................... $19,432 $19,757
Finished goods and work in process.......................... 47,739 53,100
------- -------
67,171 72,857
Other....................................................... 5,864 5,971
------- -------
Total............................................. $73,035 $78,828
======= =======
The values of inventories in the consolidated balance sheets are based on the
following accounting methods:
LIFO........................................................ $51,517 $60,904
FIFO........................................................ 21,518 17,924
------- -------
Total............................................. $73,035 $78,828
======= =======
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $16,000,000 and $13,000,000 at October
31, 1997 and 1996, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
October 31,
-----------------------
1997 1996
-----------------------
(In thousands)
Land and land improvements.................................. $ 18,901 $ 16,381
Buildings................................................... 80,981 75,466
Machinery and equipment..................................... 461,817 424,577
Construction in progress.................................... 81,155 34,890
--------- ---------
642,854 551,314
Less accumulated depreciation and amortization.............. (263,783) (232,149)
--------- ---------
$ 379,071 $ 319,165
========= =========
The Company had commitments for the purchase or construction of capital assets
amounting to approximately $23 million at October 31, 1997.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
October 31,
------------------
1997 1996
------------------
(In thousands)
Accrued contribution to pension funds....................... $ 1,033 $ 1,023
Interest.................................................... 2,516 2,925
Payroll, payroll taxes and employee benefits................ 21,995 20,682
State and local taxes....................................... 1,985 1,647
Other....................................................... 15,679 11,707
------- -------
$43,208 $37,984
======= =======
28
14
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
October 31,
--------------------
1997 1996
--------------------
(In thousands)
Revolving credit agreements................................. $100,185 $160,000
Convertible subordinated debentures......................... 84,920 84,920
Term loan................................................... 7,709 --
Bank borrowings due within one year......................... 10,278 --
Industrial Revenue and Economic Development Bonds,
unsecured, payable in annual installments through the year
2005, bearing interest ranging from 6.50% to 8.375%....... 3,275 3,275
Other....................................................... 6,541 5,318
-------- --------
$212,908 $253,513
Less maturities due within one year included in current
liabilities............................................... 11,050 --
-------- --------
$201,858 $253,513
======== ========
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"). 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 October 31, 1997, the Company had $100 million outstanding under
the Revolver. The weighted average interest rates on borrowings under the
Revolver were 6.6% and 6.3% in 1997 and 1996, respectively. As of October 31,
1997, the Company was in compliance with all Bank Agreement covenants. Under the
Company's most restrictive loan covenants, retained earnings of $42,954,000 at
October 31, 1997 were available for dividends.
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.
At October 31, 1994, the Company had $125 million outstanding in Senior Notes.
The Senior Notes paid interest at 10.77% per annum. In December 1994, the
Company acquired $59.5 million principal amount of the Senior Notes for a
purchase price equal to 105% of the principal amount plus accrued interest. The
Company recorded an extraordinary charge of $2.0 million ($3.5 million before
tax) in the first quarter of 1995 related to the call premium and write-off of
deferred debt issuance costs for the Senior Notes that were repurchased. In
August 1995, the Company made a required annual repayment of $20.8 million
principal amount. In December 1995, the Company acquired the remaining $44.7
million principal amount of the Senior Notes for a purchase price equal to
107.5% of the principal amount plus accrued interest. The second 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 October 28, 1997, Piper Impact Europe B.V. ("Piper Europe") executed a
stand-alone secured credit facility ("Credit Facility") providing up to 50
million Dutch Guilders ("NLG"). At October 31, 1997, 1 NLG was equal to .514
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.
29
15
- --------------------------------------------------------------------------------
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 October 31, 1997, Piper Europe had NLG 35.3 million outstanding under
the Credit Facility. As of October 31, 1997, Piper Europe was in compliance with
all Credit Facility covenants.
Aggregate maturities of long-term debt at October 31, 1997, are as follows (in
thousands):
1998................. $ 11,050
1999................. --
2000................. --
2001................. --
2002................. 100,185
Thereafter........... 101,673
--------
$212,908
========
9. PENSION PLANS AND RETIREMENT BENEFITS
The Company has retirement plans covering substantially all employees. The plans
provide for defined benefits. The plans pay benefits to employees at retirement
using formulas based upon years of service and compensation rates near
retirement. The Company's funding policy is generally to make the minimum annual
contributions required by applicable regulations.
The plans' funded status was as follows:
Assets exceed Accumulated benefit
accumulated obligation
benefit obligation exceeds assets
-------------------- --------------------
October 31,
--------------------------------------------
1997 1996 1997 1996
--------------------------------------------
(In thousands)
Assets available for benefits.............................. $ 12,807 $ 9,910 $ 3,606 $ 2,323
-------- -------- ------- -------
Projected benefit obligation
Vested................................................... (10,602) (8,571) (4,446) (3,637)
Nonvested................................................ (170) (283) (752) (834)
-------- -------- ------- -------
Accumulated benefit obligation........................ (10,772) (8,854) (5,198) (4,471)
Effect of future salary increases........................ (5,990) (5,378) -- --
-------- -------- ------- -------
Total projected benefit obligation............... (16,762) (14,232) (5,198) (4,471)
-------- -------- ------- -------
Assets less than projected benefit obligation.............. $ (3,955) $ (4,322) $(1,592) $(2,148)
======== ======== ======= =======
Consisting of:
Amounts to be offset against future pension costs:
Assets in excess of obligation at adoption............ $ 772 $ 876 $ 52 $ 59
Obligation (increase) decrease due to plan
amendments.......................................... 238 294 (816) (826)
Actuarial gains (losses).............................. 1,103 492 (541) (836)
Minimum liability adjustment.......................... -- -- 1,305 1,604
Amounts recognized in consolidated balance sheets:
Deferred pension credit............................... (5,371) (5,250) (1,256) (1,860)
Accrued contribution to pension funds................. (697) (734) (336) (289)
-------- -------- ------- -------
$ (3,955) $ (4,322) $(1,592) $(2,148)
======== ======== ======= =======
In accordance with the provisions of Statement of Financial Accounting Standards
No. 87, the Company recorded additional minimum pension liabilities as of
October 31, 1997 and 1996, representing the excess of the accumulated benefit
obligations over the fair value of plan assets and accrued pension liabilities.
The Company recorded additional pension liabilities of $1,305,000 and
$1,604,000; intangible assets of $816,000 and $827,000; and stockholders' equity
reductions, net of income taxes, of $298,000 and $475,000, as of October 31,
1997 and 1996, respectively.
The projected unit credit method was used to determine the actuarial present
value of the accumulated benefit obligation and the projected benefit
obligation. For 1997, 1996 and 1995 the discount rate was 7.5%. The expected
long term rate of return on assets was 10% for the three year period ending
October 31, 1997. The assumed rate of increase in future compensation levels was
4.5% in 1997, 1996 and 1995. The plans invest primarily in marketable equity and
debt securities.
30
16
- --------------------------------------------------------------------------------
Net pension costs for defined benefit plans were as follows:
Years Ended October 31,
-----------------------------
1997 1996 1995
------- ------- -------
(In thousands)
Benefits earned during the year............................. $ 1,371 $ 1,270 $ 1,109
Interest cost on projected benefit obligation............... 1,511 1,293 1,142
Actual return on plan assets................................ (2,561) (1,400) (1,319)
Net amortization and deferral............................... 1,250 335 348
------- ------- -------
$ 1,571 $ 1,498 $ 1,280
======= ======= =======
The Company has various defined contribution plans in effect for certain
eligible employees. The Company makes contributions to the plans subject to
certain limitations outlined in the plans. Contributions to these plans were
approximately $2,919,000, $2,476,000, and $2,299,000 during fiscal 1997, 1996,
and 1995, respectively.
The Company has a Supplemental Benefit Plan covering certain key officers of
the Company. Earned vested benefits under the Supplemental Benefit Plan were
approximately $3,724,000, $2,959,000, and $4,107,000 at October 31, 1997, 1996
and 1995, respectively. These benefits are funded with life insurance policies
purchased by the Company.
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain healthcare and life insurance benefits for eligible
retired employees. Employees may become eligible for those benefits if they
reach normal retirement age while working for the Company. The Company continues
to fund benefit costs on a pay-as-you-go basis; and, for fiscal year 1997, the
Company made benefit payments totaling $247,000, compared to $171,000 and
$366,000 in fiscal 1996 and 1995, respectively.
The following table sets forth the funded status of the Company's projected
postretirement benefits other than pensions, reconciled with amounts recognized
in the Company's consolidated balance sheets at:
October 31,
------------------
1997 1996
------------------
(In thousands)
Accumulated postretirement benefit obligation:
Retirees.................................................. $(4,233) $(3,870)
Fully eligible active plan participants................... (161) (178)
Other active plan participants............................ (2,217) (2,043)
------- -------
(6,611) (6,091)
Plan assets at fair value................................... -- --
------- -------
Accumulated postretirement benefit obligation
in excess of plan assets............................... (6,611) (6,091)
Unrecognized prior service cost............................. -- --
Unrecognized net loss from past experience different from
that assumed and from changes in assumption............... (224) (368)
------- -------
Accrued postretirement benefit cost......................... $(6,835) $(6,459)
======= =======
Years Ended October 31,
-----------------------
1997 1996 1995
-----------------------
(In thousands)
Net periodic postretirement benefit cost:
Service cost -- benefits attributed to service during the
period................................................. $148 $145 $124
Interest cost on accumulated postretirement Benefit
obligation............................................. 472 438 442
Net amortization and deferral............................. 3 5 54
---- ---- ----
Net periodic postretirement benefit cost.................. $623 $588 $620
==== ==== ====
The assumed healthcare cost trend rate was 8.8% in 1997, decreasing uniformly to
5.5% in the year 2003 and remaining level thereafter. The assumed discount rate
used to measure the accumulated postretirement benefit obligation was 7.5% at
October 31, 1997 and October 31, 1996.
31
17
- --------------------------------------------------------------------------------
If the healthcare cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of October 31, 1997 would be
increased by 3.5%. The effect of this change on the sum of the service cost and
interest cost would be an increase of 2.8%.
11. INDUSTRY SEGMENT INFORMATION
Quanex is principally a producer of specialized metals and metal products. The
Company's operations primarily consist of two segments: engineered steel bars
and aluminum products.
For the year ended October 31, 1997, sales to Autoliv Inc. represented 13% of
the Company's consolidated net sales. Sales to Autoliv are included in the
aluminum products segment.
Corporate
Year ended Engineered Aluminum and
October 31, 1997 Steel Bars(4) Products(1) Other(2) Consolidated
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies........................ $301,436 $444,657 -- $746,093
Intersegment(3).................................. 18,032 -- $(18,032) --
------- ------- ------- -------
Total.............................................. $319,468 $444,657 $(18,032) $746,093
======= ======= ======= =======
Operating Income (loss)............................ $50,762 $17,415 $(13,169) $55,008
Depreciation and amortization:
Operating........................................ $13,940 $23,227 $ 131 $37,298
Other............................................ -- -- 567 567
------- ------- ------- -------
Total.............................................. $13,940 $23,227 $ 698 $37,865
======= ======= ======= =======
Capital expenditures............................... $35,220 $33,581 $ 345 $69,146
Identifiable assets................................ $192,937 $443,799 $48,969 $685,705
(1) Identifiable assets includes Advanced Metal Forming C.V., acquired on
October 29, 1997.
(2) Included in "Corporate and Other" are intersegment eliminations, corporate
expenses and net assets of discontinued operations.
(3) Intersegment sales are conducted on an arm's-length basis.
(4) Includes Nitro Steel and Heat Treat divisions previously reported under the
Steel Tubes segment. See Note 3.
Corporate
Year ended Engineered Aluminum and
October 31, 1996 Steel Bars(4) Products(1) Other(2) Consolidated
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies........................ $275,202 $344,867 -- $620,069
Intersegment(3).................................. 16,965 -- $(16,965) --
------- ------- ------- -------
Total.............................................. $292,167 $344,867 $(16,965) $620,069
======= ======= ======= =======
Operating Income (loss)............................ $39,090 $22,070 $(14,727) $46,433
Depreciation and amortization:
Operating........................................ $18,263 $17,712 $ 108 $36,083
Other............................................ -- -- 571 571
------- ------- ------- -------
Total.............................................. $18,263 $17,712 $ 679 $36,654
======= ======= ======= =======
Capital expenditures............................... $19,573 $15,031 $ 133 $34,737
Identifiable assets................................ $171,351 $412,048 $55,549 $638,948
(1) Includes three months of Piper Impact's operations.
(2) Included in "Corporate and Other" are intersegment eliminations, corporate
expenses and net assets of discontinued operations.
(3) Intersegment sales are conducted on an arm's-length basis.
(4) Includes Nitro Steel and Heat Treat divisions previously reported under the
Steel Tubes segment. See Note 3.
32
18
- --------------------------------------------------------------------------------
Corporate
Year ended Engineered Aluminum and
October 31, 1995 Steel Bars(3) Products Other(1) Consolidated
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies........................ $272,420 $331,565 -- $603,985
Intersegment(2).................................. 14,229 -- $(14,229) --
------- ------- ------- -------
Total.............................................. $286,649 $331,565 $(14,229) $603,985
======= ======= ======= =======
Operating Income (loss)............................ $43,668 $21,128 $(17,336) $47,460
Depreciation and amortization:
Operating........................................ $15,537 $13,135 $ 113 $28,785
Other............................................ -- -- 625 625
------- ------- ------- -------
Total.............................................. $15,537 $13,135 $ 738 $29,410
======= ======= ======= =======
Capital expenditures............................... $12,776 $ 8,704 $ 149 $21,629
Identifiable assets................................ $177,079 $230,586 $58,793 $466,458
(1) Included in "Corporate and Other" are intersegment eliminations, corporate
expenses and net assets of discontinued operations.
(2) Intersegment sales are conducted on an arm's length basis.
(3) Includes Nitro Steel and Heat Treat divisions previously reported under the
Steel Tubes segment. See Note 3.
12. PREFERRED STOCK PURCHASE RIGHTS
The Company declared a dividend in 1986 of one Preferred Stock Purchase Right (a
"Right") on each outstanding share of its common stock. This action was intended
to assure that all shareholders would receive fair treatment in the event of a
proposed takeover of the Company. On April 26, 1989, the Company amended the
Rights to provide for additional protection to shareholders and to provide the
Board of Directors of the Company with needed flexibility in responding to
abusive takeover tactics. Each Right, when exercisable, entitles the holder to
purchase 1/100th of a share of the Company's Series A Junior Participating
Preferred Stock at an exercise price of $60. Each 1/100th of a share of Series A
Junior Participating Preferred Stock will be entitled to a dividend equal to the
greater of $.01 or the dividend declared on each share of common stock, and will
be entitled to 1/100th of a vote, voting together with the shares of common
stock. The Rights will be exercisable only if, without the Company's prior
consent, a person or group of persons acquires or announces the intention to
acquire 20% or more of the Company's common stock. If the Company is acquired
through a merger or other business combination transaction, each Right will
entitle the holder to purchase $120 worth of the surviving company's common
stock for $60. Additionally, if someone acquires 20% or more of the Company's
common stock, each Right not owned by the 20% or greater shareholder would
permit the holder to purchase $120 worth of the Company's common stock for $60.
The Rights are redeemable, at the option of the Company, at $.02 per Right at
any time until ten days after someone acquires 20% or more of the common stock.
The Rights expire in 1999.
As a result of the Rights distribution, 150,000 of the 1,000,000 shares of
authorized Preferred Stock were reserved for issuance as Series A Junior
Participating Preferred Stock.
13. PREFERRED STOCK -- DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED SHARES
During May 1992, the Company issued 3,450,000 Depositary Convertible
Exchangeable Preferred Shares ("Depositary Shares"), each representing 1/10th of
a share of the Company's 6.88% Cumulative Convertible Exchangeable Preferred
Stock ("Preferred Stock"). The net proceeds from the issuance was $82.9 million.
The dividend per annum and liquidation preference for each share of Preferred
Stock were $17.20 and $250, respectively, and for each Depositary Share were
$1.72 and $25, respectively. Dividends on the Preferred Stock and Depositary
Shares were cumulative and payable quarterly, commencing September 30, 1992. The
Company was prohibited from paying any dividends on Common Stock (other than in
Common Stock or junior stock) unless all required preferred dividends had been
paid.
The Preferred Stock was convertible at the option of the holder into shares of
the Company's Common Stock at a conversion price of $31.50 per share, subject to
adjustment in certain events. The Preferred Stock was exchangeable at the option
of the Company, in whole but not in part, on any dividend payment date
commencing June 30, 1995 for the Company's 6.88% Convertible Subordinated
Debentures due June 30, 2007 ("6.88% Debentures") at the rate of $250 principal
amount of 6.88% Debentures for each share of Preferred Stock and $25 principal
amount of 6.88% Debentures for each Depositary Share.
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% Debentures. Interest is payable
33
19
- --------------------------------------------------------------------------------
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.
14. RESTRICTED STOCK AND STOCK OPTION PLANS
The Company has restricted stock and stock option plans which provide for the
granting of common shares or stock options to key employees. Under the Company's
restricted stock plan, common stock may be awarded to key employees. The
recipient is entitled to all of the rights of a shareholder, except that during
the forfeiture period the shares are nontransferable. The award vests during an
eight year period based on the price of the Company's stock. Upon issuance of
stock under the plan, unearned compensation equal to the market value at the
date of grant is charged to stockholders' equity and subsequently amortized to
expense over the restricted period. There were no restricted shares granted in
1995, 1996 or 1997. The amount charged to compensation expense was $185,000 in
1997, $132,000 in 1996, and $53,000 in 1995.
Options are granted at prices determined by the Board of Directors which may
not be less than the fair market value of the shares at the time the options are
granted. Unless otherwise provided by the Board at the time of grant, options
become exercisable in 33 1/3% increments maturing cumulatively on each of the
first through third anniversaries of the date of grant and must be exercised no
later than ten years from the date of grant. No options may be granted under the
plans after December 1, 2002. There were 722,322, 624,035, and 140,151 shares
available for granting of options at October 31, 1997, 1996, and 1995,
respectively. Stock option transactions for the three years ended October 31,
1997, were as follows:
Shares Average
Shares Under Price
Exercisable Option Per Share
-------------------------------------
Balance at October 31, 1994................................. 405,299 794,801 $19
=======
Granted................................................... 295,000 20
Exercised................................................. (28,768) 15
Cancelled................................................. -- --
---------
Balance at October 31, 1995................................. 567,243 1,061,033 20
=======
Granted................................................... 269,650 28
Exercised................................................. (69,503) 12
Cancelled................................................. (3,534) 22
---------
Balance at October 31, 1996................................. 726,609 1,257,646 22
=======
Granted................................................... 165,700 29
Exercised................................................. (323,218) 18
Cancelled................................................. (13,987) 25
---------
Balance at October 31, 1997................................. 650,053 1,086,141 $24
======= =========
The Company also has a stock option plan which provides for the granting of
stock options to non-employee Directors to purchase up to an aggregate amount of
100,000 shares of common stock. The plan provides that each non-employee
Director and each future non-employee Director, as of the first anniversary of
the date of his election as a Director of the Company, will be granted an option
to purchase 10,000 shares of common stock at a price per share of common stock
equal to the fair market value of the common stock as of the date of the grant.
Options become exercisable in 33 1/3% increments maturing cumulatively on each
of the first through third anniversaries of the date of the grant and must be
exercised no later than 10 years from the date of grant. No options may be
granted under the plan after June 22, 1997. There were no shares available for
granting of options
34
20
- --------------------------------------------------------------------------------
at October 31, 1997. There were 20,000, and 40,000 shares available for granting
of options at October 31, 1996 and 1995, respectively. Stock option transactions
for the three years ended October 31, 1997, were as follows:
Shares Average
Shares Under Price
Exercisable Option Per Share
----------------------------------------
Balance at October 31, 1994................................. 13,333 20,000 $17
=======
Granted................................................... -- --
Exercised................................................. -- --
Cancelled................................................. -- --
--------
Balance at October 31, 1995................................. 16,666 20,000 $17
=======
Granted................................................... 20,000 20
Exercised................................................. -- --
Cancelled................................................. -- --
--------
Balance at October 31, 1996................................. 20,000 40,000 $18
=======
Granted................................................... -- --
Exercised................................................. (15,000) 18
Cancelled................................................. -- --
--------
Balance at October 31, 1997................................. 11,666 25,000 $18
======= ========
In addition, the Company has a stock option plan which provides for the granting
of stock options to non-employee Directors to purchase up to an aggregate of
210,000 shares of common stock. Each non-employee Director as of December 6,
1989, was granted an option to purchase 3,000 shares of common stock at a price
per share of common stock equal to the fair market value of the common stock as
of the date of grant. Also, each non-employee Director who is a director of the
Company on any subsequent October 31, while the plan is in effect and shares are
available for the granting of options hereunder, shall be granted on such
October 31, an option to purchase 3,000 shares of common stock at a price equal
to the fair market value of the common stock as of such October 31. Options
become exercisable at any time commencing six months after the grant and must be
exercised no later than 10 years from the date of grant. No option may be
granted under the plan after December 5, 1999. There were 30,000, 51,000, and
72,000 shares available for granting of options at October 31, 1997, 1996 and
1995, respectively. Stock option transactions for the three years ended October
31, 1997, were as follows:
Shares Average
Shares Under Price
Exercisable Option Per Share
----------------------------------------
Balance at October 31, 1994................................. 66,000 87,000 $20
=======
Granted................................................... 21,000 20
Exercised................................................. -- --
Cancelled................................................. -- --
--------
Balance at October 31, 1995................................. 87,000 108,000 $20
=======
Granted................................................... 21,000 29
Exercised................................................. (6,000) 19
Cancelled................................................. -- --
--------
Balance at October 31, 1996................................. 102,000 123,000 $22
=======
Granted................................................... 21,000 28
Exercised................................................. (30,000) 18
Cancelled................................................. -- --
--------
Balance at October 31, 1997................................. 93,000 114,000 $24
======= ========
On October 1, 1992, Carl E. Pfeiffer retired as the Chief Executive Officer of
the Company. In connection with such retirement, the Company replaced options to
purchase 60,000 shares of Common Stock at a weighted average exercise price of
$15.85 held by Mr. Pfeiffer, under the Company's employee stock option plans
with new options
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having the same exercise prices and expiration dates. Such options are
substantially similar to the options previously held by him with the exception
that vesting is not contingent upon his continued employment with the Company
and the options expire on various dates between October 25, 1999, and October
13, 2001, instead of one year after retirement. There were no shares exercisable
at October 31, 1997. There were 60,000 shares exercisable at October 31, 1996
and 1995. During the year ended October 31, 1997, 60,000 shares were exercised
at an average price of $15.85 per share. There were no transactions related to
these stock options during the years ended October 31, 1996 and 1995.
STOCK BASED COMPENSATION
Effective November 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." In accordance with SFAS No. 123, the Company will
continue to apply the existing rules contained in Accounting Principles Opinion
No. 25, "Accounting for Stock Issued to Employees," and disclose the required
pro forma effect on net income and earnings per share of the fair value based
method of accounting for stock based compensation as required by SFAS No. 123.
The following pro forma summary of the Company's consolidated results of
operations have been prepared as if the fair value based method of accounting
for stock based compensation as required by SFAS No. 123 had been applied:
Years Ended October 31,
------------------------
1997 1996
------------------------
(In thousands)
Net income attributable to common stockholders.............. $69,184 $30,368
SFAS No. 123 adjustment..................................... (995) (1,431)
------- -------
Pro forma net attributable to common stockholders........... $68,189 $28,937
======= =======
Earnings per Common share:
Primary as reported....................................... $ 4.93 $ 2.22
Primary pro forma......................................... $ 4.86 $ 2.12
Fully diluted as reported................................. $ 4.38 $ 2.05
Fully diluted pro forma................................... $ 4.32 $ 1.96
Fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996.
1997 1996
------------------
Risk-free interest rate..................................... 5.39% 5.44%
Dividend yield.............................................. 2.23% 2.23%
Volatility factor........................................... 29.83% 29.83%
Weighted average expected life.............................. 5 YEARS 5 years
15. FINANCIAL INSTRUMENTS
The Company uses futures and option 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 do not extend beyond December, 1998. 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, 1997, the Company had open futures contracts at fair values of $2.8 million
and unrealized losses of $16,000 on such contracts. At October 31, 1997, these
contracts covered a notional volume of 3,693,000 pounds of aluminum.
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 based on a fixed rate ($50 million at 7.025%, and $50 million at
6.755%) and received on a LIBOR based variable rate (5.78125% at October 31,
1997). Differentials to be paid or received under the agreements are recognized
as interest expense. The agreements mature in 2003. The unrealized losses
related to the interest rate swaps are $4.1 million ($3.1 million in 1996) on
the total notional amount of $100 million ($100 million in 1996).
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The fair values of the Company's financial assets approximate the carrying
values reported on the consolidated balance sheet. The fair value of long-term
debt was $215.6 million and $256.9 million, as of October 31, 1997 and 1996,
respectively, as compared to carrying values at October 31, 1997 and 1996 of
$212.9 million and $253.5 million, respectively.
The fair value of long-term debt was based on the quoted market price, recent
transactions, or based on rates available to the Company for instruments with
similar terms and maturities. The fair value of interest rate swaps were
estimated by discounting expected cash flows using quoted market interest rates.
16. CONTINGENCIES
Quanex is subject to loss contingencies arising from federal, state, and local
environmental laws. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. The Company accrues its best
estimates of its cleanup obligations and adjusts such accruals as further
information develops or circumstances change. Costs of future expenditures for
environmental laws might be deemed to impose joint and several liability for
remediation obligations, the Company accrues its allocable share of liability
taking into account the number of companies participating, their ability to pay
their shares, the volumes and nature of the wastes involved, the nature of
anticipated response actions, and the nature of the Company's alleged
connections. It is management's opinion that the company has established
appropriate reserves for environmental remediation obligations at various of its
plant sites and disposal facilities. Those amounts are not expected to have a
material adverse effect on the Company's financial condition. Total reserves
include $20 million related to costs for further investigations, environmental
remediation, and corrective actions in connection with the acquisition of Piper
Impact. Actual cleanup costs at the Company's current plan sites, former plants,
and disposal facilities could be more or less than the amounts accrued for
remediation obligations. It is not possible at this point to reasonably estimate
the amount of any obligation for remediation in excess of current accruals that
would be material to Quanex's financial statements because of uncertainties as
to the extent of environmental impact and concurrence of governmental
authorities.
17. SUBSEQUENT EVENT
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"), to Vision Metals, Inc., a new
company formed by certain management of the Tubing Operations and Citicorp
Venture Capital, Ltd. Under the terms of the Purchase Agreement dated December
3, 1997, the Company received cash consideration of approximately $30 million,
subject to post closing adjustments. The results of operations of the Tubing
Operations have been classified as discontinued operations and prior periods
have been restated. For business segment reporting purposes, the Tubing
Operations were previously classified as "Steel Tubes". Two small divisions,
Heat Treat Division and Nitro Steel Division, which were previously included
within the "Steel Tubes" segment, were retained by the Company and are now
included in the "Engineered Steel Bars" segment.
37
23
Quanex Corporation
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following sets forth the selected quarterly information for the years ended
October 31, 1997 and 1996. The information presented has been restated to
reflect LaSalle and the Tubing Operations as discontinued operations. (See Note
3 to the Consolidated Financial Statements)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands except per share amounts)
1997:
Net sales................................................... $167,955 $185,999 $196,589 $195,550
Gross profit................................................ 20,732 26,265 28,807 26,671
Income from continuing operations........................... 3,372 7,339 8,607 8,400
Income from discontinued operations......................... 954 1,751 813 1,658
Gain on sale of discontinued operations..................... -- 36,290 -- --
-------- -------- -------- --------
Net income.................................................. 4,326 45,380 9,420 10,058
Earnings per share:
Primary:
Income from continuing operations...................... 0.23 0.53 0.61 0.59
Income from discontinued operations.................... 0.08 0.12 0.06 0.11
Gain on sale of discontinued operations................ -- 2.60 -- --
Earnings per primary common share...................... 0.31 3.25 0.67 0.70
Assuming full dilution.................................... $ 0.31 $ 2.78 $ 0.62 $ 0.65
1996:
Net sales................................................... $121,845 $143,497 $160,294 $194,433
Gross profit................................................ 14,728 17,955 26,409 34,091
Income from continuing operations........................... 1,524 5,254 7,478 8,722
Income from discontinued operations......................... 2,523 2,878 1,667 2,844
Extraordinary charge -- early extinguishment of debt........ (2,522) -- -- --
Net income.................................................. 1,525 8,132 9,145 11,566
Earnings per share:
Primary:
Income from continuing operations...................... 0.11 0.39 0.55 0.63
Income from discontinued operations.................... 0.19 0.21 0.12 0.21
Extraordinary charge -- early extinguishment of debt... (.19) -- -- --
Earnings per primary common share...................... 0.11 0.60 0.67 0.84
Assuming full dilution.................................... $ 0.11 $ 0.55 $ 0.61 $ 0.75
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance
beginning costs and at end
Description of year expenses Write-offs Other of year
- ------------------------------------------------------ ---------- ---------- ---------- ------- ----------
(In thousands)
Allowance for doubtful accounts:
Year ended October 31, 1997......................... $7,703 $ 2,674 $ (39) $ -- $10,338
Year ended October 31, 1996......................... $2,933 $10,449 $(5,679) $ -- $ 7,703
Year ended October 31, 1995......................... $2,942 $ 445 $ (454) $ -- $ 2,933
38
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QUARTERLY FINANCIAL RESULTS
(from continuing operations)
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
NET SALES (millions)
January..................................................... 167.96 121.85 128.64
April....................................................... 186.00 143.50 154.16
July........................................................ 196.58 160.29 160.22
October..................................................... 195.55 194.43 160.97
- ---------------------------------------------------------------------------------------------------------
Total................................................ 746.09 620.07 603.99
GROSS PROFIT (millions)
January..................................................... 20.73 14.73 15.48
April....................................................... 26.27 17.95 19.98
July........................................................ 28.81 26.41 23.55
October..................................................... 26.67 34.09 23.45
- ---------------------------------------------------------------------------------------------------------
Total................................................ 102.48 93.18 82.46
INCOME FROM CONTINUING OPERATIONS (millions)
January..................................................... 3.37 1.52 2.30
April....................................................... 7.34 5.26 6.11
July........................................................ 8.61 7.48 7.57
October..................................................... 8.40 8.72 7.40
- ---------------------------------------------------------------------------------------------------------
Total................................................ 27.72 22.98 23.38
INCOME FROM CONTINUING OPERATIONS PER PRIMARY COMMON SHARE
January..................................................... .23 .11 .07
April....................................................... .53 .39 .34
July........................................................ .61 .55 .48
October..................................................... .59 .63 .54
- ---------------------------------------------------------------------------------------------------------
Total................................................ 1.98 1.68 1.43
QUARTERLY COMMON STOCK DIVIDENDS
January..................................................... .15 .15 .14
April....................................................... .15 .15 .15
July........................................................ .15 .15 .15
October..................................................... .16 .15 .15
- ---------------------------------------------------------------------------------------------------------
Total................................................ .61 .60 .59
COMMON STOCK SALES PRICE (High & Low)
January..................................................... 29 1/8-24 1/4 21 1/8-18 24 5/8-20
April....................................................... 27 7/8-23 3/8 22 3/8-19 5/8 23 7/8-21
July........................................................ 34 1/8-25 1/8 23 7/8-19 3/8 26 5/8-22 1/8
October..................................................... 36 1/2-26 1/4 28 3/4-19 5/8 26-18 5/8
- ---------------------------------------------------------------------------------------------------------
39
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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 hereto duly authorized.
QUANEX CORPORATION
By: /s/ WAYNE M. ROSE
-------------------------
Wayne M. Rose
Vice President-Finance and
Corporate Development
(Principal Financial
Officer)
By: /s/ VIREN M. PARIKH
--------------------------
Viren M. Parikh
Controller (Principal
Accounting Officer
Date: January 20, 1998
