1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission File Number 1-5725
QUANEX CORPORATION
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1872178
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 West Loop South, Suite 1500, Houston, Texas 77027
------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 961-4600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
- --------------------------------------- ----------------------------
Common Stock, par value $0.50 per share 14,179,449
2
QUANEX CORPORATION
INDEX
Page No.
--------
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - July 31, 1998 and
October 31, 1997.............................................................. 1
Consolidated Statements of Income - Three and Nine Months
Ended July 31, 1998 and 1997 ................................................. 2
Consolidated Statements of Cash Flow - Nine months
Ended July 31, 1998 and 1997 ................................................. 3
Notes to Consolidated Financial Statements....................................... 4-8
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition .............................................. 9-16
Part II. Other Information
Item 1: Legal Proceedings................................................................ 17
Item 6: Exhibits and Reports on Form 8-K................................................. 17
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
July 31, October 31,
1998 1997
------------ ------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and equivalents ........................... $ 54,667 $ 26,851
Accounts and notes receivable, net ............. 68,995 80,089
Inventories .................................... 75,451 73,035
Deferred income taxes .......................... 8,282 5,601
Prepaid expenses ............................... 2,331 1,320
------------ ------------
Total current assets ................... 209,726 186,896
Property, plant and equipment .................... 677,199 642,854
Less accumulated depreciation and amortization ... (292,851) (263,783)
------------ ------------
Property, plant and equipment, net ............... 384,348 379,071
Goodwill, net .................................... 93,891 91,496
Net assets of discontinued operations ............ -- 13,554
Other assets ..................................... 16,475 14,688
------------ ------------
$ 704,440 $ 685,705
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 71,621 $ 71,317
Income taxes payable ........................... 2,380 8,503
Accrued expenses ............................... 46,043 43,208
Current maturities of long-term debt ........... 9,093 11,050
------------ ------------
Total current liabilities .............. 129,137 134,078
Long-term debt ................................... 193,301 201,858
Deferred pension credits ......................... 6,115 6,627
Deferred postretirement welfare benefits ......... 6,969 6,835
Deferred income taxes ............................ 51,341 48,111
Other liabilities ................................ 18,878 19,373
------------ ------------
Total liabilities ...................... 405,741 416,882
Stockholders' equity:
Common stock, $.50 par value ................... 7,090 7,025
Additional paid-in capital ..................... 108,255 105,146
Retained earnings .............................. 183,677 156,528
Foreign currency translation adjustment ........ (25) 422
Adjustment for minimum pension liability ....... (298) (298)
------------ ------------
Total stockholders' equity ............. 298,699 268,823
------------ ------------
$ 704,440 $ 685,705
============ ============
(1)
4
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Unaudited)
Net sales ........................................ $ 204,854 $ 196,589 $ 589,264 $ 550,543
Cost and expenses:
Cost of sales .................................. 164,500 159,058 485,203 448,663
Selling, general and administrative expense .... 11,650 11,657 34,985 33,270
Depreciation and amortization .................. 10,771 9,628 32,249 28,752
--------- --------- --------- ---------
Operating income ................................. 17,933 16,246 36,827 39,858
Other income (expense):
Interest expense ............................... (3,708) (4,040) (11,113) (13,808)
Capitalized interest ........................... 1,057 849 3,753 2,231
Other, net ..................................... 464 189 1,816 1,440
Income from continuing operations
--------- --------- --------- ---------
before income taxes ......................... 15,746 13,244 31,283 29,721
Income tax expense ............................... (5,461) (4,637) (10,949) (10,403)
--------- --------- --------- ---------
Income from continuing operations ................ 10,285 8,607 20,334 19,318
Income from discontinued operations, net of
income taxes ................................ -- 813 -- 3,518
Gain on sale of discontinued operations, net
of income taxes ............................. -- -- 13,606 36,290
--------- --------- --------- ---------
Net income ....................................... $ 10,285 $ 9,420 $ 33,940 $ 59,126
========= ========= ========= =========
Earnings per common share:
Basic:
Continuing operations ...................... $ 0.73 $ 0.62 $ 1.44 $ 1.41
Discontinued operations .................... -- 0.06 -- 0.26
Gain on sale of discontinued operations .... -- -- 0.96 2.64
--------- --------- --------- ---------
Total basic net earnings ................ $ 0.73 $ 0.68 $ 2.40 $ 4.31
========= ========= ========= =========
Diluted:
Continuing operations ...................... $ 0.66 $ 0.57 $ 1.37 $ 1.35
Discontinued operations .................... -- 0.05 -- 0.21
Gain on sale of discontinued operations .... -- -- 0.80 2.18
--------- --------- --------- ---------
Total diluted net earnings .............. $ 0.66 $ 0.62 $ 2.17 $ 3.74
========= ========= ========= =========
Weighted average shares outstanding:
Basic ......................................... 14,176 13,840 14,138 13,734
========= ========= ========= =========
Diluted ....................................... 17,096 16,802 17,048 16,629
========= ========= ========= =========
(2)
5
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Nine Months Ended
July 31,
------------------------------
1998 1997
------------ ------------
(Unaudited)
Operating activities:
Net income .................................................... $ 33,940 $ 59,126
Adjustments to reconcile net income
to cash provided by operating activities:
Income from discontinued operations ...................... -- (3,518)
Gain on sale of discontinued operations .................. (13,606) (36,290)
Depreciation and amortization ............................ 32,674 29,201
Deferred income taxes .................................... 3,228 140
Deferred pension costs ................................... (512) (124)
Deferred postretirement welfare benefits ................. 134 285
------------ ------------
55,858 48,820
Changes in assets and liabilities net of effects from
acquisitions and dispositions:
Decrease (increase) in accounts and notes receivable ..... 12,176 (939)
Decrease (increase) in inventory ......................... (5,140) 2,048
Increase (decrease) in accounts payable .................. 676 (2,224)
Increase (decrease) in accrued expenses .................. (974) 395
Other, net ............................................... (10,122) (3,242)
------------ ------------
Cash provided by continuing operations .............. 52,474 44,858
Cash used in discontinued operations ................ -- (773)
------------ ------------
Cash provided by operating activities ............... 52,474 44,085
Investment activities:
Proceeds from the sale of discontinued operations ............. 31,434 63,900
Capital expenditures of continuing operations,
net of retirements ....................................... (39,723) (53,897)
Capital expenditures of discontinued operations ............... -- (2,636)
Other, net .................................................... (2,395) (6,126)
------------ ------------
Cash provided (used) by investment activities ....... (10,684) 1,241
------------ ------------
Cash provided by operating and
investment activities ............................ 41,790 45,326
Financing activities:
Bank borrowings (repayments), net ............................. (10,377) (60,000)
Common dividends paid ......................................... (6,791) (6,176)
Issuance of common stock under benefit plans .................. 3,174 9,715
Other, net .................................................... -- 831
------------ ------------
Cash used in financing activities ................... (13,994) (55,630)
Effect of exchange rate changes on cash and equivalents ......... 20 --
------------ ------------
Increase (decrease) in cash and equivalents ..................... 27,816 (10,304)
Cash and equivalents at beginning of period ..................... 26,851 35,962
------------ ------------
Cash and equivalents at end of period ........................... $ 54,667 $ 25,658
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 12,264 $ 15,662
Income taxes .................................................... $ 16,306 $ 12,105
(3)
6
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
The interim consolidated financial statements of Quanex Corporation and
subsidiaries ("the Company") are unaudited, but include all adjustments
which the Company deems necessary for a fair presentation of its financial
position and results of operations. All such adjustments are of a normal
recurring nature. Results of operations for interim periods are not
necessarily indicative of results to be expected for the full year. All
significant accounting policies conform to those previously set forth in
the Company's fiscal 1997 Annual Report on Form 10-K, as amended, which is
incorporated by reference. Certain amounts for prior periods have been
reclassified in the accompanying consolidated financial statements to
conform to 1998 classifications.
2. Inventories
Inventories consist of the following: July 31, October 31,
1998 1997
------- -----------
(In thousands)
Raw materials ............................................................... $22,042 $19,432
Finished goods and work in process........................................... 46,679 47,739
------- -------
68,721 67,171
Other........................................................................ 6,730 5,864
------- -------
$75,451 $73,035
======= =======
The values of inventories in the consolidated balance sheets are based
on the following accounting methods:
LIFO......................................................................... $54,062 $51,517
FIFO......................................................................... 21,389 21,518
------- -------
$75,451 $73,035
======= =======
With respect to inventories valued using the LIFO method, replacement
cost exceeded the LIFO value by approximately $16 million at July 31, 1998,
and $16 million at October 31, 1997.
3. Acquisition
On October 29, 1997, the Company, through its Dutch subsidiary, Piper
Impact Europe B.V., ("Piper Europe"), acquired the net assets of Advanced
Metal Forming C.V., a Dutch limited partnership, for approximately $30
million. Based on preliminary purchase accounting, the goodwill associated
with Piper Europe is approximately NLG 26 million or $13 million as of July
31, 1998.
Piper Europe produces aluminum impact extrusions and precision steel
stampings for the automotive and electronics industries in Europe and North
America. Piper Europe employs approximately 300 people, and its
manufacturing facilities are located near Zwolle in The Netherlands.
(4)
7
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Long-Term Debt and Financing Arrangements
The Company has an unsecured $250 million Revolving Credit and Term Loan
Agreement ("Bank Agreement"). The Bank Agreement currently 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, 2003, and provides for up to $25 million for standby letters of credit,
limited to the undrawn amount available under the Revolver. All borrowings
under the Revolver bear interest, at the option of the Company, at either
(a) the Prime Rate or the Federal Funds Rate plus one percent, whichever is
higher, or (b) a Eurodollar-based Rate. At July 31, 1998, the Company had
$90 million outstanding under the Revolver.
On October 28, 1997, Piper Europe executed a stand-alone secured credit
facility ("Credit Facility") providing up to 50 million Dutch Guilders
("NLG"). At July 31, 1998, 1 NLG was equal to 0.4987 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 28, 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% interest 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
is paid quarterly in arrears. Interest on loans under the Overdraft
Facility is payable on the repayment date, however, in the case of a loan
period of twelve months, interest is payable six months after the beginning
of the loan period and on the repayment date. At July 31, 1998, Piper
Europe had NLG 38.2 million outstanding under the Credit Facility.
(5)
8
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Discontinued Operations
In April 1997, the Company completed the sale of its LaSalle Steel Company
("LaSalle") subsidiary. The Company recorded an after tax gain on the sale
of $36.3 million in the second quarter of fiscal 1997. In the first quarter
of fiscal 1998, an additional after tax gain of $833 thousand was recorded
as a result of post-closing adjustments. LaSalle's results of operations
have been reclassified as discontinued operations in the prior period and
prior periods have been restated. For business segment reporting purposes,
LaSalle's data was previously classified as "Cold Finished Steel Bars".
In December 1997, the Company completed the sale of its tubing
operations, comprised of Michigan Seamless Tube, Gulf States Tube and the
Tube Group Administrative Office ("Tubing Operations"). The sale was
effective November 1, 1997. The Company recorded a net gain on the sale of
$12.8 million in the first quarter of fiscal 1998. Included in the gain is
an accrual for the Company's best estimate of potential environmental
clean-up costs at one of the discontinued operating facilities. Results of
these operations have been reclassified as discontinued operations in the
prior period and prior periods have been restated. For business segment
reporting purposes, Tubing Operations were previously classified as "Steel
Tubes".
Net sales and income from discontinued operations are as follows:
July 31, 1997
Three Months Nine Months
Ended Ended
------------ ------------
(In Thousands)
Net sales ........................................ $ 28,487 $ 153,258
============ ============
Income before income taxes ....................... 1,250 5,413
Income tax expense ............................... (437) (1,895)
------------ ------------
Income from discontinued operations ........... $ 813 $ 3,518
============ ============
October 31,
1997
-------------
(In Thousands)
Net Assets of Discontinued Operations:
Current assets ................................ $ 24,388
Property, plant and equipment, net ............ 17,357
Other assets .................................. 2,784
Current liabilities ........................... (11,241)
Deferred pension credits ...................... (4,373)
Deferred postretirement welfare benefits ...... (22,406)
Deferred income taxes ......................... 6,718
Adjustment for minimum pension liability ...... 327
------------
Net assets of discontinued operations ...... $ 13,554
============
(6)
9
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Earnings Per Share
The following tables present information necessary to calculate basic and
diluted earnings per share per FAS 128 for the periods indicated (in
thousands except per share amounts):
For the Three Months Ended For the Three Months Ended
July 31, 1998 July 31, 1997
-------------------------------------------------------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
BASIC EPS
Income from Cont. Oper. .......... $ 10,285 14,176 $ 0.73 $ 8,607 13,840 $ 0.62
Income from Discont. Oper. ....... -- -- 813 0.06
Gain on sale of Discont. Oper. ... -- -- -- --
----------- ------ ----------- ------
Total basic net earnings ...... $ 10,285 $ 0.73 $ 9,420 $ 0.68
=========== ====== =========== ======
EFFECT OF DILUTIVE SECURITIES
Effect of common stock Equiv.
arising from stock options ..... -- 224 -- 266
Effect of conversion of
subordinated debentures ........ $ 999 2,696 $ 999 2,696
DILUTED EPS
Income from Cont. Oper. .......... $ 11,284 17,096 $ 0.66 $ 9,606 16,802 $ 0.57
Income from Discont. Oper. ....... -- -- 813 0.05
Gain on sale of Discont. Oper. ... -- -- -- --
----------- ------ ----------- ------
Total diluted net earnings .... $ 11,284 $ 0.66 $ 10,419 $ 0.62
=========== ====== =========== ======
For the Nine Months Ended For the Nine Months Ended
July 31, 1998 July 31, 1997
-------------------------------------------------------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
BASIC EPS
Income from Cont. Oper. .......... $ 20,334 14,138 $ 1.44 $ 19,318 13,734 $ 1.41
Income from Discont. Oper. ....... -- -- 3,518 0.26
Gain on sale of Discont. Oper. ... 13,606 0.96 36,290 2.64
----------- ------ ----------- ------
Total basic net earnings ...... $ 33,940 $ 2.40 $ 59,126 $ 4.31
=========== ====== =========== ======
EFFECT OF DILUTIVE SECURITIES
Effect of common stock Equiv.
arising from stock options ..... -- 214 -- 199
Effect of conversion of
subordinated debentures ........ $ 2,997 2,696 $ 2,997 2,696
DILUTED EPS
Income from Cont. Oper. .......... $ 23,331 17,048 $ 1.37 $ 22,315 16,629 $ 1.35
Income from Discont. Oper. ....... -- -- 3,518 0.21
Gain on sale of Discont. Oper. ... 13,606 0.80 36,290 2.18
----------- ------ ----------- ------
Total diluted net earnings .... $ 36,937 $ 2.17 $ 62,123 $ 3.74
=========== ====== =========== ======
(7)
10
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Industry Segment Information
Quanex is principally a specialized metals and metal products producer. The
Company's continuing operations primarily consists of two segments:
engineered steel bars and aluminum products.
Corporate
Three Months Ended Engineered Aluminum and
July 31, 1998 Steel Bars Products Other(1) Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies ............................ $ 80,018 $ 124,836 $ 0 $ 204,854
Intersegment(2) ...................................... 741 -- (741) --
------------ ------------ ------------ ------------
Total ................................................. $ 80,759 $ 124,836 $ (741) $ 204,854
============ ============ ============ ============
Operating income (loss) ............................... $ 14,638 $ 4,362 $ (1,067) $ 17,933
============ ============ ============ ============
Corporate
Three Months Ended Engineered Aluminum and
July 31, 1997 Steel Bars Products Other(1) Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies ............................ $ 76,354 $ 120,235 $ 0 $ 196,589
Intersegment(2) ...................................... 4,883 -- (4,883)(3) --
------------ ------------ ------------ ------------
Total ................................................. $ 81,237 $ 120,235 $ (4,883) $ 196,589
============ ============ ============ ============
Operating income (loss) ............................... $ 13,236 $ 7,349 $ (4,339) $ 16,246
============ ============ ============ ============
Corporate
Nine Months Ended Engineered Aluminum and
July 31, 1998 Steel Bars Products Other(1) Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Net Sales:
To unaffiliated companies ............................ $ 247,446 $ 341,818 $ 0 $ 589,264
Intersegment(2) ...................................... 2,357 -- (2,357) --
------------ ------------ ------------ ------------
Total ................................................. $ 249,803 $ 341,818 $ (2,357) $ 589,264
============ ============ ============ ============
Operating income (loss) ............................... $ 42,760 $ 2,500 $ (8,433) $ 36,827
============ ============ ============ ============
Corporate
Nine Months Ended Engineered Aluminum and
July 31, 1997 Steel Bars Products Other(1) Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies ............................ $ 222,580 $ 327,963 $ 0 $ 550,543
Intersegment(2) ...................................... 13,242 -- (13,242)(3) --
------------ ------------ ------------ ------------
Total ................................................. $ 235,822 $ 327,963 $ (13,242) $ 550,543
============ ============ ============ ============
Operating income (loss) ............................... $ 36,076 $ 14,402 $ (10,620) $ 39,858
============ ============ ============ ============
(1) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
(3) Includes intersegment sales of $3.5 and $10.7 million to discontinued
operations for the three and nine month periods ended July 31, 1997.
(8)
11
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition
RESULTS OF OPERATIONS
The Company classifies its operations into two business segments: engineered
steel bars and aluminum products. The Company's products are marketed to the
transportation, capital equipment, homebuilding and remodeling, defense and
other commercial industries.
In April 1997, the Company completed the sale of LaSalle. LaSalle's results
of operations have been classified as discontinued operations and prior periods
have been restated. For business segment reporting purposes, LaSalle's data was
previously classified as "Cold Finished Steel Bars".
In October 1997, the Company, through its Dutch subsidiary, Piper Europe,
purchased the net assets of Advanced Metal Forming C.V., a Dutch limited
partnership, for approximately $30 million. The Company's balance sheet as of
October 31, 1997 takes into account this transaction.
In December 1997, the Company completed the sale of its tubing operations
("Tubing Operations"), comprised of Michigan Seamless Tube, Gulf States Tube and
the Tube Group Administrative Office. The sale was effective November 1, 1997.
Results of these operations have been reclassified as discontinued operations in
the prior period and prior periods have been restated. For business segment
reporting purposes, Tubing Operations were previously classified as "Steel
Tubes". Two small divisions, Heat Treat Division and Nitro Steel Division, which
were previously included with this segment, were retained by the Company and are
now included in the engineered steel bars segment.
The Company's engineered steel bars business reflected record quarterly and
nine month earnings for the period ended July 31, 1998. These record earnings
were primarily due to strong demand in the transportation markets, but also
reflect the benefits realized from the Company's capital expenditure programs,
which have allowed the Company to increase production, enhance quality and
manage manufacturing costs.
The Company's aluminum products business experienced lower operating income
for the nine months ended July 31, 1998 compared to the same period in 1997
despite increased net sales. The Nichols Aluminum division was negatively
effected by seasonal and weather-related weakness in the construction business
and compressed margins due to the costs of raw materials. These margins,
referred to herein as "price spreads", are a key financial performance indicator
in the aluminum sheet business. Markets for Nichols Aluminum began to
strengthen, however, in the third quarter with increased demand and a flattening
of scrap prices. With the ongoing operational improvements at the mini-mill and
rolling mills, flat-rolled sheet quality has improved and this has allowed
penetration into distributor markets. These distributor markets are important
and active year-round purchasers of aluminum sheet.
(9)
12
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
The engineered products group of the aluminum products business also
experienced lower operating income for the nine months ended July 31, 1998
compared to the same period of 1997. This decline was a result of operating
losses at Piper Impact, Inc., ("Piper Impact"), stemming from continued high
start-up costs at its new plant, slack demand in Asia for automotive air bag
products and the 54-day work stoppage at General Motors' North American
facilities. Marketing efforts are being focused on building sales in diverse
applications utilizing Piper Impact's unique impact extrusion technology,
product design and development capabilities, and aluminum and steel products
manufacturing capacity.
The Company currently expects that overall business levels for the
remainder of fiscal 1998 should be similar to those experienced during 1997.
Start-up costs at Piper Impact's new plant are expected to decrease with the use
of key new equipment, however the weakened Asian market may continue to impact
operating results for the remainder of 1998. The sale of LaSalle in April 1997
and the Tubing Operations in December 1997 will affect income for the remainder
of fiscal 1998 by the difference between the amount LaSalle and the Tubing
Operations would have earned and the reduction in interest expense as a result
of the repayment of debt with the net proceeds from the sale. Domestic and
global market factors will impact the Company and any slowdown in the U.S.
economy could affect demand and pricing for many of the Company's products.
Improved financial results will be dependent upon, among other things, whether
the continued strength of the economy can be sustained, improvements in the
markets which the Company serves and improvement in the price spreads of
aluminum products.
The following table sets forth selected operating data for the Company's
two business segments:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------------ -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands)
Engineered Steel Bars:
Net Sales..................... $ 80,759 $ 81,237 $249,803 $235,822
Operating Income.............. $ 14,638 $ 13,236 $ 42,760 $ 36,076
Depreciation and amortization. $ 3,384 $ 3,516 $ 10,146 $ 10,556
Identifiable assets........... $207,496 $183,479 $207,496 $183,479
Aluminum Products:
Net Sales..................... $124,836 $120,235 $341,818 $327,963
Operating Income.............. $ 4,362 $ 7,349 $ 2,500 $ 14,402
Depreciation and amortization. $ 7,353 $ 6,088 $ 22,001 $ 18,126
Identifiable assets........... $431,355 $414,179 $431,355 $414,179
(10)
13
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Consolidated net sales for the three and nine months ended July 31, 1998,
were $204.9 and $589.3 million, respectively, representing an increase of $8.3
million, or 4%, and $38.7 million or 7%, respectively, when compared to
consolidated net sales for the same periods last year. The increase reflects
improved sales volume in the Company's aluminum products business for the three
and nine months ended July 31, 1998 and improved sales volume in the engineered
steel bar business for the nine months ended July 31,1998. Additionally, sales
by Piper Europe which did not exist in 1997 and $3.5 and $10.7 million of sales
to discontinued operations reflected as inter-segment sales in the three and
nine months ended July 31, 1997, respectively, contributed to the increase.
Net sales from the Company's engineered steel bar business for the three
and nine months ended July 31, 1998, were $80.8 and $249.8 million representing
a decrease of $478 thousand, or 1%, and an increase of $14.0 million, or 6%,
respectively, when compared to the same periods last year. Sales were only
slightly down for the three months ended July 31, 1998 compared to the same
period of 1997. The improvement for the nine months ended 1998 compared to the
same period of 1997 was primarily due to higher sales volume and improved
product mix. The increase in net sales at the engineered steel bar business is
principally due to the continued strength in the durable goods market,
particularly transportation and capital goods, and increased production capacity
resulting from capital expansion programs.
Net sales from the Company's aluminum products business for the three and
nine months ended July 31, 1998, were $124.8 and $341.8 million representing an
increase of $4.6 million, or 4%, and $13.9 million, or 4%, respectively, when
compared to the same periods last year. The majority of the improvement in net
sales for the three and nine months ended July 31, 1998 is due to sales by the
newly acquired Piper Europe, partially offset by a decrease in sales from the
prior year at Piper Impact's domestic operations.
Consolidated operating income for the three and nine months ended July 31,
1998 was $17.9 and $36.8 million representing an increase of $1.7 million, or
10%, and a decrease of $3.0 million, or 8%, respectively, when compared to the
same periods last year. The increase for the three months ended July 31, 1998
was due to increased operating income at the engineered steel bars business and
decreased general and administrative expenses at the corporate office, together
with LIFO credits, partially offset by decreased operating income at the
aluminum products segment. The decrease for the nine months ended July 31, 1998
was due to lower operating earnings from the aluminum products business partly
offset by improved earnings in the engineered steel bar business and lower
general and administrative expenses experienced at the corporate office.
Operating income from the Company's engineered steel bar business for the
three and nine months ended July 31, 1998, was $14.6 and $42.8 million,
respectively, representing an increase of $1.4 million, or 11% and $6.7 million,
or 19%, respectively, when compared to the same periods last year. Operating
income for the three months ended July 31, 1998 increased from the same period
of 1997 despite slightly lower net sales due to reduced costs for the period.
The improvement for the nine months ended July 31, 1998 compared to the same
period of 1997 was attributable to higher sales volume due to increased capacity
and strong demand.
(11)
14
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Operating income from the Company's aluminum products business for the
three and nine months ended July 31, 1998, was $4.4 million and $2.5 million,
respectively, representing a decrease of $3.0 million, or 41%, and $11.9
million, or 83%, respectively, when compared to the same periods last year. The
earnings decline in this segment for the three and nine months ended July 31,
1998 is largely a result of operating losses experienced at Piper Impact due to
high start-up costs at its new plant, slack demand in Asia and the 54-day work
stoppage at General Motors' North American facilities. However, these results
were offset by the addition of Piper Europe and improvements at Nichols Aluminum
and Fabricated Products divisions.
Selling, general and administrative expenses remained flat for the three
months ended July 31, 1998 and increased by $1.7 million, or 5%, for the nine
months ended July 31, 1998, as compared to the same periods of last year. The
increase in the nine month period compared to the same prior year period is
principally due to the inclusion of Piper Europe and the higher sales levels of
the Company.
Depreciation and amortization increased by $1.1 million, or 12%, and $3.5
million, or 12%, respectively, for the three and nine months ended July 31, 1998
as compared to the same periods of last year. The increase is principally due to
increased depreciation at Piper Impact and the inclusion of Piper Europe.
Interest expense decreased by $332 thousand and $2.7 million for the three
and nine months ended July 31, 1998, as compared to the same periods of 1997 as
a result of reducing bank borrowings with proceeds received from the sale of
LaSalle and the Tubing Operations.
Capitalized interest increased by $208 thousand and $1.5 million for the
three and nine months ended July 31, 1998, as compared to the same periods of
1997 primarily due to Phase III and IV of the MACSTEEL expansion project.
"Other, net" remained relatively constant for the three and nine months
ended July 31, 1998, as compared to the same periods of 1997.
Income from continuing operations increased $1.7 million, or 19%, and $1.0
million, or 5%, for the three and nine months ended July 31, 1998 compared to
the same periods of 1997. The majority of the increase in the three months ended
July 31, 1998, compared to 1997 is due to the increased operating income and the
reduced interest expense. The increase in the nine months ended July 31, 1998 is
due primarily to the reduced interest expense and increased capitalized
interest, partially offset by the decline in operating income for the period.
Included in net income for the nine months ended July 31, 1998 is $13.6
million of gain on sale of discontinued operations, net of income taxes.
Included in net income for the three months ended July 31, 1997 is $813 thousand
of income from discontinued operations, net of taxes. Included in net income for
the nine months ended July 31, 1997 is $36.3 million gain on the sale of
discontinued operations, net of taxes, and $3.5 million of income from
discontinued operations, net of taxes.
(12)
15
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash on hand, cash flow from
operations, and borrowings under an unsecured $250 million Revolving Credit and
Term Loan Agreement ("Bank Agreement"). The Bank Agreement currently 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, 2003 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. In the fourth quarter of fiscal 1996, the Company entered
into interest rate swap agreements, which effectively converted $100 million of
its variable rate debt under the Bank Agreement to fixed rate. Under these
agreements, payments are made each quarter based on a fixed rate ($50 million at
7.025%, and $50 million at 6.755%) and payments are received each quarter on a
LIBOR based variable rate (5.6875% at July 31, 1998). Differentials to be paid
or received under the agreements are recognized as interest expense. Payments
under the swap agreements are tied to the interest periods for the borrowings
under the Bank Agreement. The swap agreements mature on July 29, 2003. The Bank
Agreement contains customary affirmative and negative covenants and requirements
to maintain a minimum consolidated tangible net worth, as defined therein. The
Bank Agreement limits the payment of dividends and certain restricted
investments. Under the Bank Agreement, at July 31, 1998, there was $90 million
of outstanding Revolver borrowings.
On June 30, 1995, the Company exercised its right under the terms of its
Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for
an aggregate of $84,920,000 of its 6.88% Convertible Subordinated Debentures due
June 30, 2007("Debentures"). Interest is payable semi-annually on June 30 and
December 31 of each year. The Debentures are subject to mandatory annual sinking
fund payments sufficient to redeem 25% of the Debentures issued on each of June
30, 2005 and June 30, 2006, to retire a total of 50% of the Debentures before
maturity. The Debentures are subordinate to all senior indebtedness of the
Company and are convertible, at the option of the holder, into shares of the
Company's common stock at a conversion price of $31.50 per share.
On April 18, 1997, the Company completed the sale of LaSalle for
approximately $65 million in cash. The proceeds were used to pay down the
Company's Revolver.
On October 29, 1997, the Company acquired, through its Dutch subsidiary,
Piper Europe, substantially all of the assets of Advance Metal Forming C.V., a
Dutch limited partnership, for approximately $30 million. The acquisition was
financed with existing cash and bank borrowings of 35 million Dutch Guilders.
Piper Europe's primary source of funds is a stand-alone secured credit facility
("Credit Facility") providing up to 50 million Dutch Guilders ("NLG"). At July
31, 1998, 1 NLG was equal to 0.4987 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 28, 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% interest 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
(13)
16
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
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 is paid quarterly in arrears.
At July 31, 1998, Piper Europe had NLG 38.2 million outstanding under the Credit
Facility.
On December 3, 1997, the Company completed the sale of its Tubing
Operations for approximately $30 million in cash. The proceeds were used to
improve the Company's debt structure and for investment in the Company's
value-added businesses.
On December 22, 1997, the Company renewed its letter of intent to purchase
Decatur Aluminum Corp., a Decatur, Alabama based aluminum sheet manufacturer.
The acquisition of Decatur Aluminum is subject to the results of on-going
negotiations of a definitive agreement.
At July 31, 1998, the Company had commitments of $26 million for the
purchase or construction of capital assets, primarily relating to the Company's
continued expansion and improvement programs at MacSteel, Piper Impact and
Nichols Aluminum. 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 and
environmental expenditures.
Operating Activities
Cash provided by operating activities during the nine months ended July 31, 1998
was $52.5 million as compared to $44.1 million provided during the nine months
ended July 31, 1997. The increase was principally due to lower working capital
requirements and higher depreciation expense from continuing operations, and the
elimination of cash used by discontinued operations.
Investment Activities
Net cash provided by investment activities during the nine months ended July 31,
1998, was $41.8 million as compared to $45.3 million for the same 1997 period.
The decrease in cash provided by investment activities was principally due to
decreased proceeds from the sale of discontinued operations, but partially
offset by lower capital expenditures on continuing operations and the
elimination of capital expenditures on discontinued operations. The Company
estimates that fiscal 1998 capital expenditures will be approximately $60 to $65
million.
Financing Activities
Cash used in financing activities for the nine months ended July 31, 1998, was
$14.0 million, as compared to $55.6 million for the same 1997 period. The cash
used in both periods primarily consists of repayments of bank borrowings.
(14)
17
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for the Company's year ending October 31, 1999. SFAS No. 130
establishes standards for the reporting and displaying of comprehensive income
and its components. The Company continues to analyze SFAS No. 130 to determine
the additional disclosures required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which is effective for the Company's
year ending October 31, 1999. This statement establishes standards for the
reporting of information about operating segments. The Company continues to
analyze SFAS No. 131 to determine what, if any, additional disclosures will be
required.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits", which is effective for the
Company's year ending October 31, 1999. This statement defines new disclosure
requirements for pension and other postretirement benefits in an effort to
facilitate financial analysis by adding useful information and deleting
disclosures that the FASB considers no longer useful. The Company continues to
analyze SFAS No. 132 to determine what additional disclosures will be required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the Company's year
ending October 31, 2000. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company will be
analyzing SFAS No. 133 to determine what, if any, impact or additional
disclosure requirements this pronouncement will have.
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, 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.
(15)
18
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
YEAR 2000
In response to the Year 2000 issue, the Company initiated a project in early
1997 to identify, evaluate and implement changes to its existing computerized
business systems. The Company is addressing the issue through a combination of
modifications to existing programs and conversions to Year 2000 compliant
software. In addition, the Company will be communicating with its major
customers, suppliers, and other service providers to determine whether they are
actively involved in projects to ensure that their products and business systems
will be Year 2000 compliant. Although the Company currently anticipates that it
will not incur material expenditures or disruption of operations relating to
year 2000 processing issues, if the Company or its key customers or key vendors
are unable to resolve, in a timely manner, any significant processing issues
that may arise, such inability could have an adverse effect on the Company's
business, financial condition and results of operations. Accordingly, the
Company plans to devote the necessary resources to resolve all significant year
2000 issues in a timely manner.
ENVIRONMENTAL MATTERS
The Company's former Tube Group Division once owned and operated a plant in
Redford Township, Michigan. The Michigan Department of Environmental Quality has
alleged that the Company is liable for contamination there and asked the Company
to undertake clean-up actions in response thereto. Quanex contests its alleged
responsibility for the contamination, but conditionally has offered to enter
into negotiations with the State and other potentially responsible parties
concerning participation in clean-up work. However, to date the State has not
responded to the Company's offer.
On or about July 13, 1998, the United States Department of Justice ("DOJ")
notified the Company that the federal government was prepared to bring against
the Company a court action alleging violations of the Clean Water Act at the
Company's former facility in Rosenberg, Texas. Among other things, the
government contended that the plant had discharged water which contained
pollutants at levels greater than applicable effluent limits, had not
appropriately monitored its discharges, and had not adequately notified the
federal Environmental Protection Agency of exceedances. DOJ's demand letter
extended to the Company and to Vision Metals, the current owner and operator of
the Rosenberg plant, the opportunity to resolve this matter short of litigation
and offered to settle the Company's alleged violations for a civil penalty of
$1.1 million. The Company tendered this matter to Vision Metals for defense and
indemnification pursuant to the Purchase Agreement by which Vision Metals
acquired the Rosenberg facility and assumed certain environmental liabilities.
Having accepted the Company's tender without reservation, Vision Metals at its
expense is contesting the government's allegations and attempting to negotiate
resolution of the government's Clean Water Act claims against the Company.
(16)
19
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings.
Other than the proceedings described under Part I Item 2, "Environmental
Matters", there are no material legal proceedings to which Quanex, its
subsidiaries, or their property is subject.
Item 6 - Exhibits and Reports on Form 8-K.
Exhibit 11 - Statement re computation of earnings per share.
Exhibit 27 - Financial Data Schedule - July 31, 1998.
No reports on Form 8-K were filed by the Company during the quarter for which
this report is being filed.
(17)
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUANEX CORPORATION
--------------------------------------
Viren M. Parikh
Controller (Chief Accounting Officer)
Date September 3, 1998
-------------------
(18)
21
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
[S] [C]
11 - Statement re computation of earnings per share.
27 - Financial Data Schedule - July 31, 1998.
1
EXHIBIT 11
QUANEX CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited)
Income from continuing operations ..................... $ 10,285 $ 8,607 $ 20,334 $ 19,318
Income from discontinued operations, net of
income taxes ....................................... -- 813 -- 3,518
Gain on sale of discontinued operations, net
of income taxes .................................. -- -- 13,606 36,290
-------- -------- -------- --------
Income before extraordinary charge .................... 10,285 9,420 33,940 59,126
Extraordinary charge - early
extinguishment of debt ............................. -- -- -- --
-------- -------- -------- --------
Net income ............................................ $ 10,285 $ 9,420 $ 33,940 $ 59,126
======== ======== ======== ========
Weighted average shares
outstanding-basic ................................... 14,176 13,840 14,138 13,734
======== ======== ======== ========
Earnings per common share:
Basic:
Income from continuing operations ................. $ 0.73 $ 0.62 $ 1.44 $ 1.41
Income from discontinued operations ............... -- 0.06 -- 0.26
Gain on sale of discontinued operations ........... -- -- 0.96 2.64
-------- -------- -------- --------
Earnings per common share ....................... $ 0.73 $ 0.68 $ 2.40 $ 4.31
======== ======== ======== ========
Income from continuing operations ..................... $ 10,285 $ 8,607 $ 20,334 $ 19,318
Income from discontinued operations, net of
income taxes ....................................... -- 813 -- 3,518
Gain on sale of discontinued operations, net
of income taxes .................................. -- -- 13,606 36,290
-------- -------- -------- --------
Income before extraordinary charge .................... 10,285 9,420 33,940 59,126
Extraordinary charge - early
extinguishment of debt ............................. -- -- -- --
-------- -------- -------- --------
Net income ............................................ $ 10,285 $ 9,420 $ 33,940 $ 59,126
Interest on 6.88% convertible subordinated
debentures and amortization of related issuance
costs, net of applicable income taxes ............... 999 999 2,997 2,997
-------- -------- -------- --------
Adjusted net income ................................... $ 11,284 $ 10,419 $ 36,937 $ 62,123
======== ======== ======== ========
Weighted average shares
outstanding-basic ................................... 14,176 13,840 14,138 13,734
Effect of common stock equivalents
arising from stock options .......................... 224 266 214 199
Subordinated debentures assumed
converted to common stock ........................... 2,696 2,696 2,696 2,696
-------- -------- -------- --------
Weighted average shares
outstanding-diluted ................................. 17,096 16,802 17,048 16,629
======== ======== ======== ========
Earnings per common share:
Diluted:
Income from continuing operations ................. $ 0.66 $ 0.57 $ 1.37 $ 1.35
Income from discontinued operations ............... -- 0.05 -- 0.21
Gain on sale of discontinued operations ........... -- -- 0.80 2.18
-------- -------- -------- --------
Earnings per common share ....................... $ 0.66 $ 0.62 $ 2.17 $ 3.74
======== ======== ======== ========
5
1,000
9-MOS
OCT-31-1998
NOV-01-1997
JUL-31-1998
54,667
0
68,995
0
75,451
209,726
677,199
292,851
704,440
129,137
193,301
0
0
7,090
291,609
704,440
589,264
589,264
517,452
517,452
0
0
11,113
31,283
10,949
20,334
0
13,606
0
33,940
2.400
2.170
