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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 77027
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (713) 961-4600
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.50 par value New York Stock Exchange, Inc.
Rights to Purchase Series A Junior
Participating Preferred Stock New York Stock Exchange, Inc.
6.88% Convertible Subordinated Debentures New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates as of December 31, 1999, computed by reference to the closing
price for the Common Stock on the New York Stock Exchange, Inc. on that date,
was $358,765,289. Such calculation assumes only the registrant's officers and
directors were affiliates of the registrant.
At December 31, 1999, there were outstanding 14,351,225 shares of the
registrant's Common Stock, $.50 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement, to be filed with
the Commission within 120 days of October 31, 1999, for its Annual Meeting of
Stockholders to be held on February 23, 2000, are incorporated herein by
reference in Items 10, 11, 12, and 13 of Part III of this Annual Report.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
General..................................................... 1
Manufacturing Processes, Markets and Product Sales by
Business Segment............................................ 2
Raw Materials and Supplies.................................. 6
Backlog..................................................... 6
Competition................................................. 6
Sales and Distribution...................................... 6
Seasonal Nature of Business................................. 6
Service Marks, Trademarks, Trade Names and Patents.......... 7
Research and Development.................................... 7
Environmental Matters....................................... 7
Employees................................................... 8
Financial Information About Foreign and Domestic
Operations.................................................. 8
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for Registrant's Common Equity and Related Security
Holder Matters.............................................. 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 7A. Quantitative/Qualitative Disclosure......................... 21
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Disagreements on Accounting and Financial Disclosure........ 58
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 58
Item 11. Executive Compensation...................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 58
Item 13. Certain Relationships and Related Transactions.............. 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 59
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PART I
ITEM 1. BUSINESS
GENERAL
Quanex was organized in 1927 as a Michigan corporation under the name
Michigan Seamless Tube Company. The Company reincorporated in Delaware in 1968
under the same name and then changed its name to Quanex Corporation in 1977. The
Company's executive offices are located at 1900 West Loop South, Suite 1500,
Houston, Texas 77027. References made to the "Company" or "Quanex" include
Quanex Corporation and its subsidiaries unless the context indicates otherwise.
Quanex is a technological leader in the production of value-added
engineered carbon and alloy steel bars, aluminum flat-rolled products, and
precision-formed metal products. The Company uses state-of-the-art manufacturing
technologies, low-cost production processes, and engineering and metallurgical
expertise to provide customers with specialized products for specific
applications. These capabilities also provide Quanex with unique competitive
advantages.
The Company seeks to reduce the impact of cyclical economic downturns on
its operations by serving diverse markets. These markets include the
transportation industry, the industrial machinery and capital equipment
industries, the homebuilding and remodeling industries, defense industries, and
other commercial markets.
The Company's future growth strategy is focused on the continued
penetration of higher margin markets, continued expansion of its aluminum and
steel manufacturing operations, expansion of precision-formed, value-added metal
products, and niche acquisitions.
In October 1998, Quanex completed the purchase of Decatur Aluminum
Corporation, an aluminum sheet manufacturer in Decatur, Alabama, for
approximately $19 million. The newly acquired company, renamed Nichols
Aluminum-Alabama, Inc. (Nichols Aluminum Alabama), includes cold rolling and
finishing operations and a wide-width paint line that allows it to produce
painted or coated aluminum sheet, a premium value-added product. This
acquisition significantly expanded the aluminum mill sheet products segment's
overall cold-rolling capacity, effectively utilizing most of the 400-million
pounds of current casting capacity.
On December 15, 1999, the Company announced that it had signed a contract
to acquire the assets of Alcoa's Fort Lupton, Colorado-based aluminum sheet
production facility for $8 million plus working capital value which is estimated
at $17 million. Consummation of the sale is subject to government approval.
The acquisition of the Fort Lupton mill will increase the casting,
cold-finishing and value-added painting capacities of Nichols Aluminum, Quanex's
aluminum sheet business. The Fort Lupton mill can produce more than 40-million
pounds annually of high-grade aluminum sheet for a variety of applications,
including beverage cans and other food packaging, home furnishing, and other
consumer durable products.
The Company also has invested significantly in technologically advanced
continuous manufacturing processes to meet demanding quality specifications and
to achieve additional cost efficiencies. In its MACSTEEL operations, rotary
centrifugal continuous casters are used with an in-line manufacturing process to
produce bearing grade and aircraft quality, seam-free, engineered carbon and
alloy steel bars that enable Quanex to participate in higher margin markets.
Since 1992, the Company has invested more than $169 million to enhance its steel
manufacturing and refining processes, to improve rolling and finishing
capability, and to expand manufacturing capacity at its MACSTEEL operations to
approximately 620,000 tons per year. Phases I through IV of the MACSTEEL
expansions have been completed. In Phase IV of these expansions, finished during
1999, the Company installed an additional cold finishing line at each of the
MACSTEEL plants in Jackson, Michigan, and at Ft. Smith, Arkansas. This project
doubled the shipping capacity of MACPLUS cold finished bars, a premium
value-added product, to more than 180,000 tons annually. In October 1998, the
Company announced its Phase V program, which will increase engineered steel bar
shipping capacity by approximately 13% to 700,000 tons annually. Phase V also
includes smaller projects at MACSTEEL Heat Treating, based in Huntington,
Indiana, where a third processing line is being built, and at Kenosha,
Wisconsin-based MACSTEEL NitroSteel, where efficiency enhancing equipment has
been installed. Phase V is expected to be complete by year-end 2000.
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In November 1998 the Aluminum Mill Sheet Products segment completed
construction of two rotary furnaces and upgraded the dross processing equipment
at its casting plant. The $12 million expansion now allows the Company's Nichols
Aluminum Division to use less costly scrap, resulting in lower raw material
costs, improved yields of scrap to molten metal, and improved efficiency through
more flexible operations.
The Company's businesses are managed on a decentralized basis. Each
operating group has administrative, operating and marketing functions. Financial
reporting systems measure each group's return on investment, and the Company
seeks to reward superior performance with incentive compensation, which is a
significant portion of total employee compensation. Intercompany sales are
conducted on an arms-length basis. Operational activities and policies are
managed by both corporate officers and key division executives. Also, a small
corporate staff provides corporate accounting, financial and treasury
management, tax, and human resource services to the operating divisions.
MANUFACTURING PROCESSES, MARKETS, AND PRODUCT SALES BY BUSINESS SEGMENT
The Company's operations are grouped into three business segments: (i)
engineered steel bars, (ii) aluminum mill sheet products, and (iii) engineered
products. General corporate expenses are classified as other operations.
Information with respect to major markets for the Company's products,
expressed as a percentage of consolidated net sales, is shown under the heading
"Sales by Major Markets" as set forth below. For financial information regarding
each of Quanex's business segments, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein and Note 13 to the
Consolidated Financial Statements. Although Quanex has attempted to estimate its
sales by product and market categories, many products have multiple end uses for
several industries and sales are not recorded on the basis of product or market
categories. A portion of sales is made to distributors who sell to different
industries. Net sales by principal market are based upon the total dollar volume
of customer invoices. For the year ended October 31, 1999, one customer, Autoliv
Inc., accounted for 12% of Company sales.
Quanex operates 13 manufacturing facilities in eight states in the United
States and one plant in Zwolle, The Netherlands. These facilities feature
efficient plant design and flexible manufacturing processes, enabling the
Company to produce a wide variety of products for various industries and
applications. The Company is generally able to maintain minimal levels of
finished goods inventories at most locations because it typically manufactures
products to customer specifications upon order.
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SALES BY MAJOR MARKETS
SALES ($ MILLIONS)
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FISCAL YEAR ENDED OCTOBER 31,
MARKET ------------------------------------------
MARKETS DESCRIPTION QUANEX PRODUCTS 1999 1998 1997 1996 1995
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TRANSPORTATION Auto/Truck Steel bars, $384.1 $352.9 $322.3 $207.2 $170.9
impact-extruded 47.4% 44.2% 43.2% 33.4% 28.3%
components, aluminum
sheet
Other Transportation Steel bars, treated $ 30.1 $ 31.8 $ 32.8 $ 22.0 $ 23.1
tubes
(including and bars, aluminum 3.7% 4.0% 4.4% 3.6% 3.8%
ship/railroad, sheet
recreational vehicles
and military
transportation)
TOTAL $414.2 $384.7 $355.1 $229.2 $194.0
TRANSPORTATION 51.1% 48.2% 47.6% 37.0% 32.1%
ALUMINUM Residential and Aluminum sheet, $293.9 $334.8 $327.5 $313.1 $331.6
BUILDING Commercial Building fabricated aluminum 36.3% 42.0% 43.9% 50.5% 54.9%
PRODUCTS Materials, Other products, aluminum
coil, coated aluminum
coil
INDUSTRIAL General Industrial Specialized forgings, $ 37.8 $ 29.9 $ 24.9 $ 47.4 $ 59.9
MACHINERY AND Machinery (including impact-extruded 4.7% 3.8% 3.3% 7.6% 9.9%
products,
CAPITAL EQUIPMENT mining, agriculture and steel bars
construction)
Capital Equipment Steel bars, treated $ 12.3 $ 10.4 $ 17.5 $ 22.0 $ 13.1
bars
(including material and tubes, partition 1.5% 1.3% 2.4% 3.6% 2.2%
handling, machine products,
tools, and impact-extruded
office/household) products
TOTAL INDUSTRIAL $ 50.1 $ 40.3 $ 42.4 $ 69.4 $ 73.0
MACHINERY AND 6.2% 5.1% 5.7% 11.2% 12.1%
CAPITAL EQUIPMENT
OTHER $ 51.9 $ 37.7 $ 21.1 $ 8.4 $ 5.4
6.4% 4.7% 2.8% 1.3% .9%
TOTAL SALES $810.1 $797.5 $746.1 $620.1 $604.0
100.0% 100.0% 100.0% 100.0% 100.0%
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Engineered Steel Bars
The Company's Engineered Steel Bars segment comprises engineered steel bar
operations, steel bar and tube heat treating services, and steel bar and tube
corrosion and wear resistant finishing services.
The Company's engineered steel bar operations are conducted through its
MACSTEEL division, consisting of two plants located in Ft. Smith, Arkansas, and
Jackson, Michigan. These plants manufacture hot finished, precision engineered,
carbon and alloy steel bars. The Company believes that MACSTEEL has the only two
plants in North America using continuous rotary centrifugal casting technology.
This casting process produces seam-free bars, without surface defects or
inclusions, thereby reducing the need for subsequent surface conditioning. The
continuous casting and automated in-line manufacturing operations at the
MACSTEEL plants substantially reduce labor and energy costs by eliminating the
intermittent steps that characterize manufacturing operations at most larger,
and particularly integrated steel mills. The Company typically sells only
complete heat lots, or batches, which are made to specific customer
requirements. Heat lots average 45 tons at the Jackson plant and 50 tons at the
Ft. Smith plant.
MACSTEEL produces various grades of customized engineered steel bars by
melting steel scrap and casting it in a rotary centrifugal continuous caster.
MACSTEEL's molten steel is further processed through secondary refining
processes that includes argon stirring, ladle injection, and vacuum arc
degassing prior to casting. These processes enable MACSTEEL to produce higher
quality, "cleaner" steels.
As a result of its state-of-the-art continuous manufacturing technology,
which reduces labor, energy and process yield loss, the Company believes that
MACSTEEL is one of the lowest cost producers of precision engineered carbon and
alloy steel bars. The Company believes that energy costs at MACSTEEL are
significantly lower than those of its competitors because its bars are moved
directly from the caster to the rolling mill before cooling, eliminating the
need for costly reheating. MACSTEEL's low unit labor costs are achieved with its
highly automated manufacturing process, enabling it to produce finished steel
bars using less than two man-hours of labor per ton compared with an estimated
average of four to five man-hours per ton for U.S. integrated steel producers.
MACSTEEL products are custom manufactured for customers in the passenger
car, light truck, sport utility vehicle (SUVs), heavy truck, anti-friction
bearing, off-road and farm equipment, defense, capital equipment, and seamless
tubular industries. These industries use engineered steel bars in critical
applications such as camshafts, crankshafts, transmission gears, wheel spindles
and hubs, bearing cages and rollers, steering components, hydraulic mechanisms
and seamless tube production. Also, MACSTEEL engineered steel bars are used for
the manufacture of components for safety critical steel air bag inflators at the
Company's plant in New Albany, Mississippi.
Also included in the Engineered Steel Bars segment is a heat treating plant
in Huntington, Indiana ("Heat Treat"), and a plant in Kenosha, Wisconsin, that
improves the wear and corrosion resistance properties of steel bars and tubes
("NitroSteel").
The Heat Treat facility uses custom designed, in-line equipment to provide
tube and bar heat treating and related services, such as quench and temper,
stress relieving, normalizing, "cut-to-length", and metallurgical testing. This
plant serves customers in the energy, automotive, ordnance and mining markets.
The NitroSteel plant processes steel bars and tubes using the patented
Nitrotec treatment to improve corrosion and wear resistance while providing an
environmentally friendly, non-toxic alternative to chrome plating. NitroSteel's
products are made for specific customer applications and sold into fluid power
markets.
Aluminum Mill Sheet Products
The Company's Aluminum Mill Sheet Products segment comprises aluminum sheet
continuous casting operations and cold rolling, annealing, painting, and other
finishing operations through its Nichols Aluminum Division (Nichols).
Nichols manufactures mill finished and coated aluminum sheet for the home
improvement, residential and light commercial construction, transportation,
appliance, and service center markets. The division comprises four plants: a
thin-slab casting and hot rolling mill (NAC) located in Davenport, Iowa, and
three cold rolling and finishing plants located in Davenport, Iowa (NAD),
Lincolnshire, Illinois (NAL), and Decatur, Alabama (NAA).
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NAC's mini-mill uses a single, in-line casting process that can produce 400
million pounds of reroll (hot-rolled aluminum sheet) annually. The mini-mill
converts aluminum scrap to sheet through melting, continuous casting, and
in-line hot rolling processes. NAC has shredding and blending capabilities,
including two rotary barrel furnaces, that broaden its sources of raw material
and allow it to melt lower grades of scrap. Delacquering equipment improves the
quality of the raw material before it reaches the melting furnaces by burning
off combustibles in the scrap. Scrap is blended using computerized processes to
most economically achieve the desired molten aluminum alloy composition. The
molten metal flows into a Hazelett thin-slab caster, which casts an aluminum
slab up to 52 inches wide and .75 inches thick. The slab is fed directly to a
hot mill where three in-line rolling stands reduce the slab to gauges as thin as
.045 inches. This hot rolling process substantially reduces subsequent cold
rolling requirements. NAC also has an efficient, in-house dross recovery system
to improve raw material yields.
The Company believes the combination of capacity increases and
technological enhancements directed at producing higher quality reroll results
in a significant manufacturing advantage with savings derived from reduced raw
material costs, optimized scrap utilization, reduced unit energy cost, reduced
cold rolling requirements and lower labor costs.
Further processing of the reroll occurs at the NAD, NAL or NAA plants,
where customers' specific product requirements can be met through cold rolling
to various gauges, annealing for additional mechanical and formability
properties, tension leveling to improve the flatness of the sheet, and slitting
to specific widths. Products at the NAD and NAA plants can also be custom
painted, an important value-added feature for the applications of certain
customers in building products, transportation, and appliance markets.
Engineered Products
The Company's Engineered Products segment consists of impact extrusion
operations for primarily aluminum and steel products, which are produced at
Piper Impact facilities, and aluminum and steel fabrication operations conducted
at the Fabricated Products Division.
The Piper Impact division comprises Piper Impact, which includes two
impact-extrusion facilities in New Albany, Mississippi, dedicated to steel and
aluminum products, and Piper Impact Europe, with an aluminum impact-extrusion
facility in Zwolle, The Netherlands. Fabricated Products comprises the AMSCO
plant in Rice Lake, Wisconsin, and two Homeshield Fabricated Products ("HFP")
plants in Chatsworth, Illinois, that manufacture precision-formed metal
products.
Piper Impact and Piper Impact Europe are technological leaders in the
manufacture of custom designed, impact extruded aluminum and steel parts for
transportation, electronics, defense, and other commercial applications. Piper
Impact's operations use impact extrusion technology to produce highly
engineered, near-net shaped components from aluminum and steel bar slugs. The
pressure resulting from the impact of the extrusion presses causes metal to flow
into the desired shape. This cost efficient, cold-forming of the metal results
in a high quality, work hardened product with a superior finish. Products may be
further processed with heat treating and precision machining. The parts are then
delivered to customers' assembly lines, requiring little or no additional
processing. The majority of Piper Impact's sales are to one customer, Autoliv
Inc., for use in automotive air bag systems.
During 1997 the Company completed the construction of a greenfield
manufacturing facility in New Albany, Mississippi, for the production of highly
engineered, impact-extruded steel parts. Piper Impact's steel products plant was
part of a two-year, $42 million capital project to provide capacity for new
customer programs primarily for the automotive air bag systems market. This
includes passenger and side-impact air bags, "smart" bags with adjustable
inflation force, and those with alternative inflation technologies. The Company
believes that this project will provide Piper Impact with the technology and
additional capacity for advanced applications, improved customer service, and
cost effective manufacturing processes, thereby improving competitiveness and
long-term growth opportunities.
The Fabricated Products Division manufactures aluminum window and patio
door screens, window frames, and a broad line of custom designed, roll formed
products and stamped shapes for manufacturers of premium wood windows and vinyl
windows for the home improvement, residential, and commercial construction
markets. AMSCO combines strong product design and development expertise with
reliable,
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just-in-time delivery. HFP also coats and/or paints aluminum sheet in many
colors, sizes, and finishes, and it fabricates aluminum coil into rain carrying
systems, soffit, exterior housing trim and roofing products.
RAW MATERIALS AND SUPPLIES
The Company's MACSTEEL plants purchase on the open market their principal
raw material, steel scrap or substitutes such as pig iron, beach iron and hot
briquetted iron. Collection and transportation of these raw materials to Company
plants can be adversely affected by extreme weather conditions. Prices for scrap
also vary in relation to the general business cycle, typically declining in
periods of slow economic activity.
Nichols' principal raw material is aluminum scrap purchased on the open
market, which can also be adversely affected by weather. Nichols purchases and
sells in limited quantities aluminum ingot futures contracts on the London Metal
Exchange to hedge against fluctuations in the price of aluminum scrap required
to manufacture products for fixed-price sales contracts.
In the Engineered Products Group, Piper Impact's raw material consists of
aluminum bars and slugs that it purchases on the open market and steel bars that
it purchases from MACSTEEL. Piper Impact Europe purchases its raw material,
aluminum slugs and steel sheet, on the open market in Europe and in the United
States. Fabricated Products' primary raw material is coated and uncoated
aluminum sheet purchased primarily from Nichols Aluminum.
BACKLOG
At October 31, 1999, Quanex's backlog of orders to be shipped in the next
twelve months was $164.1 million. This compares to $183.8 million at October 31,
1998. Because many of the markets in which Quanex operates have short lead
times, the Company does not believe that backlog figures are reliable indicators
of annual sales volume or operating results.
COMPETITION
The Company's products are sold under highly competitive conditions. Quanex
competes with a number of companies, some of which have greater financial and
other resources. Competitive factors include product quality, price, delivery,
and ability to manufacture to customer specifications. The amounts of engineered
steel bars, aluminum mill sheet products, and engineered products made by the
Company represent a small percentage of annual domestic production.
The Company's engineered bar plants compete primarily with two large
integrated steel producers, two large non-integrated steel producers, and two
smaller companies. Although these producers may be larger and have greater
resources than the Company, Quanex believes that the technology used at MACSTEEL
facilities permits it to compete effectively in the markets it serves.
The Company's aluminum mill sheet businesses compete with many small and
large aluminum sheet manufacturers. Some of these competitors are divisions or
subsidiaries of major corporations with substantially greater resources than the
Company. The Company also competes with major aluminum producers in coil-coated
and mill finished products, primarily on the basis of the breadth of product
lines, the quality and responsiveness of its services, and price.
The Company's Engineered Products Group competes with many small metal
fabricators and impact extruders, primarily on the basis of custom engineering,
quality, service, and price.
SALES AND DISTRIBUTION
The Company's three businesses have sales organizations with sales
representatives in many parts of the U. S. MACSTEEL sells hot rolled and cold
finished engineered steel bars primarily to original equipment manufacturers
(OEMs) through its sales organization and manufacturers' representatives.
Nichols' products are sold directly to OEMs and through metal service centers.
The Company's engineered products are sold primarily to OEMs, except for some
residential building products, which are also sold through distributors.
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SEASONAL NATURE OF BUSINESS
With the exception of impact extrusions, which are not a seasonal business,
the Company's aluminum mill sheet and Fabricated Products businesses are
seasonal. The primary markets of these businesses are in the Northeast and
Midwest regions of the United States, where winter weather reduces homebuilding
and home improvement activity. Historically in these businesses, lowest sales
have occurred during the Company's first fiscal quarter. Profits for the
operations in these businesses tend to be lower in quarters with lower sales
because a high percentage of their manufacturing overhead and operating expense
is due to labor and other costs that are generally fixed throughout the year.
The other businesses in which the Company competes are generally not seasonal.
However, due to the holidays in the Company's first fiscal quarter and steel
plant shutdowns for vacations and maintenance in the Company's third fiscal
quarter, sales have historically been lower in those periods. As a result of
these trends, combined with the effects of seasonality, the Company generally
expects that, absent unusual activity or changes in economic conditions, its
lowest sales will occur in the first fiscal quarter.
SERVICE MARKS, TRADEMARKS, TRADE NAMES, AND PATENTS
The Company's Quanex, Quanex design, Seam-Free design, NitroSteel, MACGOLD,
MACSTEEL, MACSTEEL design, MAC+, Ultra-Bar, Homeshield, Homeshield design, and
"The Best Alloy & Specialty Bars" marks are registered trademarks or service
marks. The Company's Piper Impact name is used as a service mark, but is not yet
registered in the United States. The trade name Nichols-Homeshield and the
Homeshield and the Homeshield design trademarks are used in connection with the
sale of the Company's aluminum mill sheet products and residential building
products. The Homeshield, Piper Impact, MACSTEEL and Quanex word and design
marks and associated trade names are considered valuable in the conduct of the
Company's business. The businesses conducted by the Company generally do not
depend upon patent protection. Although the Company holds numerous patents, in
many cases the proprietary technology that the Company has developed for using
the patents is more important than the patents themselves.
RESEARCH AND DEVELOPMENT
Expenditures for research and development of new products or services
during the last three years were not significant. Although not technically
defined as research and development, a significant amount of time, effort and
expense is devoted to custom engineering and qualifying the Company's products
for specific customer applications.
ENVIRONMENTAL MATTERS
As a manufacturer of specialized metal products, Quanex is subject to
extensive laws and regulations concerning the discharge of materials into the
environment and the remediation of chemical contamination. Quanex is required to
make capital and other expenditures on an ongoing basis in order to satisfy such
requirements. The cost of environmental matters has not had a material adverse
effect on Quanex's operations or financial condition in the past, and management
is not aware of any existing conditions that it currently believes are likely to
have a material adverse effect on Quanex's operations or financial condition.
Under applicable state and federal laws, the Company may be responsible
for, among other things, all or part of the costs required to remove or
remediate wastes or hazardous substances at locations Quanex has owned or
operated at any time. The Company is currently participating in environmental
assessments and remediation at a number of those locations.
From time to time, Quanex also has been alleged to be liable for all or
part of the costs incurred to clean up third-party sites where it is alleged to
have arranged for disposal of hazardous substances. The Company's allocable
share of liability at those sites, taking into account the likelihood that other
parties will pay their shares, has not been material to its operations or
financial condition.
Total remediation reserves, at October 31, 1999, for Quanex's current
plants, former operating locations, and disposal facilities were approximately
$20 million. Of that, approximately 80% is allocated to cleanup of historical
soil and groundwater contamination and other corrective measures at a plant
operated by the Company's Piper Impact subsidiary in New Albany, Mississippi.
Depending upon such factors as
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the nature and extent of contamination, the cleanup technologies employed, and
regulatory concurrences, final remediation costs may be more or less than
amounts accrued; however, management believes it has established adequate
reserves for all probable and reasonably estimable remediation liabilities.
Environmental agencies continue to develop regulations implementing the
Federal Clean Air Act. Depending on the nature of the regulations adopted,
Quanex may be required to incur additional capital and other expenditures
sometime in the next several years for air pollution control equipment, to
maintain or obtain operating permits and approvals, and to address other air
emission-related issues. The Company incurred capital expenditures totaling
approximately $20 million between 1996 and 1998 to meet those requirements. That
amount included spending toward a significant upgrade to pollution control
systems at MACSTEEL to ensure compliance with the air standards. Based upon its
analysis and experience to date, Quanex does not believe that its compliance
with Clean Air Act requirements will have a material effect on its operations or
financial condition.
Quanex incurred approximately $7 million and $23 million during fiscal 1999
and 1998, respectively, in expenses and capital expenditures in order to comply
with existing or proposed environmental regulations. The 1998 amount includes
funds spent in connection with a significant upgrade to pollution control
systems at MACSTEEL. The Company estimates spending of approximately $7 million
at various of its facilities during fiscal 2000 for continuing compliance with
environmental regulations. Future expenditures relating to environmental matters
will necessarily depend upon the application to Quanex and its facilities of
future regulations and government decisions. Quanex will continue to have
expenditures in connection with environmental matters beyond 2000, but it is not
possible at this time to reasonably estimate the amount of these expenditures.
EMPLOYEES
At October 31, 1999, the Company employed 3,345 persons. Of the total
employed, 37% were covered by collective bargaining agreements. A five-year
contract was ratified by the United Steel Workers representing 190 employees at
MACSTEEL's Michigan plant as of February 28, 1999. In January 1999, the
production and maintenance employees at the MACSTEEL Arkansas plant voted to
have the United Steel Workers as their bargaining representative. Negotiations
of the first contract are ongoing. On June 30, 2000, the CAO Groot Metaal
collective labor agreement representing 334 employees at Piper Europe will
expire. Negotiations will begin in early calendar year 2000. No other collective
bargaining agreements will expire during the fiscal year ending October 31,
2000.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
For financial information on the Company's foreign and domestic operations,
see Note 13 of the Financial Statements contained in this Annual Report on Form
10-K.
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ITEM 2. PROPERTIES
The following table lists Quanex's principal plants together with their
locations, general character and the industry segment which uses the facility.
Each of the facilities identified as being owned by the Company is free of any
material encumbrance.
SQUARE
LOCATION PLANT FOOTAGE
- -------- ----- -------
Owned: ENGINEERED STEEL BARS
Fort Smith, Arkansas................................ MACSTEEL 464,000
Jackson, Michigan................................... MACSTEEL 281,000
Huntington, Indiana................................. Heat Treating 96,000
Leased (expires 2009):
Kenosha, Wisconsin.................................. NitroSteel 35,000
Owned: ALUMINUM MILL SHEET PRODUCTS
Lincolnshire, Illinois.............................. Nichols Aluminum 142,000
Davenport, Iowa..................................... Nichols Aluminum 236,000
Davenport, Iowa..................................... Nichols Aluminum Casting 245,000
Leased (4 leases expiring 2003, 2004, 2005 and 2018):
Decatur, Alabama.................................... Nichols Aluminum Alabama 410,000
Owned: ENGINEERED PRODUCTS
Rice Lake, Wisconsin................................ AMSCO 290,800
Chatsworth, Illinois................................ Homeshield Fabricated
Products (two plants) 212,000
New Albany, Mississippi............................. Piper Impact (two plants) 683,000
Zwolle, The Netherlands............................. Piper Impact Europe 110,000
Leased (expires 2010): EXECUTIVE OFFICES
Houston, Texas...................................... Quanex Corporation 21,000
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ITEM 3. LEGAL PROCEEDINGS
On or about May 26, 1999, the federal government filed in the United States
District Court for the Southern District of Texas a complaint and proposed
consent decree with respect to alleged violations of the Clean Water Act by the
Company and Vision Metals, Inc. at the Company's former facility in Rosenberg,
Texas. Among other things, the complaint alleged that during the Company's
ownership 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. 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. Vision Metals accepted the Company's tender without reservation.
Under the consent decree, all of the complaint's allegations against the Company
are to be settled by payment of a civil penalty by Vision Metals in the amount
of $466,421 plus interest payable in three installments. The court approved and
entered the consent decree on or about August 2, 1999. Pursuant to the consent
decree, the first installment of $155,474 plus interest, was paid by Vision
Metals as of December 30, 1999.
On or about September 27, 1999, USEPA Region V sent to the Company's
MACSTEEL Michigan division findings of violation, an administrative order for
compliance, and a request for information pursuant to the Clean Water Act. The
Agency alleged that the plant had violated the terms of its water discharge
permit 236 times since March 1994 and directed the plant to comply with that
permit. To date the Agency has not assessed any penalties for the alleged
violations, but is reserving its rights to do so.
Other than the above matters and proceedings described under Item 1,
"Environmental Matters", there are no material legal proceedings to which
Quanex, its subsidiaries, or their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quanex's common stock, $.50 par value, is traded on the New York Stock
Exchange, under the ticker symbol: NX. Quarterly stock price information and
annual dividend information for the common stock is as follows:
QUARTERLY COMMON STOCK DIVIDENDS 1999 1998 1997 1996 1995
- -------------------------------- ---- ---- ---- ---- ----
Quarter Ended:
January............................................... .16 .16 .15 .15 .14
April................................................. .16 .16 .15 .15 .15
July.................................................. .16 .16 .15 .15 .15
October............................................... .16 .16 .16 .15 .15
Total....................................... .64 .64 .61 .60 .59
QUARTERLY COMMON STOCK SALES PRICE 1999 1998 1997 1996 1995
- ---------------------------------- ----- ---------- ---------- ------- -------
(High & Low) Quarter Ended:
January......................................... 23 7/8 30 7/16 29 1/8 21 1/8 24 5/8
16 13/16 27 1/16 24 1/4 18 20
April........................................... 26 1/4 33 13/16 27 7/8 22 3/8 23 7/8
15 3/8 28 1/2 23 3/8 19 5/8 21
July............................................ 29 32 3/16 34 1/8 23 7/8 26 5/8
25 1/8 27 1/4 25 1/8 19 3/8 22 1/8
October......................................... 27 3/8 27 7/8 36 1/2 28 3/4 26
20 1/8 15 5/8 26 1/4 19 5/8 18 5/8
The terms of Quanex's revolving credit arrangements with certain banks
limit the total amount of common and preferred stock dividends and other
distributions on such stock. Under the most
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restrictive test under such credit facilities, the total common stock dividends
the Company may declare and pay is limited to $21 million, plus 50% of
consolidated net income earned after October 31, 1989, adjusted for other
factors as set forth in the credit agreement. As of October 31, 1999, the
aggregate amount available for dividends and other restricted payments under its
credit facilities was approximately $48 million.
There were 5,362 holders of Quanex common stock on record as of December
31, 1999.
ITEM 6. SELECTED FINANCIAL DATA
GLOSSARY OF TERMS
The exact definitions of commonly used financial terms and ratios vary
somewhat among different companies and investment analysts. The following list
gives the definition of certain financial terms that are used in this report:
Capital expenditures: Additions to property, plant and equipment.
Book value per common
share: Stockholders' equity less the stated value of
preferred stock divided by the number of common
shares outstanding.
Asset turnover: Net sales divided by average total assets.
Current ratio: Current assets divided by current liabilities.
Return on investment: The sum of net income and the after-tax effect of
interest expense less capitalized interest divided
by the sum of the averages for long-term debt and
stockholders' equity.
Return on common
stockholders' equity: Net income attributable to common stockholders
divided by average common stockholders' equity.
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ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY 1994 -- 1999
FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
($ THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES AND EARNINGS
Net sales(1)................................................ 810,094 797,490 746,093 620,069 603,985 435,983
Cost of sales including depreciation........................ 681,799 683,954 644,041 526,886 521,521 376,077
-------- -------- -------- -------- -------- --------
Gross profit................................................ 128,295 113,536 102,052 93,183 82,464 59,906
Piper Impact Restructuring Charge........................... 58,500(2)
Other depreciation and amortization......................... 3,434 5,059 3,669 1,791 1,258 1,266
Selling, general and administrative expenses................ 53,104 47,713 43,375 44,959 33,746 31,893
-------- -------- -------- -------- -------- --------
Operating income............................................ 71,757 2,264 55,008 46,433 47,460 26,747
Percent of net sales........................................ 8.9 0.3 7.4 7.5 7.9 6.1
Other income (expense) -- net............................... 1,383 2,278 1,637 4,544 1,721 2,765
Interest expense -- net..................................... 12,791 10,506 14,002 11,360 8,870 10,178
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes, extraordinary items,
cumulative effect of accounting change, and income from
discontinued
operations................................................ 60,349 (5,964) 42,643 39,617 40,311 19,334
Income taxes (credit)....................................... 21,048 (2,087) 14,925 16,639 16,931 8,120
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations.................... 39,301 (3,877) 27,718 22,978 23,380 11,214
Income from discontinued operations......................... 0 0 5,176 9,912 10,480 7,638
Gain on sale of discontinued operations..................... 0 13,046 36,290
Extraordinary items -- early extinguishment of debt, net of
taxes..................................................... 415 -- -- (2,522) (2,021) --
-------- -------- -------- -------- -------- --------
Net income.................................................. 39,716 9,169 69,184 30,368 31,839 18,852
Percent of net sales........................................ 4.9 1.1(5) 9.3(4) 4.9 5.3 4.3
-------- -------- -------- -------- -------- --------
PER SHARE DATA
Basic Earnings per share:
Income (loss) from continuing operations.................. 2.76 (0.27) 2.01 1.70 1.44 0.40
Income from discontinued operations....................... -- -- 0.37 0.73 0.78 0.57
Gain on sale of discontinued operations................... -- 0.92 2.63 -- -- --
Extraordinary items and cumulative effect of accounting
change.................................................. 0.03 -- -- (0.19) (0.15) --
Net earnings (loss)....................................... 2.79 0.65(5) 5.01 2.24 2.07 0.97
Cash dividends declared..................................... 0.64 0.64 0.61 0.60 0.59 0.56
Book value.................................................. 21.24 19.19 19.13 14.50 12.81 11.04
Average shares outstanding (000)............................ 14,234 14,149 13,807 13,524 13,443 13,342
Market closing price range
High...................................................... 28 15/16 33 1/2 36 1/2 28 5/8 26 27
Low....................................................... 15 1/2 16 23 3/8 18 3/8 18 3/8 16 1/4
-------- -------- -------- -------- -------- --------
FINANCIAL POSITION -- YEAR END
Working capital............................................. 76,247 62,979 52,818 88,238 53,629 100,007
Property, plant and equipment -- net........................ 406,841 395,054 379,071 319,165 233,982 239,642
Other assets................................................ 71,218 69,422 119,738 117,142 55,989 54,736
Total assets................................................ 690,446 674,288 685,705 638,948 466,458 491,329
Noncurrent deferred income taxes............................ 43,910 33,412 48,111 40,454 45,740 39,298
-------- -------- -------- -------- -------- --------
Long-term debt.............................................. 179,121 188,302 201,858 253,513 111,894 107,442
Stockholders' equity........................................ 301,061 272,044 268,823 197,009 172,814 233,883
Total capitalization........................................ 480,182 460,346 470,681 450,522 284,708 341,325
Long-term debt percent of capitalization.................... 37.3 40.9 42.9 56.3 39.3 31.5
-------- -------- -------- -------- -------- --------
OTHER DATA
Asset turnover.............................................. 1.2 1.2 1.1 1.0 1.3 0.9
Current ratio............................................... 1.6 to 1 1.4 to 1 1.4 to 1 1.8 to 1 1.4 to 1 2.0 to 1
Return on average investment -- percent..................... 10.0 3.4(5) 16.7(4) 9.8 11.1 6.9
Return on average common equity -- percent.................. 13.9 3.4(5) 29.7(4) 16.4 17.4 9.0
-------- -------- -------- -------- -------- --------
Working capital provided by operations(3)................... 94,682 82,830 73,321 60,378 57,767 39,326
Depreciation and amortization............................... 45,883 42,400 37,865 36,499 29,062 25,520
Capital expenditures........................................ 60,934 60,936 69,146 34,737 21,629 42,297
Backlog for shipment in next 12 months...................... 164,128 183,847 225,498 123,382 94,464 109,626
-------- -------- -------- -------- -------- --------
Number of stockholders...................................... 5,113 5,720 5,488 3,425 3,659 3,454
Average number of employees................................. 3,393 3,261 2,994 1,950 1,653 1,530
Sales per employee.......................................... 239 245 249 318 365 285
-------- -------- -------- -------- -------- --------
- ---------------
Note: Several acquisitions and divestitures have been made in the past three
years. See Notes 2 and 3 to the financial statements for a description of these
transactions.
(1) Excludes sales from discontinued operations for the years 1997-1994,
respectively of $187,123, $275,641, $287,210 and $263,331.
(2) During the fourth quarter of 1998, Piper Impact recorded a $58.5 million
non-recurring restructuring charge as the result of impairment as described
by Statement of Financial Accounting Standards No. 121. See Footnote 4 to
the financial statements for further information.
(3) Working capital provided by operations is a supplemental financial
measurement used in the company's business and should not be construed as an
alternative to operating income or cash provided by operating activities
since it excludes the effects of changes in working capital. Working capital
from operations is calculated as income from continuing operations, net of
taxes, adjusted for non-cash and nonrecurring items.
(4) Includes gain on sale of discontinued operations.
(5) Includes effect of Piper Impact's restructuring charge ($58.5 million) and
gain on sale of discontinued operations ($13 million).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Selected Financial
Data and the Consolidated Financial Statements of the Company and the
accompanying notes.
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 produce
actual results materially different 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 Company's principal customers, 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.
RESULTS OF OPERATIONS
Overview
Summary Information as % of Sales:
FISCAL YEAR ENDED OCTOBER 31,
------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
DOLLAR % OF DOLLAR % OF DOLLAR % OF
AMOUNT SALES AMOUNT SALES AMOUNT SALES
------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
Net Sales....................... $810.1 100% $797.5 100% $746.1 100%
Cost of Sales................. 639.9 79 647.2 81 610.4 82
Selling, general and admin.... 53.1 6 47.7 6 43.4 6
Depreciation and
amortization............... 45.3 6 41.8 5 37.3 5
Restructuring Charge.......... -- -- 58.5 7 -- --
------ ---- ------ ---- ------ ----
Operating Income................ 71.8 9% 2.3 1% 55.0 7%
Interest Expense................ (14.4) (2) (14.9) (2) (17.5) (2)
Capitalized Interest............ 1.6 0 4.4 1 3.5 0
Other, net...................... 1.4 0 2.2 0 1.6 0
Income tax benefit (expense).... (21.1) (2) 2.1 0 (14.9) (1)
------ ---- ------ ---- ------ ----
Income (loss) from continuing
operations.................... $ 39.3 5% $ (3.9) 0% $ 27.7 4%
====== ====== ======
For the seventh consecutive year, the Company's continuing operations
achieved higher sales from the previous fiscal year. These continued increases
are a result of the Company's growth strategies through internal investments as
well as acquisitions. The Company's internal growth investments, principally at
the MACSTEEL Division and at Piper Impact, Inc. ("Piper Impact") were focused
toward capacity expansions, new product offerings, quality improvements, and
enhanced customer service capabilities.
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Acquisitions/Divestitures Since October 31, 1996
In April 1997, the Company completed the sale of its LaSalle Steel Company
("LaSalle") subsidiary. LaSalle's results of operations have been classified as
discontinued operations and prior periods have been restated. For business
segment reporting purposes, LaSalle's data was previously classified as "Cold
Finished Steel Bars".
In October 1997, the Company, through its Dutch subsidiary, Piper Impact
Europe B.V. ("Piper Impact Europe"), purchased the net assets of Advanced Metal
Forming C.V., a Dutch limited partnership, for approximately $30 million. The
Company's income statement for the twelve months ended October 31, 1997 does not
include results for Piper Impact Europe.
In December 1997, the Company completed the sale of its tubing operations
("Tubing Operations"), comprised of Michigan Seamless Tube, Gulf States Tube,
and the Tube Group Administrative Office. The results of the Tubing Operations
have been classified as discontinued operations and prior periods have been
restated. For business segment reporting purposes, these businesses were
previously classified as "Steel Tubes". Two small divisions, Heat Treat Division
and NitroSteel Division, which were previously included with this segment, were
retained by the Company and are now included in the Engineered Steel Bars
segment.
In October 1998, the Company acquired the stock of Decatur Aluminum Corp.,
a Decatur, Alabama based aluminum sheet manufacturer for approximately $19
million. The newly acquired company has been renamed Nichols Aluminum-Alabama,
Inc. ("Nichols Aluminum Alabama") in alignment with Quanex's other aluminum mill
sheet businesses in its Nichols Aluminum division. Nichols Aluminum Alabama's
operations include cold rolling aluminum sheet to specific gauge, annealing,
leveling, custom painting and slitting to width.
On December 15, 1999, the Company announced that it had signed a contract
to acquire the assets of Alcoa's Fort Lupton, Colorado-based aluminum sheet
production facility for $8 million plus working capital value which is estimated
at $17 million. Consummation of the sale is subject to government approval.
The acquisition of the Fort Lupton mill will increase the casting,
cold-finishing and value-added painting capacities of Nichols Aluminum, Quanex's
aluminum sheet business. The Fort Lupton mill can produce more than 40-million
pounds annually of high-grade aluminum sheet for a variety of applications,
including beverage cans and other food packaging, home furnishing, and other
consumer durable products.
Business Segments
The Company adopted Statement of Financial Accounting Standards No. 131,
"SFAS 131" for the fiscal year ended 1998. SFAS 131 requires that the Company
disclose certain information about its operating segments where operating
segments are defined as "components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance". Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
Pursuant to SFAS 131, the Company has three reportable segments: engineered
steel bars, aluminum mill sheet products, and engineered products. The
engineered steel bar segment consists of engineered steel bars manufacturing,
steel bar and tube heat treating services and steel bar and tube wear and
corrosion resistant finishing services. The aluminum mill sheet segment
manufactures mill finished and coated aluminum sheet. The engineered products
segment manufactures impact-extruded aluminum and steel parts, aluminum window
and patio door screens, window frames and other roll formed products and stamped
shapes.
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The following table sets forth selected operating data for the Company's
three business segments:
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998(4) 1997(4)
-------- -------- --------
(IN THOUSANDS)
Engineered Steel Bars:
Net sales.......................................... $297,369 $327,296 $319,468
Operating income................................... 60,446 58,908 50,762
Depreciation and amortization...................... 16,293 13,097 13,940
Identifiable assets................................ $241,783 $219,727 $192,937
Aluminum Mill Sheet Products:(1)
Net sales.......................................... $311,763 $266,355 $261,041
Operating income................................... 15,306 7,788 1,753
Depreciation and amortization...................... 12,334 10,670 10,154
Identifiable assets................................ $200,733 $198,596 $163,637
Engineered Products:(2)(3)
Net sales.......................................... $227,362 $230,012 $206,831
Operating income (loss)............................ 12,153 (52,606) 15,444
Depreciation and amortization...................... 16,185 17,928 13,055
Identifiable assets................................ $209,153 $220,161 $281,943
- ---------------
(1) 1998 results include three weeks of Nichols Aluminum Alabama's operations
acquired October 9, 1998. (See Note 2 to financial statements)
(2) 1997 data does not include the results of Piper Impact Europe. However,
identifiable assets as of October 31, 1997 include Piper Impact Europe,
acquired October 29, 1997. (See Note 2 to financial statements)
(3) During 1998, Piper Impact recorded a $58.5 million non-recurring
restructuring charge as the result of impairment as described by Statement
of Financial Accounting No. 121. This restructuring charge is included in
operating income. (See Note 4 to financial statements)
(4) At the start of fiscal 1999, Quanex changed its inventory valuation method
for measuring segment results from LIFO to FIFO. This change has no impact
on consolidated results, which remain LIFO based. Prior data have not been
restated above. (See footnote 13 to the consolidated financial statements
for further information.)
The engineered steel bar business posted record annual operating income,
benefiting from strong demand in the transportation markets and favorable raw
material costs, which helped to offset softness in other markets. Pricing has
been under intense pressure, and it is expected to continue in the year ahead.
In fiscal 1999, MACSTEEL finished its Phase IV expansion project, doubling
production capacity for MACPLUS cold-finished steel bars, its most premium
value-added product. Work continues on Phase V, which will increase capacity at
MACSTEEL's engineered bar mills and the MACSTEEL Heat Treating Division and will
improve operational efficiency at MACSTEEL NitroSteel.
The aluminum mill sheet business achieved a breakthrough year, consistently
improving its quarterly performance during fiscal 1999. Operating income, which
increased 97% on 17% higher sales was helped by the acquisition of Nichols
Aluminum Alabama and improved spreads from lower aluminum scrap prices as well
as benefits resulting from the Rotary Furnace project at its mini-mill in
Davenport, Iowa. The backlog for the first quarter is seasonally normal with
some pricing pressures and short lead times.
The engineered products business also had significantly improved earnings
on slightly lower sales. Adjusting for the one-time restructuring charge of
$58.5 million recorded at Piper Impact in fiscal 1998 and the resulting lower
amortization, the operating income from the engineered products business
improved by 47% in fiscal 1999. Lower raw material costs, stringent cost
controls and implementation of lean manufacturing techniques contributed to the
success. However, fierce competition in the air bag market will continue to pose
significant challenges for Piper Impact until it can diversify its business in
new markets with new products. The fabricated products businesses, AMSCO and
Homeshield Fabricated
15
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Products, continue to expand their markets by leveraging their product design
and engineering expertise to develop applications for new customers.
Outlook
The Company currently expects that the overall business levels for fiscal
2000 should be similar to those experienced during 1999, except for its
engineered products business which is experiencing product mix change resulting
in lower sales. Domestic and global market factors will also 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, successful new product
development efforts at engineered products business and whether the improvements
in the price spreads of aluminum mill sheet products can be sustained.
1999 Compared to 1998
Net Sales -- Consolidated net sales for fiscal 1999 were $810.1 million,
representing an increase of $12.6 million, or 2%, when compared to fiscal 1998.
This increase reflects higher net sales at the aluminum mill sheet business
partially offset by lower net sales at the Company's engineered steel bar and
engineered products businesses. Nichols Aluminum Alabama, which was acquired in
October 1998, contributed a full year of sales in fiscal 1999.
Net sales from the Company's engineered steel bar business for fiscal 1999,
were $297.4 million, representing a decrease of $29.9 million, or 9%, when
compared to fiscal 1998. This decline was principally due to the reduced demand
in some of the durable goods market, inventory adjustments by some customers and
pricing pressures resulting from global sourcing of engineered bars and forged
components.
Net sales for fiscal 1999 from the Company's aluminum mill sheet products
business increased by $45.4 million or 17% to $311.8 million when compared to
fiscal 1998. This increase was largely due to the acquisition of Nichols
Aluminum Alabama in October of 1998.
Net sales from the Company's engineered products business for fiscal 1999
were $227.4 million, representing a decrease of $2.7 million, or 1% from last
year. The decrease was largely due to reduced demand for older generation
aluminum airbag components at the Piper facilities, partially offset by sales of
new non-airbag products as well as increased demand for traditional window and
door products in the Fabricated Products division.
Operating income -- Consolidated operating income for fiscal 1999 was $71.8
million. This represents an increase of $11.0 million, or 18%, when compared to
the operating income in fiscal 1998 of $60.8 million, excluding the one-time
$58.5 million restructuring charge. During fiscal 1999 all business segments had
increased operating income, partially offset by increased expenses at the
corporate office for Year 2000 readiness efforts, relocation expenses and
consulting expenses for systems implementation.
At the start of fiscal year 1999, Quanex changed its inventory valuation
method for measuring segment results from LIFO to FIFO. See Note 13 to the
financial statements for further discussion. This change has no impact on
consolidated results, which remain LIFO based.
Operating income from the Company's engineered steel bar business was $60.4
million for fiscal 1999, representing an increase of $1.5 million, or 3%, when
compared to fiscal 1998. The increase achieved, despite the lower net sales, was
largely due to the higher spreads resulting from lower material prices,
increased sales of value-added products and productivity improvements realized
from the Phase III project completed in 1998. Additionally, approximately $2
million of benefits were realized as a result of an insurance recovery and a
litigation settlement received in fiscal 1999.
Operating income for fiscal 1999 from the Company's aluminum mill sheet
products business was $15.3 million, representing an increase of $7.5 million or
97% from last year. This increase was largely due to higher sales and operating
efficiencies realized from the acquisition of Nichols Aluminum Alabama and
improved spreads resulting from lower aluminum scrap prices as well as benefits
from the new rotary furnaces and the dross recovery system. Also, the operating
income in fiscal 1998 was based on inventory valuation using LIFO method (see
Note 13 to the financial statements).
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Operating income from the Company's engineered products business was $12.2
million for fiscal 1999. For comparison purposes, fiscal 1998 operating loss of
$52.6 million should be adjusted for the one-time restructuring charge of $58.5
million and the decreased amortization expense of $2.4 million, both recorded at
Piper Impact. When compared to the adjusted operating income of $8.3 million,
fiscal 1999 operating income from the engineered products business represents an
increase of $3.9 million or 47%. The improvement was largely due to lower
material costs and some success at cost management measures.
In addition to the three operating segments mentioned above, operating
expenses for corporate and other for fiscal 1999 were $16.1 million,
representing an increase of $4.3 million over the $11.8 million recorded in
fiscal 1998. Included in corporate and other are the corporate office expenses,
impact of inventory accounting using LIFO method and inter-segment eliminations.
(See notes 8 and 13 to the financial statements regarding LIFO valuation method
of inventory accounting.)
Selling, general and administrative expenses -- Selling, general and
administrative expenses increased by $5.4 million, or 11% in fiscal 1999 as
compared to last year. This increase is largely a result of the acquisition of
Nichols Aluminum Alabama, Year 2000 readiness efforts, relocation expenses and
consulting expenses for system implementations.
Depreciation and amortization -- Depreciation and amortization increased by
$3.5 million, or 8% in fiscal 1999 as compared to last year. The increase is
principally due to increased depreciation at the engineered steel bar and
aluminum mill sheet products businesses for recently completed projects as well
as the inclusion of Nichols Aluminum Alabama, which was acquired in October
1998, partially offset by lower amortization at the engineered products
business.
Interest expense -- Interest expense decreased by $500 thousand in fiscal
1999 primarily resulting from the purchase of $9.7 million face value
subordinated debentures.
Capitalized interest -- Capitalized interest decreased by $2.8 million in
fiscal 1999 as compared to fiscal 1998 primarily due to the completion of
significant capital projects at MACSTEEL during 1998.
Other, net -- "Other, net" decreased by $900 thousand in fiscal 1999 as
compared to last year primarily as a result of reduced investment income on
lower cash balances.
Income from continuing operations -- The Company earned income from
continuing operations of $39.3 million in fiscal 1999. This represents an
increase of $5.2 million or 15% when compared to fiscal 1998 income from
continuing operations of $34.1 million, excluding the restructuring charge. The
increase in fiscal 1999 was principally due to increased operating earnings from
all three business segments of the Company and inclusion of a full year's
earnings from Nichols Aluminum Alabama, which was acquired in October 1998.
Net income -- Fiscal 1999 net income was $39.7 million, compared to $9.2
million for fiscal 1998. Included in net income for fiscal 1999 were $415
thousand of extraordinary items representing net gain on early extinguishment of
debt. Fiscal 1998 net income included an after-tax non-recurring restructuring
charge of $38.0 million at Piper Impact and an after-tax gain of $13.0 million
on the sale of discontinued operations.
1998 Compared to 1997
Net Sales -- Net sales for fiscal 1998 were $797.5 million, representing an
increase of $51.4 million when compared to fiscal 1997. This increase reflects
higher net sales in all three business segments as well as an increase of $14.4
million resulting from sales to discontinued operations which were previously
reflected as intersegment sales and eliminated in 1997. These sales are now
third-party sales and are not eliminated in 1998. Piper Impact Europe, which was
acquired in October 1997, contributed a full year of sales in fiscal 1998.
Net sales for fiscal 1998 from the Company's engineered steel bar business
were $327.3 million, representing an increase of $7.8 million, or 2%, when
compared to fiscal 1997. This increase was primarily attributable to a better
mix of product sales with a higher percentage of MACPLUS and bearing steels.
17
20
Net sales from the Company's aluminum mill sheets products business for
fiscal 1998 were $266.4 million, representing an increase of $5.3 million, or
2%, when compared to fiscal 1997. This increase was primarily attributable to
strong demand, which yielded a 5% increase in volume.
Net sales from the engineered products group increased $23.2 million to
$230.0 million. The majority of the increase resulted from the addition of Piper
Impact Europe offset by a decrease in net sales at Piper Impact.
Restructuring Charge -- During the year ended October 31, 1998, the Company
recorded a restructuring charge of $58.5 million related to its subsidiary,
Piper Impact.
Components of this special charge include $51.2 million for goodwill
impairment; $6.7 million for impairment of property, plant and equipment; and
$600 thousand for severance benefits to be paid to employees of the Park City,
Utah plant. Piper Impact experienced significant changes in market conditions
and the relationship with its major customer in fiscal 1998, which led to
substantial declines in sales and operating cash flow. Management began an
evaluation of the operations of Piper Impact in August 1998. As a result of this
evaluation, in September 1998, management approved a plan to close the Park
City, Utah facility and move its production to the New Albany, Mississippi
facility.
Due to the significance of the changes discussed above and the decision to
close one of the acquired production facilities, management performed an
evaluation of the recoverability of all of the assets of Piper Impact, excluding
the new steel plant, as described in Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". Management concluded from the results of this
evaluation that a significant impairment of intangible as well as long-lived
assets had occurred. An impairment charge was required because estimated fair
value was less than the carrying value of the assets. Considerable management
judgment is necessary to estimate fair value. Accordingly, actual results could
vary significantly from management's estimates.
The one-time restructuring charge resulted in an after-tax impact on net
income of $38 million or $2.68 per share.
Operating Income -- Consolidated operating income for fiscal 1998 was $2.3
million. Included in operating income was the one-time $58.5 million
restructuring charge discussed above. Operating income excluding this
restructuring charge was $60.8 million, representing an increase of $5.8
million, or 10%, when compared to fiscal 1997. Primary contributing factors to
this increase were: 1) Increased sales and operating income from the engineered
steel bar and aluminum mill sheet business and 2) the inclusion of a full year
of Piper Impact Europe in the engineered products business. These improvements
were partly offset by lower operating income from Piper Impact of the engineered
products business.
Operating income from the Company's engineered steel bar business for
fiscal 1998 was $58.9 million, representing an increase of $8.1 million, or 16%,
when compared to fiscal 1997. This increase was principally due to increased
sales from strong demand in the transportation markets as well as lower material
prices. These results represented a record year for this business.
Operating income from the Company's aluminum mill sheet products business
for fiscal 1998 was $7.8 million, representing an increase of $6.0 million, or
344%, when compared to fiscal 1997. This increase was principally due to
increased volume and net sales accompanied by lower scrap prices. During the
fourth quarter of 1998, this business experienced a turnaround with strong
demand and favorable material costs.
The Company's engineered products business experienced an operating loss of
$52.6 million for fiscal 1998. Included in this loss was the non-recurring
restructuring charge of $58.5 million described above. Operating income for 1998
excluding this restructuring charge was $5.9 million, a decrease of $9.6 million
or 62% from 1997. This decline is largely a result of operating losses
experienced at Piper Impact. While Piper Impact Europe made a solid contribution
in its first full year with the Company, slack demand in Asia and the General
Motors strike adversely affected sales for Piper Impact products in North
American markets. The fabricated products lines within this business showed
modest improvement over fiscal 1997.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses increased in fiscal 1998 by $4.3 million, or 10%,
compared to fiscal 1997. This increase is largely a result of the inclusion of a
full year of Piper Impact Europe, which was not included in 1997.
Depreciation and Amortization -- Depreciation and amortization increased by
$4.5 million in fiscal 1998 compared to fiscal 1997. This increased depreciation
resulted from the inclusion of Piper Impact
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Europe in 1998 and the increased depreciation at Piper Impact for the steel
products plant partially offset by lower depreciation at the engineered steel
bar business.
Interest Expense and Capitalized Interest -- Interest expense decreased by
$2.6 million compared to fiscal 1997 as a result of reducing bank borrowings
with proceeds received from the sale of LaSalle and the Tubing operations.
Capitalized interest increased by $859 thousand in 1998 compared to 1997
primarily due to Phase III and IV of the MACSTEEL expansion projects.
Other -- "Other, net" consists largely of investment income and remained
relatively constant.
Income From Continuing Operations -- The Company had a loss from continuing
operations of $3.9 million in 1998. Included in this loss was the after-tax
non-recurring restructuring charge of $38.0 million. Income from continuing
operations excluding the restructuring charge was $34.1 million, an improvement
of $6.4 million, or 23%, compared to fiscal 1997. The improvement was
attributable to improved results in the Company's engineered steel bars and
aluminum mill sheet businesses, and the inclusion of a full year of Piper Impact
Europe and lower interest expense. These improvements were partially offset by
lower operating results at Piper Impact. The Company's effective income tax rate
was 35% for fiscal 1998 and 1997.
Income from Discontinued Operations -- Income from discontinued operations,
net of income taxes, for fiscal 1997, was $5.2 million, which consisted of the
Tubing Operations and LaSalle Steel. There was no income from discontinued
operations in fiscal 1998. (See Note 3 to the financial statements)
Net Income -- Fiscal 1998 net income was $9.2 million, compared to $69.2
million for fiscal 1997. Included in net income for fiscal 1998 is an after-tax
non-recurring restructuring charge of $38.0 million and an after-tax gain of
$13.0 million on the sale of discontinued operations. Included in net income for
1997 was an after-tax gain of $36.3 million on the sale of discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES
Total capitalization at October 31, 1999 was $490.7 million, consisting of
$189.7 million of debt and $301.0 million of equity. The debt-to-capitalization
ratio at the end of fiscal 1999 was 38.7% compared with 42.4% at the end of
fiscal 1998. The lower debt-to-capitalization ratio results primarily from the
purchase of subordinated debentures.
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. As of October 31, 1999, there was
$75 million outstanding under the Revolver. See footnote 11 to the financial
statements for a detailed description of all of the Company's debt instruments,
outstanding balances and aggregate maturities over each of the next five years
and beyond.
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. At October 31, 1999, retained earnings of approximately
$48 million were available for dividends and other restricted payments. As of
October 31, 1999, the Company was in compliance with all covenants under the
Bank Agreement.
During fiscal 1999, the Company accepted unsolicited block offers to buy
back $9.7 million principal amount of convertible subordinated debentures for
$8.8 million in cash. An after-tax extraordinary gain of $415 thousand was
recorded on these transactions. The outstanding balance of these debentures as
of October 31, 1999 was $73.7 million.
On June 1, 1999, the Company borrowed $3 million through unsecured Scott
County, Iowa Variable Rate Demand Industrial Waste Recycling Revenue Bonds
Series 1999.
At October 31, 1999, the Company had commitments of $15 million for the
purchase or construction of capital assets. The most significant project
included in this total relates to the Company's continued expansions at
MACSTEEL. The Company plans to fund these capital expenditures through cash flow
from operations and, if necessary, additional borrowings.
On December 9, 1999, the Company announced that its Board of Directors
approved a program to repurchase shares of the Company's common stock. Under
terms of the program, the Company may periodically purchase up to a total of 2
million shares of its common stock in the open market or in privately negotiated
transactions. The repurchase plan does not have a time limit, and funds for the
program will be provided from the Company's available working capital and bank
credit line.
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22
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 fiscal 1999 was $77.7 million.
This represents an increase of $13.6 million, or 21%, compared to fiscal 1998.
This increase primarily resulted from 1) increased cash from improved operating
earnings in fiscal 1999 as compared to 1998 and 2) a decreased use of cash for
working capital.
Investment Activities
Net cash used by investment activities in fiscal 1999 was $62.7 million
compared to $39.8 million in fiscal 1998. Fiscal 1998 cash from investing
activities included the acquisition of Decatur Aluminum Corp. and proceeds from
the sale of the Tubing Operations. There were no acquisitions or divestitures in
fiscal 1999. Capital expenditures increased from $58.5 million in 1998 to $60.8
million in 1999. The Company estimates that fiscal 2000 capital expenditures
will approximate $50 million.
Financing Activities
Net cash used by financing activities for fiscal 1999 was $15.4 million,
compared to $24.9 million in the prior year. During fiscal 1999, the Company
used $8.8 million to purchase subordinated debentures, whereas it repaid
approximately $17 million of bank borrowings in fiscal 1998. Dividend payments
amounted to approximately $9 million in both fiscal 1999 and fiscal 1998.
Proceeds from the issuance of stock totaled $1.6 million in fiscal 1999 compared
to $3.2 million in fiscal 1998.
EFFECTS OF INFLATION
Inflation has not had a significant effect on earnings and other financial
statement items.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133"
which defers the effective date of SFAS No. 133 until the Company's year ending
October 31, 2001. The Company will be analyzing SFAS No. 133 to determine what,
if any, impact or additional disclosure requirements this pronouncement will
have.
YEAR 2000
The Company, like other businesses, faced the Year 2000 issue, (also known
as Y2K issue). Many computer systems and equipment with embedded chips or
processors use only two digits to represent the calendar year. This could result
in computational or operational errors as dates are compared across the century
boundary causing possible disruptions in business operations. The Y2K issue
could have occurred at any point in the Company's supply, manufacturing,
processing, distribution, and financial chains.
The Company began addressing the Y2K issue in 1997, with an initial
assessment of Y2K readiness efforts at each of its operating units. Based on
responses from the operating units, a standardized Year 2000 Plan format was
developed. By July 1998, each operating unit had developed a Year 2000 Plan that
included:
a) inventory,
b) assessment,
c) remediation and replacement,
d) testing, and
e) third party relationships.
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23
The Year 2000 issue was addressed within the Company by its individual
business units, and progress was reported periodically to management. The
Company committed necessary resources to conduct risk assessment and to take
corrective actions, where required.
By the end of November 1999, the Company had assessed, replaced or
remediated, and tested all the critical and non-critical business information
systems. Also, all of the non-information technology (Non-IT) systems were
assessed, tested or vendor certified, and replaced, where necessary. The
Company's business units surveyed approximately 700 major suppliers and 500
major customers for their Year 2000 readiness efforts. Monitoring risk in this
area continued through the fourth quarter of calendar 1999.
Contingency plans were developed to mitigate possible disruption in
business operations that may result from the Year 2000 issue. These plans
included carrying necessary materials and parts inventories, securing
alternative sources of supply, adjusting of facility shutdown and start-up
schedules, development of manual procedures to execute transactions and complete
processes. Once developed, these contingency plans were continually refined, as
additional information became available.
The Company commissioned third party reviews of its Y2K program, assessed
the progress and identified areas where additional resources were needed. As a
result of these reviews, the Company augmented the staff resources working on
the Y2K program to address the requirements that were identified. The Company
also retained a consultant to provide Y2K program coordination support for the
corporate office, and to assist in the audit of readiness efforts at the
business segments.
Year 2000 activities and associated costs were managed within each business
unit. The historical costs of remediation, replacement, testing and other
activities directly connected with Year 2000 issues incurred through the
successful completion of the project were less than $3.0 million. Although the
Company believes that it successfully avoided any significant disruption from
the Year 2000 issue relating to the century rollover, it will continue to
monitor all critical systems for the appearance of delayed complications or
disruptions, problems relating to the leap year and problems encountered through
suppliers, customers and other third parties with whom Quanex deals. Although
these and other unanticipated Year 2000 issues could have an adverse effect on
the results of operations or financial condition of the Company, it is not
possible to anticipate the extent of impact at this time..
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU")
introduced a new currency, the Euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services among the participating countries.
On January 1, 1999, the participating countries adopted the Euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash (banking) transactions. The existing local currencies, or legacy
currencies, will remain legal tender through January 1, 2002. Beginning on
January 1, 2002, Euro-denominated bills and coins will be issued for cash
transactions. For a period of six months from this date, both legacy currencies
and the Euro will be legal tender. On or before July 1, 2002, the participating
countries will withdraw all legacy currency and use exclusively the Euro.
At the current time, the Company does not believe that the conversion to
the Euro will have a material impact on its business or its financial
statements.
ITEM 7A. QUANTITATIVE/QUALITATIVE DISCLOSURE
The following discussion of the Company and its subsidiaries' exposure to
various market risks contains "forward looking statements" that involve risks
and uncertainties. These projected results have been prepared utilizing certain
assumptions considered reasonable in light of information currently available to
the Company. Nevertheless, because of the inherent unpredictability of interest
rates, foreign currency rates and metal commodity prices as well as other
factors, actual results could differ materially from those projected in such
forward looking information. For a description of the Company's significant
accounting policies associated with these activities, see Notes 1 and 16 to the
Consolidated Financial Statements.
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Interest Rate Risk
The Company and its subsidiaries have a Revolving Credit Facility,
Convertible Subordinated Debentures, interest rate swap agreements and other
long-term debt which subject the Company to the risk of loss associated with
movements in market interest rates.
At October 31, 1999 and 1998, the Company had fixed-rate debt totaling $90
and $101 million respectively. This debt is fixed-rate and, therefore, does not
expose the Company to the risk of earnings loss due to changes in market
interest rates (see Notes 11 and 16 to the Company's Consolidated Financial
Statements). The conversion feature of the Company's Subordinated Debentures
makes it impractical to estimate the effect of a hypothetical 10% change in
interest rates. This is due to the high correlation between the market value of
these instruments and the market value of the Company's common stock. In
general, any changes in fair value would impact earnings and cash flows only if
the Company were to reacquire all or a portion of these instruments in the open
market prior to their maturity.
The Company and certain of its subsidiaries' floating-rate obligations
total $99 million at October 31, 1999 and 1998 (see Note 11 to the Company's
Consolidated Financial Statements). The exposure of these obligations to
increases in short-term interest rates is limited by interest rate swap
agreements entered into by the Company. These swap agreements effectively fix
the interest rate on all of the Company's variable rate debt, thus limiting the
potential impact that increasing interest rates would have on earnings. Under
these swap agreements, payments are made based on a fixed rate ($50 million at
7.025%, and $50 million at 6.755%) and received on a LIBOR based variable rate
(6.21% and 5.22% at October 31, 1999 and 1998, respectively). At October 31,
1999 and 1998, the unrealized losses related to the interest rate swap
agreements are $2.0 and $8.5 million. If the floating rates were to change by
10% from October 31 levels, the fair market value of these swaps would change by
approximately $1.9 and $1.7 million as of October 31, 1999 and 1998,
respectively. However, it should be noted that any change in value of these
contracts, real or hypothetical, would be significantly offset by an inverse
change in the value of the underlying hedged item.
Foreign Currency Exchange Rate Risk
The Company is subject to significant exposure from fluctuations in US
Dollar/Dutch Guilder exchange rates. As further described in Note 16 of the
Consolidated Financial Statements, the Company utilizes foreign currency forward
contracts to limit transactional exposure to changes in currency exchange rates.
At October 31, 1999 the Company had no such contracts open as the transactional
exposure was immaterial. As of October 31, 1998, the Company had 11 separate
contracts maturing in monthly increments to purchase an aggregate notional
amount of $4.675 million in foreign currency. These forward contracts did not
extend beyond September 30, 1999. Unrealized pretax gains on these forward
contracts totaled approximately $137 thousand at October 31, 1998. A
hypothetical 10% change in applicable October 31, 1998 forward rates would
increase or decrease the pretax gain by approximately $463 thousand related to
these positions. However, it should be noted that any change in value of these
contracts, real or hypothetical, would be significantly offset by an inverse
change in the value of the underlying hedged item.
In addition, the Company utilizes a range forward zero-cost agreement to
protect its initial equity investment in its Netherlands subsidiary, Piper
Impact Europe. This agreement, which was entered into with a major financial
institution, has a notional value of 30 million guilders. By establishing
minimum and maximum exchange rates, this agreement limits the potential
devaluation of the Company's initial investment in its subsidiary while also
limiting any potential appreciation. If, at the expiration date of the
agreement, the Dutch guilder/US dollar exchange rate is within the range of 1.80
to 2.05, this agreement will expire at no cost to either party. At October 31,
1998, there was no financial statement impact as the exchange rate fell within
the range. At October 31, 1999, the Company booked a gain to stockholder's
equity of $378 thousand. A hypothetical 10% increase in the October 31, 1999 and
1998 exchange rate would result in a positive adjustment to stockholders' equity
of approximately $1.3 million and $10 thousand, respectively. In contrast, a
hypothetical 10% decrease would result in a negative adjustment to stockholder's
equity of approximately $378 thousand and $1.2 million, respectively. However,
it should be noted that any change in the value of this agreement, real or
hypothetical, would be significantly offset by an inverse change in the value of
the underlying hedged position.
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Commodity Price Risk
In the normal course of business, the Company enters into long-term firm
price aluminum sheet sales contracts. In order to hedge the risk of higher
prices for the anticipated aluminum purchases required to fulfill these
long-term contracts, the Company enters into long futures positions. At October
31, 1999 and 1998, the Company had open futures contracts at fair values of $5.3
and $3.3 million, respectively, and an unrealized gain of $117 thousand and an
unrealized loss of $369 thousand, respectively, on such contracts. These
contracts covered a notional volume of 7,716,170 and 5,511,557 pounds of
aluminum. A hypothetical 10% change from the October 31, 1999 and 1998 average
London Metal Exchange ("LME") ingot price of $.688 and $.60, respectively, per
pound would increase or decrease the unrealized pretax losses related to these
contracts by approximately $530 and $330 thousand, respectively. However, it
should be noted that any change in the value of these contracts, real or
hypothetical, would be significantly offset by an inverse change in the cost of
purchased aluminum scrap.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Quanex Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Quanex
Corporation and subsidiaries as of October 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 1999. Our audits also
included the financial statement schedule listed in the index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Quanex Corporation and
subsidiaries as of October 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Houston, Texas
Date: November 19, 1999
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RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Quanex Corporation
and subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles and include amounts that are based on
management's best judgments and estimates.
Quanex's system of internal controls is designed to provide reasonable
assurance, at justifiable cost, as to the reliability of financial records and
reporting and the protection of assets. The system of controls provides for
appropriate division of responsibility and the application of policies and
procedures that are consistent with high standards of accounting and
administration. Internal controls are monitored through recurring internal audit
programs and are updated as our businesses and business conditions change.
The Audit Committee, composed solely of outside directors, determines that
management is fulfilling its financial responsibilities by meeting periodically
with management, Deloitte & Touche LLP, and Quanex's internal auditors, to
review internal accounting control and financial reporting matters. The internal
and independent auditors have free and complete access to the Audit Committee.
We believe that Quanex's system of internal controls, combined with the
activities of the internal and independent auditors and the Audit Committee,
provides reasonable assurance of the integrity of our financial reporting.
/s/ VERNON E. OECHSLE /s/ TERRY M. MURPHY
Vernon E. Oechsle Terry M. Murphy
Chairman and Chief Executive Officer Vice President -- Finance and
Chief Financial Officer
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QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
OCTOBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Current assets:
Cash and equivalents...................................... $ 25,874 $ 26,279
Accounts and notes receivable, less allowance for doubtful
accounts of $12,154,000 in 1999 and $11,752,000 in
1998................................................... 87,204 85,166
Inventories............................................... 78,463 85,397
Deferred income taxes..................................... 19,146 11,560
Prepaid expenses.......................................... 1,700 1,410
-------- --------
Total current assets.............................. 212,387 209,812
Property, plant and equipment, net.......................... 406,841 395,054
Goodwill, net............................................... 48,990 52,281
Other assets................................................ 22,228 17,141
-------- --------
$690,446 $674,288
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 70,187 $ 75,160
Accrued expense........................................... 54,305 56,125
Current maturities of long-term debt...................... 10,545 12,248
Income taxes payable...................................... 1,103 3,300
-------- --------
Total current liabilities......................... 136,140 146,833
Long-term debt.............................................. 179,121 188,302
Deferred pension credits.................................... 6,691 7,832
Deferred postretirement welfare benefits.................... 7,490 7,092
Deferred income taxes....................................... 43,910 33,412
Other liabilities........................................... 16,033 18,773
-------- --------
Total liabilities................................. 389,385 402,244
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized; issued & outstanding -- none in 1999 and
1998................................................... -- --
Common stock, $.50 par value, 50,000,000 shares
authorized; 14,269,800 shares in 1999 and 14,179,834
shares in 1998 issued.................................. 7,135 7,090
Common stock held by rabbi trust -- 94,606 shares in 1999
and no shares in 1998.................................. (2,322) --
Additional paid-in capital.................................. 110,317 108,624
Retained earnings........................................... 186,867 156,278
Unearned compensation....................................... (171) --
Accumulated other comprehensive income...................... (765) 52
-------- --------
Total stockholders' equity........................ 301,061 272,044
-------- --------
$690,446 $674,288
======== ========
See notes to consolidated financial statements.
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QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales.................................................. $810,094 $797,490 $746,093
Costs and expenses:
Cost of sales............................................ 639,911 647,179 610,412
Selling, general and administrative...................... 53,104 47,713 43,375
Depreciation and amortization............................ 45,322 41,834 37,298
Restructuring charge..................................... -- 58,500 --
-------- -------- --------
Operating income........................................... 71,757 2,264 55,008
Other income (expense):
Interest expense......................................... (14,402) (14,904) (17,541)
Capitalized interest..................................... 1,611 4,398 3,539
Other, net............................................... 1,383 2,278 1,637
-------- -------- --------
Income (loss) from continuing operations before income
taxes and extraordinary gain............................. 60,349 (5,964) 42,643
Income tax benefit (expense)............................... (21,048) 2,087 (14,925)
-------- -------- --------
Income (loss) from continuing operations and before
extraordinary gain....................................... 39,301 (3,877) 27,718
Income from discontinued operations, net of income taxes... -- -- 5,176
Gain on sale of discontinued operations, net of income
taxes.................................................... -- 13,046 36,290
-------- -------- --------
Income before extraordinary gain........................... 39,301 9,169 69,184
Extraordinary gain on early extinguishment of debt, net of
income taxes............................................. 415 -- --
-------- -------- --------
Net income attributable to common stockholders............. $ 39,716 $ 9,169 $ 69,184
======== ======== ========
Earnings per common share:
Basic:
Continuing operations................................. $ 2.76 $ (0.27) $ 2.01
Discontinued operations............................... -- -- 0.37
Gain on sale of discontinued operations............... -- 0.92 2.63
Extraordinary gain.................................... 0.03 -- --
-------- -------- --------
Total basic net earnings......................... $ 2.79 $ 0.65 $ 5.01
======== ======== ========
Diluted:
Continuing operations................................. $ 2.56 $ (0.27) $ 1.90
Discontinued operations............................... -- -- 0.31
Gain on sale of discontinued operations............... -- .92 2.17
Extraordinary gain.................................... 0.03 -- --
-------- -------- --------
Total diluted net earnings....................... $ 2.59 $ 0.65 $ 4.38
======== ======== ========
Weighted average number of shares outstanding
Basic.................................................... 14,234 14,149 13,807
Diluted.................................................. 16,776 14,149 16,725
See notes to consolidated financial statements.
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QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON
STOCK
COMMON STOCK HELD BY ADDITIONAL
YEARS ENDED OCTOBER 31, 1999, ------------------- RABBI PAID-IN RETAINED
1998, AND 1997 SHARES AMOUNT TRUST CAPITAL EARNINGS
- ----------------------------- ---------- ------ ------- ---------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
BALANCE AT OCTOBER 31, 1996.... 13,590,400 $6,795 $ 94,251 $ 96,623
Comprehensive income:
Net income................... -- -- -- 69,184
Ad