SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
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 April 30, 1997
- --------------------------------------- -------------------------------
Common Stock, par value $0.50 per share 13,728,987
QUANEX CORPORATION
INDEX
Page No.
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - April 30, 1997 and
October 31, 1996 ................................... 1
Consolidated Statements of Income - Three and Six
Months Ended April 30, 1997 and 1996................ 2
Consolidated Statements of Cash Flow - Six Months
Ended April 30, 1997 and 1996 ...................... 3
Notes to Consolidated Financial Statements ............ 4-6
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition .................... 7-12
Part II. Other Information
Item 5: Other Information ..................................... 13
Item 6: Exhibits and Reports on Form 8-K ...................... 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
April 30, October 31,
1997 1996
---------- ----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and equivalents ............................$ 34,809 $ 35,975
Accounts and notes receivable, net .............. 93,782 90,583
Inventories ..................................... 89,852 89,938
Deferred income taxes ........................... 9,971 10,019
Prepaid expenses ................................ 1,915 121
---------- ----------
Total current assets .................... 230,329 226,636
Property, plant and equipment ..................... 656,500 620,058
Less accumulated depreciation and amortization ....(302,650) (284,723)
---------- ----------
Property, plant and equipment, net ................ 353,850 335,335
Goodwill, net ..................................... 82,793 84,343
Net assets of discontinued operations ............. - 7,217
Other assets ...................................... 17,314 17,152
---------- ----------
$684,286 $670,683
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................... $ - $ 5,575
Accounts payable ................................ 74,206 73,958
Income taxes payable ............................ 14,827 3,807
Accrued expenses ................................ 44,139 44,286
Current maturities of long-term debt ............ 402 -
---------- ----------
Total current liabilities ............... 133,574 127,626
Long-term debt .................................... 214,163 253,513
Deferred pension credits .......................... 11,839 11,827
Deferred postretirement welfare benefits .......... 28,509 28,033
Deferred income taxes ............................. 31,571 33,743
Other liabilities ................................. 19,812 20,000
---------- ----------
Total liabilities ....................... 439,468 474,742
Stockholders' equity:
Preferred stock, no par value ................... - -
Common stock, $.50 par value .................... 6,863 6,795
Additional paid-in capital ...................... 97,464 94,251
Retained earnings ............................... 142,219 96,623
Unearned compensation ........................... (185) (185)
Adjustment for minimum pension liability ........ (1,543) (1,543)
---------- ----------
Total stockholders' equity .............. 244,818 195,941
---------- ----------
$684,286 $670,683
========== ==========
(1)
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
April 30 April 30
---------------- ----------------
1997 1996 1997 1996
------- ------- ------ -------
(Unaudited)
Net sales............................ $217,058 $174,316 $411,992 $325,463
Cost and expenses:
Cost of sales...................... 187,451 150,994 360,464 284,087
Selling, general and
administrative expense.......... 12,504 10,950 24,818 21,999
------- ------- ------- -------
Operating income..................... 17,103 12,372 26,710 19,377
Other income (expense):
Interest expense................... (4,917) (2,260) (9,768) (5,140)
Capitalized interest............... 764 78 1,382 127
Other, net......................... 85 1,031 (299) 1,163
Income from continuing operations ------- ------- ------- -------
before income taxes............... 13,035 11,221 18,025 15,527
Income tax expense................... (4,561) (4,713) (6,308) (6,522)
------- ------- ------- -------
Income from continuing operations.... 8,474 6,508 11,717 9,005
Income from discontinued operations,
net of income taxes............... 616 1,624 1,699 3,174
Gain on sale of discontinued
operations, net of income taxes... 36,290 - 36,290 -
------- ------- ------- -------
Income before extraordinary charge... 45,380 8,132 49,706 12,179
Extraordinary charge - early
extinguishment of debt.......... - - - (2,522)
------- ------- ------- -------
Net income........................... $ 45,380 8,132 $ 49,706 9,657
======= ======= ======= =======
Earnings per common share:
Primary:
Continuing operations.......... $ 0.61 $ 0.48 $ 0.84 $ 0.67
Discontinued operations........ 0.04 0.12 0.12 0.23
Gain on sale of discontinued
operations.................. 2.60 - 2.60 -
Extraordinary charge........... - - - (0.19)
------- ------- ------- -------
Total primary net earnings..... $ 3.25 $ 0.60 $ 3.56 $ 0.71
======= ======= ======= =======
Fully diluted:
Continuing operations.......... $ 0.57 $ 0.45 $ 0.83 $ 0.66
Discontinued operations........ 0.03 0.10 0.10 0.19
Gain on sale of discontinued
operations.................. 2.18 - 2.18 -
Extraordinary charge........... - - - (0.15)
------- ------- ------- -------
Total assuming full dilution... $ 2.78 $ 0.55 $ 3.11 $ 0.70
======= ======= ======= =======
Weighted average shares outstanding:
Primary........................... 13,965 13,641 13,939 13,614
======= ======= ======= =======
Assuming full dilution............ 16,661 16,360 16,635 16,353
======= ======= ======= =======
(2)
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Six Months Ended
April 30,
--------------------
1997 1996
------ ------
(Unaudited)
Operating activities:
Net income..............................................$49,706 $ 9,657
Adjustments to reconcile net income
to cash provided by operating activities:
Income from discontinued operations.................. (1,699) (3,174)
Gain on sale of discontinued operations..............(36,290) -
Depreciation and amortization........................ 20,437 17,656
Deferred income taxes................................ (2,172) (4,237)
Deferred pension costs............................... 12 (486)
Deferred postretirement welfare benefits............. 476 584
------ ------
30,470 20,000
Changes in assets and liabilities net of effects from
acquisitions and dispositions:
Decrease (increase) in accounts and notes receivable (3,199) 4,512
Decrease (increase) in inventory.................... 86 (9,190)
Increase (decrease) in accounts payable............. 248 (7,812)
Increase (decrease) in accrued expenses............. (147) 515
Other, net.......................................... (4,072) 2,326
------ ------
Cash provided by continuing operations............ 23,386 10,351
Cash provided by (used in) discontinued operations (4,630) 5,500
------ ------
Cash provided by operating activities............. 18,756 15,851
Investment activities:
Proceeds from the sale of discontinued operations...... 63,900 -
Capital expenditures of continuing operations
net of retirements.................................. (36,970) (8,298)
Capital expenditures of discontinued operations........ (685) (3,673)
Other, net............................................. (6,169) (2,781)
------ ------
Cash provided by (used in) investment activities 20,076 (14,752)
Cash provided by operating and ------ ------
investment activities..................... 38,832 1,099
Financing activities:
Notes payable borrowings (repayments).................. - (10,000)
Purchase of Senior Notes............................... - (44,667)
Bank borrowings (repayments)........................... (40,000) 50,000
Common dividends paid.................................. (4,110) (4,055)
Other, net............................................. 4,112 684
------ ------
Cash used by financing activities.............. (39,998) (8,038)
Decrease in cash and equivalents......................... (1,166) (6,939)
Cash and equivalents at beginning of period.............. 35,975 45,205
------ ------
Cash and equivalents at end of period.................... $34,809 $38,266
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................. $10,127 $ 5,369
Income taxes............................................. 11,269 273
(3)
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
- ----------------------
The interim consolidated financial statements of Quanex Corporation and
subsidiaries are unaudited, but include all adjustments which the Company
deems necessary for a fair presentation of its financial position and results
of operations. All such adjustments are of a normal recurring nature. Results
of operations for interim periods are not necessarily indicative of results to
be expected for the full year. All significant accounting policies conform to
those previously set forth in the Company's fiscal 1996 Annual Report on Form
10-K, which is incorporated by reference. Certain amounts for prior periods
have been reclassified in the accompanying consolidated financial statements
to conform to 1997 classifications.
2. Inventories
- --------------
Inventories consist of the following: April 30, October 31,
1997 1996
------- -------
(In thousands)
Raw materials ......................... $26,307 $28,426
Finished goods and work in process..... 54,776 52,768
------- -------
81,083 81,194
Other.................................. 8,769 8,744
------- -------
$89,852 $89,938
======= =======
The values of inventories in the consolidated balance sheets are based on the
following accounting methods:
LIFO...................................... $65,299 $69,234
FIFO...................................... 24,553 20,704
------- -------
$89,852 $89,938
======= =======
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $18 million at April 30, 1997, and
$15 million at October 31, 1996.
3. Long-Term Debt and Financing Arrangements
- ---------------------------------------------
On July 23, 1996, the Company replaced its $75 million Revolving Credit and
Letter of Credit Agreement with an unsecured $250 million Revolving Credit and
Term Loan Agreement ("Bank Agreement"). The Bank Agreement consists of a
revolving line of credit ("Revolver") and up to two term loans not to exceed
$100 million in the aggregate and repayable at a time selected by the Company
to be no later than July 23, 2004. Any term loan elections reduce the amount
available under the Revolver. The Bank Agreement expires July 23, 2001, and
provides for up to $25 million for standby letters of credit, limited to the
undrawn amount available under the Revolver. All borrowings under the Revolver
bear interest, at the option of the Company, at either (i) the prime rate or
the federal funds rate plus one percent, whichever is higher, or (ii) a
Eurodollar based rate. At April 30, 1997, the Company had $120 million
outstanding under the Revolver and no outstanding term loans.
In December 1995, the Company acquired the remaining $44.7 million principal
amount of its Senior Notes for a purchase price equal to 107.5% of the
principal amount plus accrued interest. The acquisition and related expenses
resulted in an after-tax extraordinary charge of approximately $2.5 million
($4.3 million before tax) in the first quarter of 1996.
(4)
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.Discontinued Operations
- -------------------------
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 reported as the segment "Cold Finished Steel Bars".
Net sales and income from discontinued operations are as follows:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- ---------------------
1997 1996 1997 1996
------ ------ ------ ------
(In thousands)
Net sales................... $28,485 $44,025 $66,733 $81,650
Income before income taxes.. 949 2,800 2,615 5,472
Income tax expense.......... (333) (1,176) (916) (2,298)
Net income.................. 616 $ 1,624 $ 1,699 $ 3,174
October 31,
1996
--------------
(In thousands)
Net Assets of Discontinued Operations
Current assets............................. $36,702
Property, plant and equipment, net......... 16,211
Other assets............................... 1,827
Current liabilities........................ (25,440)
Deferred pension credits................... (5,466)
Deferred postretirement welfare benefits... (27,595)
Deferred income taxes...................... 9,710
Adjustment for minimum pension liability... 1,268
-------
Net assets of discontinued operations... $ 7,217
=======
5.Subsequent Event
- ------------------
In May 1997, the Company entered into a non-binding letter
of intent to purchase Advanced Metal Forming C.V., a Netherlands based
manufacturer of impact extruded automotive air bag products. The transaction
is subject to various conditions, including the completion of due diligence,
the receipt of all regulatory and governmental approvals and the negotiation
and execution of a definitive agreement. Although there can be no assurance
that the transaction will close, the Company anticipates that the transaction
will close in the Company's fiscal fourth quarter.
(5)
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Industry Segment Information
- --------------------------------
Quanex is principally a specialized metals and metal products producer. The
company's continuing operations primarily consist of three segments:
hot rolled steel bars, steel tubes and aluminum products.
Corporate
Three Months Ended Hot Rolled Steel Aluminum and Consoli-
April 30, 1997 Steel Bars Tubes Products(1) Other(2) dated
------------------ ---------- ---------- ---------- ---------- ----------
(in thousands)
Units shipped:
To unaffiliated companies 145.0 Tons 25.9 Tons 71,946 Lbs.
Intersegment............ 6.2 - -
------- ------- -------
Total.................... 151.2 Tons 25.9 Tons 71,946 Lbs.
======= ======= =======
Net Sales:
To unaffiliated companies $76,859 $32,231 $107,968 - $217,058
Intersegment(3)......... 3,630 - - $(3,630) -
------- ------- ------- ------- -------
Total.................... $80,489 $32,231 $107,968 $(3,630) $217,058
======= ======= ======= ======= =======
Operating income (loss).. $12,796 $ 2,151 $ 4,614 $(2,458) $ 17,103
======= ======= ======= ======= =======
Corporate
Three Months Ended Hot Rolled Steel Aluminum and Consoli-
April 30, 1996 Steel Bars Tubes Products Other(2) dated
------------------ ---------- ---------- ---------- ---------- ----------
Units shipped:
To unaffiliated companies 127.7 Tons 24.2 Tons 59,833 Lbs.
Intersegment............ 6.5 - -
------- ------- -------
Total.................... 134.2 Tons 24.2 Tons 59,833 Lbs.
======= ======= =======
Net Sales:
To unaffiliated companies $69,375 $31,661 $73,280 - $174,316
Intersegment(3)......... 3,715 - - $(3,715) -
------- ------- ------- ------- -------
Total.................... $73,090 $31,661 $73,280 $(3,715) $174,316
======= ======= ======= ======= =======
Operating income (loss).. $10,340 $ 2,382 $ 3,766 $(4,116) $ 12,372
======= ======= ======= ======= =======
Corporate
Six Months Ended Hot Rolled Steel Aluminum and Consoli-
April 30, 1997 Steel Bars Tubes Products(1) Other(2) dated
---------------- ---------- ---------- ---------- ---------- ----------
Units shipped:
To unaffiliated companies 270.5 Tons 49.9 Tons 136,734 Lbs.
Intersegment............ 12.5 - -
------- ------- -------
Total.................... 283.0 Tons 49.9 Tons 136,734 Lbs.
======= ======= =======
Net Sales:
To unaffiliated companies $143,976 $60,288 $207,728 - $411,992
Intersegment(3)......... 7,367 - - $ (7,367) -
------- ------- ------- ------- -------
Total.................... $151,343 $60,288 $207,728 $ (7,367) $411,992
======= ======= ======= ======= =======
Operating income (loss).. $ 21,941 $ 2,447 $ 8,603 $ (6,281) $ 26,710
======= ======= ======= ======= =======
Corporate
Six Months Ended Hot Rolled Steel Aluminum and Consoli-
April 30, 1996 Steel Bars Tubes Products Other(2) dated
---------------- ---------- ---------- ---------- ---------- ----------
Units shipped:
To unaffiliated companies 230.9 Tons 47.1 Tons 109,466 Lbs.
Intersegment............ 14.1 - -
------- ------- -------
Total.................... 245.0 Tons 47.1 Tons 109,466 Lbs.
======= ======= =======
Net Sales:
To unaffiliated companies $126,483 $61,811 $137,169 - $325,463
Intersegment(3)......... 8,158 - - $ (8,158) -
------- ------- ------- ------- -------
Total.................... $134,641 $61,811 $137,169 $ (8,158) $325,463
======= ======= ======= ======= =======
Operating income (loss).. $ 17,675 $ 4,337 $ 5,417 $ (8,052) $ 19,377
======= ======= ======= ======= =======
(1) 1997 includes Piper Impact, Inc.
(2) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(3) Intersegment sales are conducted on an arm's-length basis.
(6)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition
Results of Operations
The Company classifies its operations into three business segments: hot
rolled steel bars, steel tubes and aluminum products. The Company's products are
marketed to the industrial machinery and capital equipment industries, the
transportation industry, the energy processing industry and the residential and
commercial building 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".
The Company's hot rolled steel business reflected improvements in net
sales and operating income for the first and second quarters of fiscal 1997 as
compared to the same periods of fiscal 1996. The improvements were due primarily
to higher sales volume. The improved results in the Company's hot rolled steel
business reflect the benefits realized from the Company's capital improvement
programs, which have allowed the Company to increase production, improve quality
and manage manufacturing costs.
The Company's aluminum products business achieved higher sales and
operating income primarily due to the acquisition in August 1996 of Piper
Impact, Inc. ("Piper Impact") and its higher margin operations. The Company's
Nichols-Homeshield Division was affected by weaker margins between selling
prices and raw material costs. These margins, referred to herein as "price
spreads", are a key financial performance indicator in the aluminum products
business.
The Company currently expects that overall business levels for the
remainder of fiscal 1997 should be similar to those experienced during 1996.
However, 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. The acquisition of Piper Impact in August 1996 is expected
to result in higher fiscal 1997 sales through the third fiscal quarter and,
assuming no material declines in the markets in which it serves, be accretive to
fiscal 1997 earnings. The sale of LaSalle in April 1997 will affect income for
the remainder of fiscal 1997 by the difference between the amount LaSalle would
have earned and the reduction in interest expense as a result of the repayment
of debt with the net proceeds from the sale. 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.
(7)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
The following table sets forth selected operating data for the Company's four
businesses:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ ------------------
1997 1996 1997 1996
------ ------- ------ -------
(In thousands)
Hot Rolled Steel Bars:
Units shipped (Tons)............ 151.2 134.2 283.0 245.0
Net Sales....................... $ 80,489 $ 73,090 $151,343 $134,641
Operating income................ $ 12,796 $ 10,340 $ 21,941 $ 17,675
Depreciation and amortization... $ 3,405 $ 4,590 $ 6,810 $ 9,180
Identifiable assets............. $175,381 $170,779 $175,381 $170,779
Steel Tubes:
Units shipped (Tons)............ 25.9 24.2 49.9 47.1
Net Sales....................... $ 32,231 $ 31,661 $ 60,288 $ 61,811
Operating income................ $ 2,151 $ 2,382 $ 2,447 $ 4,337
Depreciation and amortization... $ 617 $ 583 $ 1,244 $ 1,178
Identifiable assets............. $ 47,336 $ 43,839 $ 47,336 $ 43,839
Aluminum Products:
Units shipped (Pounds).......... 71,946 59,833 136,734 109,466
Net Sales....................... $107,968 $ 73,280 $207,728 $137,169
Operating income................ $ 4,614 $ 3,766 $ 8,603 $ 5,417
Depreciation and amortization... $ 5,968 $ 3,454 $ 12,038 $ 6,937
Identifiable assets............. $417,078 $227,862 $417,078 $227,862
Consolidated net sales for the three and six months ended April 30,
1997, were $217.1 million and $412.0 million, respectively, representing
increases of $42.7 million, or 25%, and $86.5 million, or 27%, respectively,
when compared to the same periods last year. The improvement principally
reflects the inclusion of Piper Impact sales and improved sales volume in the
Company's hot rolled steel bar business.
Net sales from the Company's hot rolled steel bar business for the
three and six months ended April 30, 1997, were $80.5 million and $151.3
million, respectively, representing increases of $7.4 million, or 10%, and $16.7
million, or 12%, respectively, when compared to the same periods last year. The
improvements were primarily due to sales volume increases of 13% and 16%,
respectively, for the three and six months ended April 30, 1997, as compared to
the same prior year periods. The hot rolled 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 to the
Company's product quality and delivery performance.
Net sales from the Company's steel tube business for the three and six
months ended April 30, 1997, were $32.2 million and $60.3 million, respectively,
representing an increase of $570 thousand and a decrease of $1.5 million,
respectively, when compared to the same periods last year. Product pricing
pressure continued, however, demand for mechanical, pipe and heat exchanger
products was improved during the second fiscal quarter of 1997.
(8)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Net sales from the Company's aluminum products business for the three
and six months ended April 30, 1997, were $108.0 million and $207.7 million,
respectively, representing increases of $34.7 million, or 47%, and $70.6
million, or 51%, respectively, when compared to the same periods last year.
These increases are principally due to the acquisition of Piper Impact in August
1996 and were partially offset by substantially lower aluminum prices. Net sales
were also higher for the three and six months ended April 30, 1997, compared to
the same periods last year, due to increased sales volume of aluminum flat roll.
Consolidated operating income for the three and six months ended April
30, 1997, was $17.1 million and $26.7 million, respectively, representing
increases of $4.7 million, or 38%, and $7.3 million, or 38%, respectively, when
compared to the same periods last year. This increase was primarily due to the
inclusion of Piper Impact's results and improved operating income in the hot
rolled steel bar business.
Operating income from the Company's hot rolled steel bar business for
the three and six months ended April 30, 1997, was $12.8 million and $21.9
million, respectively, representing increases of $2.5 million, or 24%, and $4.3
million, or 24%, respectively, when compared to the same periods last year.
These improvements were attributable to higher sales for both the quarter and
year-to-date due to increased capacity and strong demand.
Operating income from the Company's steel tube business for the three
and six months ended April 30, 1997, was $2.2 million and $2.4 million,
respectively, representing decreases of $231,000, or 10%, and $1.9 million, or
44%, respectively, when compared to the same periods last year. Profitability
improved during the second quarter of fiscal 1997 compared to the first quarter
but still remained below prior year levels primarily due to weaker selling
prices and a depressed boiler tube market.
Operating income from the Company's aluminum products business for the
three and six months ended April 30, 1997, was $4.6 million and $8.6 million,
respectively, representing increases of $848,000, or 23%, and $3.2 million, or
59%, respectively, when compared to the same periods last year. Improvement in
this segment reflects the acquisition of Piper Impact and were offset by lower
aluminum prices.
Selling, general and administrative expenses increased by $1.6 million,
or 14%, and $2.8 million, or 13%, respectively, for the three and six months
ended April 30, 1997, as compared to the same periods of last year, primarily
due to the inclusion of Piper Impact's selling, general and administrative
expenses. However, as a percentage of net sales, selling, general and
administrative expenses were 5.8% and 6.0%, respectively, for the three and six
months ended April 30, 1997, compared to 6.3% and 6.8%, respectively, in the
same prior year periods.
Interest expense increased by $2.7 million and $4.6 million,
respectively, for the three and six months ended April 30, 1997, as compared to
the same periods of 1996 primarily as a result of increased bank borrowings
associated with the Piper Impact acquisition. This increased interest expense
was partly offset by decreased expense due to the early extinguishment of the
Company's remaining Senior Notes late in the first quarter of fiscal 1996.
(9)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Income from continuing operations for the three and six months ended
April 30, 1997, was $8.5 million and $11.7 million, respectively, as compared to
$6.5 million and $9.0 million for the same prior year periods. The improvements
were principally attributable to the inclusion of the results of Piper Impact
and improved results at the Company's MacSteel division. Included in "Other,
net" for the three months ended April 30, 1997 was a life insurance gain of
approximately $400,000. Included in "Other, net" for the three months ended
April 30, 1996, was a $2.3 million pretax gain related to the final recovery of
a business interruption claim. Also included in "Other, net" for the three
months ended April 30, 1996, was $1.5 million resulting from a loss on
abandonment of idle assets. Capitalized interest increased to $764,000 and $1.4
million, respectively, for the three and six months ended April 30, 1997,
compared to $78,000 and $127,000 for the same periods last year due to ongoing
construction related to the expansion programs at MacSteel and Piper Impact.
Income taxes were applied at the Company's expected annual effective rate. The
Company's effective income tax rate was 35% for the first and second quarters of
fiscal 1997 compared to 42% in both prior year periods.
Income from discontinued operations, net of income taxes, for the three
and six months ended April 30, 1997, was $616,000 and $1.7 million,
respectively, as compared to $1.6 million and $3.2 million for the same periods
in 1996. The decrease was primarily attributable to lower margins between
selling prices and raw material costs, partly offset by higher sales volume.
Included in net income for the three and six months ended April 30, 1997, is an
after-tax gain of $36.3 million on the sale of discontinued operations.
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") and up to two term loans not to exceed
$100 million in the aggregate and repayable at a date selected by the Company to
be no later than July 23, 2004. Any term loan elections reduce the amount
available under the Revolver. New borrowings under the Bank Agreement may not be
made after July 23, 2001. The Bank Agreement also 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 (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 based on
a fixed rate ($50 million at 7.025%, and $50 million at 6.755%) and payments are
received on a LIBOR based variable rate (5.53125% at April 30, 1997).
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
in 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 April 30, 1997,
there were $120 million of outstanding Revolver borrowings and no term loans
outstanding.
(10)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
In December 1995, the Company acquired all of its outstanding 10.77%
Senior Notes for a purchase price equal to 107.5% of the principal amount plus
accrued interest. The acquisition and related expenses resulted in an after-tax
extraordinary charge of approximately $2.5 million in the first quarter of 1996.
The acquisition was funded with cash and bank 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 August 9, 1996, the Company completed the acquisition of substantially
all of the assets of Piper Impact. Piper's assets, net of various liabilities,
were acquired for approximately $130 million in cash, cash equivalents, and
notes. This acquisition was financed with existing cash and bank borrowings.
Subsequent to the acquisition, the Company's Board of Directors approved
additional capital expenditures at Piper totaling approximately $55 million.
These expenditures are expected to provide the capacity needed to supply major
new customer programs phasing in over the next two years.
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.
At April 30, 1997, the Company had commitments of $22 million for the
purchase or construction of capital assets, primarily relating to the Company's
continued expansions at MacSteel and Piper Impact. 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 six months ended April
30, 1997, was $18.8 million as compared to $15.9 million during the six months
ended April 30, 1996. The increase was principally due to improved income and
higher depreciation, partially offset by increased cash used by discontinued
operations.
Investment Activities
Net cash provided by investment activities during the six months ended
April 30, 1997, was $20.1 million as compared to cash used in investment
activities of $14.8 million for the same 1996 period. The increase in cash
provided by investment activities was principally due to proceeds from the sale
of LaSalle, and was partly offset by increased capital expenditures and payment
of the remaining notes related to the Piper Impact acquisition. The Company
estimates that fiscal 1997 capital expenditures will be approximately $70 to
$80 million.
(11)
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Financing Activities
Cash used in financing activities for the six months ended April 30,
1997, was $40.0 million, principally consisting of $40.0 million of repayments
of bank borrowings from proceeds of the LaSalle sale. Cash used in financing
activities for the six months ended April 30, 1996, was $8.0 million,
principally consisting of $44.7 million for the early extinguishment of
long-term debt, a $10.0 million reduction in notes payable and the payment of
$4.1 million in common dividends and was offset by long-term bank borrowings of
$50.0 million.
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.
(12)
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders.
On February 27, 1997, the Company held its regular Annual Meeting of
Stockholders (the "Annual Meeting").
At the Annual Meeting, John D. O'Connell, Robert C. Snyder, and Vernon E.
Oechsle were elected as directors for a three year term. The following sets
forth the number of shares that voted for and for which votes were withheld of
each of such persons:
For Withheld
John D. O'Connell 11,005,824 858,396
Robert C. Snyder 11,008,316 855,902
Vernon E. Oechsle 11,006,057 858,162
In addition, at the Annual Meeting, the stockholders of the Company ratified the
appointment of Deloitte & Touche LLP as the Company's independent auditors and
approved to amend the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of the Company's common stock, $.50 par
value, from 25,000,000 shares to 50,000,000 shares.
The ratification of Deloitte & Touche LLP as the Company's independent auditors
was approved with 11,776,615 votes cast for approval, 25,008 votes cast against,
and 62,594 abstentions. The amendment to the Company's Restated Certificate of
Incorporation was approved with 10,718,920 votes cast for approval, 1,078,157
votes cast against, and 67,137 abstentions.
Item 5 - Other Information.
None
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 May 5, 1997, regarding the
completion of the sale of its LaSalle Steel subsidiary and containing
certain pro forma financial statements of the Company and notes thereto
regarding the sale.
(13)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUANEX CORPORATION
/s/ Viren M. Parikh
-------------------
Viren M. Parikh
Controller (Chief Accounting Officer)
Date June 12, 1997
- -------------------
(14)
EXHIBIT 11
QUANEX CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
April 30, April 30,
----------------- -----------------
1996 1995 1996 1995
------ ------ ------ ------
(Unaudited) (Unaudited)
Income from continuing operations................. $ 8,474 $ 6,508 $ 11,717 $ 9,005
Income from discontinued operations, net of
income taxes................................... 616 1,624 1,699 3,174
Gain on sale of discontinued operations, net
of income taxes................................ 36,290 - 36,290 -
------ ------ ------ ------
Income before extraordinary charge................ 45,380 8,132 49,706 12,179
Extraordinary charge - early extinguishment of debt - - - (2,522)
------ ------ ------ ------
Net income........................................ $45,380 $ 8,132 $ 49,706 $ 9,657
====== ====== ====== ======
Weighted average shares
outstanding-primary............................. 13,965 13,641 13,939 13,614
====== ====== ====== ======
Earnings per common share:
Primary:
Income from continuing operations.............. $ 0.61 $ 0.48 $ 0.84 $ 0.67
Income from discontinued operations............ 0.04 0.12 0.12 0.23
Gain on sale of discontinued operations........ 2.60 - 2.60 -
Extraordinary charge........................... - - - (0.19)
------ ------ ------ ------
Earnings per common share.................... $ 3.25 $ 0.60 $ 3.56 $ 0.71
====== ====== ====== ======
Income from continuing operations.................$ 8,474 $ 6,508 $ 11,717 $ 9,005
Income from discontinued operations, net of
income taxes................................... 616 1,624 1,699 3,174
Gain on sale of discontinued operations, net
of income taxes................................ 36,290 - 36,290 -
------ ------ ------ ------
Income before extraordinary charge................ 45,380 8,132 49,706 12,179
Extraordinary charge - early extinguishment of debt - - - (2,522)
------ ------ ------ ------
Net income........................................ 45,380 8,132 49,706 9,657
Interest on 6.88% convertible subordinated
debentures and amortization of related issuance
costs, net of applicable income taxes.......... 999 891 1,998 1,784
------ ------ ------ ------
Adjusted net income...............................$ 46,379 $ 9,023 $ 51,704 $ 11,441
Weighted average shares
outstanding-primary............................. 13,965 13,641 13,939 13,614
Effect of common stock equivalents
arising from stock options...................... - 23 - 43
Subordinated debentures assumed converted
to common stock................................. 2,696 2,696 2,696 2,696
Weighted average shares ------ ------ ------ ------
outstanding-fully diluted....................... 16,661 16,360 16,635 16,353
====== ====== ====== ======
Earnings per common share:
Assuming full dilution:
Income from continuing operations.............. $ 0.57 $ 0.45 $ 0.83 $ 0.66
Income from discontinued operations............ 0.03 0.10 0.10 0.19
Gain on sale of discontinued operations........ 2.18 - 2.18 -
Extraordinary charge........................... - - - (0.15)
------ ------ ------ ------
Earnings per common share.................... $ 2.78 $ 0.55 $ 3.11 $ 0.70
====== ====== ====== ======
5
1,000
6-MOS
OCT-31-1997
NOV-01-1996
APR-30-1997
34,809
0
93,782
0
89,852
230,329
656,500
302,650
684,286
133,574
214,163
0
0
6,863
237,955
684,286
411,992
411,992
360,464
360,464
0
0
9,768
18,025
6,308
11,717
1,699
36,290
0
49,706
3.560
3.110
