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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
18
21
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
Adjustment for minimum
pension liability (net of
tax expense of $112).......
Foreign currency translation
adjustment.................
Total Comprehensive
income...............
Common dividends ($.61 per
share)..................... -- -- -- (8,422)
Unearned compensation........ -- -- -- --
Other........................ 460,011 230 10,895 (857)
---------- ------ -------- --------
BALANCE AT OCTOBER 31, 1997.... 14,050,411 $7,025 $105,146 $156,528
Comprehensive income:
Net income................... 9,169
Adjustment for minimum
pension liability (net of
tax benefit of $500).......
Foreign currency translation
adjustment.................
Total Comprehensive
income...............
Common dividends ($.64 per
share)..................... (9,059)
Other........................ 129,423 65 3,478 (360)
---------- ------ -------- --------
BALANCE AT OCTOBER 31, 1998.... 14,179,834 $7,090 $108,624 $156,278
Comprehensive income:
Net income................... 39,716
Adjustment for minimum
pension liability (net of
tax expense of $395).......
Foreign currency translation
adjustment.................
Total Comprehensive
income...............
Common dividends ($.64 per
share)..................... (9,124)
Common stock held by Rabbi
Trust...................... (2,322)
Other........................ 89,966 45 1,693 (3)
---------- ------ ------- -------- --------
BALANCE AT OCTOBER 31, 1999.... 14,269,800 $7,135 $(2,322) $110,317 $186,867
OTHER COMPREHENSIVE
INCOME
-----------------------
MINIMUM FOREIGN TOTAL
YEARS ENDED OCTOBER 31, 1999, PENSION CURRENCY STOCKHOLDERS'
1998, AND 1997 LIABILITY TRANSLATION OTHER EQUITY
- ----------------------------- --------- ----------- ----- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
BALANCE AT OCTOBER 31, 1996.... $ (475) -- $(185) $197,009
Comprehensive income:
Net income................... 69,184
Adjustment for minimum
pension liability (net of
tax expense of $112)....... 177 177
Foreign currency translation
adjustment................. 422 422
--------
Total Comprehensive
income............... 69,783
Common dividends ($.61 per
share)..................... -- (8,422)
Unearned compensation........ 185 185
Other........................ -- -- -- 10,268
------- ------ ----- --------
BALANCE AT OCTOBER 31, 1997.... $ (298) $ 422 $ 0 $268,823
Comprehensive income:
Net income................... 9,169
Adjustment for minimum
pension liability (net of
tax benefit of $500)....... (782) (782)
Foreign currency translation
adjustment................. 710 710
--------
Total Comprehensive
income............... 9,097
Common dividends ($.64 per
share)..................... (9,059)
Other........................ -- -- -- 3,183
------- ------ ----- --------
BALANCE AT OCTOBER 31, 1998.... $(1,080) $1,132 $ 0 $272,044
Comprehensive income:
Net income................... 39,716
Adjustment for minimum
pension liability (net of
tax expense of $395)....... 618 618
Foreign currency translation
adjustment................. (1,435) (1,435)
--------
Total Comprehensive
income............... 38,899
Common dividends ($.64 per
share)..................... (9,124)
Common stock held by Rabbi
Trust...................... (2,322)
Other........................ (171) 1,564
------- ------ ----- --------
BALANCE AT OCTOBER 31, 1999.... $ (462) $ (303) $(171) $301,061
See notes to consolidated financial statements.
28
31
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income................................................ $ 39,716 $ 9,169 $ 69,184
Adjustments to reconcile net income to cash provided by
operating activities:
Income from discontinued operations (net of taxes)..... -- -- (5,176)
Gain on sale of discontinued operations(net of
taxes)............................................... -- (13,046) (36,290)
Restructuring charge (net of deferred taxes of
$20,475)............................................. -- 38,025 --
Extraordinary gain on early extinguishment of debt..... (638) -- --
Depreciation and amortization.......................... 45,883 42,400 37,865
Deferred income taxes.................................. 10,150 6,059 7,545
Deferred pension and postretirement benefits........... (429) 223 193
Changes in assets and liabilities net of effects from
acquisitions and dispositions:
Decrease (increase) in accounts and notes receivable... (2,665) 3,664 2,957
Decrease (increase) in inventory....................... 6,485 (10,994) 8,898
Increase (decrease) in accounts payable................ (4,648) (2,262) 112
Increase (decrease) in accrued expenses................ (1,510) (346) 2,919
Other, net............................................. (14,656) (8,822) (8,868)
-------- -------- --------
Cash provided by continuing operations............... 77,688 64,070 79,339
Cash provided by discontinued operations............. -- -- 89
-------- -------- --------
Cash provided by operating activities................ 77,688 64,070 79,428
INVESTMENT ACTIVITIES:
Acquisition of Decatur Aluminum Corp., net of cash and
equivalents acquired................................... -- (9,573) --
Acquisition of Advanced Metal Forming, C.V., net of cash
and equivalents acquired............................... -- -- (33,584)
Acquisition of Piper Impact, Inc., net of cash and
equivalents acquired................................... -- -- (5,575)
Net proceeds from sale of LaSalle Steel Company........... -- 1,366 63,900
Net proceeds from sale of the Tubing Operations........... -- 30,068 --
Capital expenditures, net of retirements.................. (60,848) (58,513) (68,916)
Capital expenditures of discontinued operations........... -- -- (3,868)
Other, net................................................ (1,832) (3,168) (1,550)
-------- -------- --------
Cash (used) by investment activities................... (62,680) (39,820) (49,593)
-------- -------- --------
Cash provided by operating and investment activities... 15,008 24,250 29,835
FINANCING ACTIVITIES:
Bank borrowings (repayments), net......................... 1,035 (17,124) (41,828)
Purchase of subordinated debentures....................... (8,799) (1,500) --
Common dividends paid..................................... (9,124) (9,059) (8,422)
Issuance of common stock, net............................. 1,567 3,183 10,453
Other, net................................................ (60) (429) 429
-------- -------- --------
Cash (used) by financing activities.................... (15,381) (24,929) (39,368)
-------- -------- --------
Effect of exchange rate changes on cash and equivalents..... (32) 107 422
-------- -------- --------
Decrease in cash and equivalents............................ (405) (572) (9,111)
Cash and equivalents at beginning of period................. 26,279 26,851 35,962
-------- -------- --------
Cash and equivalents at end of period....................... $ 25,874 $ 26,279 $ 26,851
======== ======== ========
See notes to consolidated financial statements.
29
32
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Quanex
Corporation and its subsidiaries (the "Company"), all of which are wholly owned.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Scope of Operations
The Company operates primarily in three industry segments: manufacturing of
engineered steel bars, aluminum mill sheet products and engineered products. The
Company's products include engineered steel bars, coiled aluminum sheet (mill
finish and coated), aluminum and steel fabricated products and impact
extrusions. The Company's manufacturing operations are conducted primarily in
the United States.
Revenues
The Company recognizes revenues when products are shipped and the title and
risk of ownership pass to the customer.
Statements of Cash Flows
The Company generally considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
Similar investments with original maturities beyond three months are considered
short-term investments. For fiscal years 1999, 1998 and 1997 cash paid for
income taxes was $22,005,000, $20,860,000, and $13,906,000, respectively. These
amounts are before refunds of $1,181,000, $172,000, and $471,000, respectively.
Cash paid for interest for fiscal 1999, 1998 and 1997 was $13,931,000,
$14,404,000, and $17,964,000, respectively.
Inventories
Inventories are valued at the lower of cost or market. The accounting
methods used in valuing the Company's inventories are described in Note 8.
Long-Lived Assets
Property, plant and equipment is stated at cost and is depreciated using
the straight-line method over the estimated useful lives of the assets. The
estimated useful lives of certain categories are as follows:
YEARS
--------
Land improvements........................................... 10 to 25
Buildings................................................... 10 to 40
Machinery and equipment..................................... 3 to 20
30
33
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill represents the excess of the purchase price over the fair value of
acquired companies and is being amortized on a straight line basis over forty
years for the goodwill resulting from the acquisition of Nichols Homeshield in
1989, and over twenty-five years for the goodwill resulting from the
acquisitions of Piper Impact Europe B.V. ("Piper Impact Europe") in 1997 and
Nichols Aluminum Alabama, Inc. in 1998 (See Note 2). Goodwill from the
acquisition of Piper Impact, Inc. ("Piper Impact") in 1996 was being amortized
over 25 years, however, during the fourth quarter of 1998, the balance of
goodwill associated with Piper Impact was written off in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 121. (See Note 4) At
October 31, 1999 and 1998, accumulated amortization was $11,035,000, and
$9,255,000, respectively.
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. (See Note 4 -- regarding the impact of this statement.)
Hedging
The Company enters into various derivative instruments to protect itself
from fluctuating prices and rates. The Company uses futures contracts to hedge a
portion of its exposure to price fluctuations of aluminum. Hedging gains and
losses are recognized concurrently with related sales transactions. The Company
enters into interest rate swap agreements, which effectively exchange variable
interest rate debt for fixed interest rate debt. The agreements are used to
reduce the exposure to possible increases in interest rates. The Company enters
into these swap agreements with major financial institutions. The Company uses
foreign currency swap agreements to protect the value of its investment in Piper
Impact Europe as well as to protect itself from currency fluctuations on certain
sales and purchases. The impact of the foreign currency instruments which
protect the investment in Piper Impact Europe are recorded as a foreign currency
translation adjustment in the equity section of the financial statements when
exchange rates go outside of the limits. The gains and losses on the forward
contracts related to the sales and purchases are deferred off-balance sheet and
included as a component of the related transaction when recorded. (See Note 16)
Earnings Per Share Data
Basic earnings per share excludes dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at year-end exchange rates, and income and expense items are translated
at the average exchange rates for the year. Resulting translation adjustments
are reported as a separate component of stockholders' equity.
31
34
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts for prior periods have been reclassified in the
accompanying consolidated financial statements to conform to fiscal 1999
presentations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income", which establishes standards for the
reporting and displaying of comprehensive income and its components. The Company
has adopted this pronouncement as of October 31, 1999 and the accompanying
consolidated financial statements are presented in accordance with this
statement.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits", which defines new disclosure
requirements for pension and other postretirement benefits in an effort to
facilitate financial analysis by adding useful information and deleting
disclosures that the FASB considers no longer useful. The Company has adopted
this pronouncement as of October 31, 1999 and disclosures required by this
statement have been made in Note 13 for all periods presented.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the Company's year
ending October 31, 2000. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. 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.
32
35
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
On October 29, 1997, the Company, through its Dutch subsidiary, Piper
Impact Europe, acquired the net assets of Advanced Metal Forming C.V., a Dutch
limited partnership, for approximately $30 million. Goodwill associated with
Piper Impact Europe is approximately NLG 26 million or $12 million. The income
statement for the year ended October 31, 1997 does not include the operations of
Piper Impact Europe.
Piper Impact Europe produces aluminum impact extrusions and precision steel
stampings for the automotive and electronics industries in Europe and North
America. Piper Impact Europe employs approximately 300 people, and its
manufacturing facilities are located near Zwolle in The Netherlands.
On October 9, 1998, the Company acquired the stock of Decatur Aluminum
Corp., a Decatur, Alabama based coiled aluminum sheet manufacturer for
approximately $19 million. Included in the purchase price was debt totaling $5
million and other specified liabilities for $5 million assumed by the Company.
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. Goodwill associated with
Nichols Aluminum Alabama is approximately $10 million. Nichols Aluminum
Alabama's operations include cold rolling aluminum sheet to specific gauge,
annealing, leveling, custom painting and slitting to width.
3. DISCONTINUED OPERATIONS
In April 1997, the Company completed the sale of its LaSalle Steel Company
("LaSalle") subsidiary. The Company recorded an after tax gain on the sale of
$36,290,000 in the second quarter of fiscal 1997. During 1998, an additional
after tax gain of $668,000 was recorded as a result of post-closing adjustments.
LaSalle's results of operations have been classified as discontinued operations
and prior periods have been restated. For business segment reporting purposes,
LaSalle's data was previously reported as the segment "Cold Finished Steel
Bars".
In December 1997, the Company completed the sale of its tubing operations,
comprised of Michigan Seamless Tube, Gulf States Tube, and the Tube Group
Administrative Office ("Tubing Operations"). The sale was effective November 1,
1997. The Company recorded an after tax gain on the sale of $12,378,000 during
fiscal 1998. Included in the gain is an accrual for the Company's best estimate
of potential environmental clean-up costs at one of the discontinued operating
facilities. Results of these operations have been classified as discontinued and
prior periods have been restated. For business segment reporting purposes,
Tubing Operations were previously classified as "Steel Tubes".
Net sales and income from discontinued operations are as follows:
YEAR ENDED
OCTOBER 31, 1997
----------------
(IN THOUSANDS)
Net sales................................................... $187,123
Operating income............................................ 7,962
Income tax expense.......................................... (2,786)
Income from discontinued operations......................... $ 5,176
33
36
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PIPER IMPACT IMPAIRMENT DISCLOSURE
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. Production ceased at the Utah facility and its operations were
consolidated in Mississippi by May 1999.
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.
5. EXTRAORDINARY ITEM
During fiscal 1999, the Company accepted unsolicited block offers to buy
back $9.7 million principal amount of the 6.88% Convertible Subordinated
Debentures for $8.8 million in cash. An after tax extraordinary gain of $415
thousand was recorded on these transactions in the second fiscal quarter of
1999.
34
37
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. EARNINGS PER SHARE
The computational components of basic and diluted earnings per share are as
follows (Shares and dollars in thousands except per share amounts):
FOR THE YEAR ENDED OCTOBER 31, 1999
-----------------------------------
NUMERATOR DENOMINATOR PER SHARE
(INCOME) (SHARES) AMOUNT
--------- ----------- ---------
BASIC EPS
Income from continuing operations................. $39,301 14,234 $2.76
Extraordinary gain on early extinguishment of
debt........................................... 415 0.03
------- -----
Total basic net income.................... $39,716 $2.79
======= =====
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equivalents arising from
stock options.................................. -- 56
Effect of common stock held by rabbi trust........ -- 16
Effect of conversion of subordinated debentures... 3,663 2,470
------- ------
DILUTED EPS
Income from continuing operations................. 42,964 16,776 $2.56
======
Extraordinary gain on early extinguishment of
debt........................................... 415 0.03
------- -----
Total diluted net income.................. $43,379 $2.59
======= =====
FOR THE YEAR ENDED OCTOBER 31, 1998
-----------------------------------
NUMERATOR DENOMINATOR PER SHARE
(INCOME) (SHARES) AMOUNT
--------- ----------- ---------
BASIC EPS
Loss from continuing operations................... $(3,877) 14,149 $(0.27)
Gain on sale of discontinued operations........... 13,046 $ 0.92
------- ------
Total basic net income.................... $ 9,169 $ 0.65
======= ======
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equivalents arising from
stock options(1)............................... -- --
Effect of conversion of subordinated
debentures(1).................................. -- --
------- ------
DILUTED EPS
Loss from continuing operations................... $(3,877) 14,149 $(0.27)
======
Gain on sale of discontinued operations........... 13,046 $ 0.92
------- ------
Total diluted net income.................. $ 9,169 $ 0.65
======= ======
- ---------------
(1) The effect of both common stock equivalents arising from stock options and
the conversion of subordinated debentures was anti-dilutive.
35
38
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED OCTOBER 31, 1997
-----------------------------------
NUMERATOR DENOMINATOR PER SHARE
(INCOME) (SHARES) AMOUNT
--------- ----------- ---------
BASIC EPS
Income from continuing operations................. $27,718 13,807 $2.01
Income from discontinued operations............... 5,176 0.37
Gain on sale of discontinued operations........... 36,290 2.63
------- -----
Total basic net income.................... $69,184 $5.01
======= =====
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equivalents arising from
stock options.................................. 222
Effect of conversion of subordinated debentures... $ 3,997 2,696
------- ------
DILUTED EPS
Income from continuing operations................. $31,715 16,725 $1.90
======
Income from discontinued operations............... 5,176 0.31
Gain on sale of discontinued operations........... 36,290 2.17
------- -----
Total diluted net income.................. $73,181 $4.38
======= =====
36
39
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Income taxes are provided on taxable income at the statutory rates
applicable to such income.
Income tax expense (benefit) consists of the following:
YEARS ENDED OCTOBER 31,
----------------------------
1999 1998 1997
------- -------- -------
(IN THOUSANDS)
Current:
Federal.............................................. $17,819 $ 9,312 $ 846
State................................................ 1,066 4,190 2,829
Foreign.............................................. (372) 507 --
------- -------- -------
18,513 14,009 3,675
Deferred............................................... 2,535 (16,096) 11,250
------- -------- -------
Income taxes from continuing operations................ 21,048 (2,087) 14,925
Income taxes from discontinued operations.............. -- -- 2,786
Income taxes from sale of discontinued operations...... -- 3,441 13,178
Income taxes from extinguishment of debt............... 223 -- --
------- -------- -------
Total........................................ $21,271 $ 1,354 $30,889
======= ======== =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax liability are as
follows:
OCTOBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Deferred tax liability:
Property, plant and equipment............................. $ 51,477 $ 44,723
Inventory................................................. (573) (1,161)
Other..................................................... 16,085 16,926
-------- --------
66,989 60,488
-------- --------
Deferred tax assets:
Intangibles............................................... 14,411 19,678
Postretirement benefit obligation......................... 3,345 3,149
Other employee benefit obligations........................ 9,448 9,314
Other..................................................... 15,021 6,495
-------- --------
42,225 38,636
-------- --------
Net deferred tax liability.................................. $ 24,764 $ 21,852
======== ========
Deferred income tax non-current liability................... $ 43,910 $ 33,412
Deferred tax current assets................................. (19,146) (11,560)
-------- --------
Net deferred tax liability................................ $ 24,764 $ 21,852
======== ========
Deferred taxes have not been provided on the Company's foreign subsidiary's
cumulative undistributed earnings of $241,000, since such amounts are expected
to be reinvested indefinitely. If these earnings were remitted to the Company,
there would be little or no additional federal income tax because of the
availability of foreign tax credits.
37
40
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) differs from the amount computed by applying
the statutory federal income tax rate to income from continuing operations
before income taxes for the following reasons:
YEARS ENDED OCTOBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Income tax expense (benefit) at statutory tax rate...... $21,123 $(2,087) $14,925
Increase (decrease) in taxes resulting from:
State income taxes, net of federal effect............. 1,118 (250) 1,655
Goodwill.............................................. 334 345 334
Other items, net...................................... (1,527) (95) (1,989)
------- ------- -------
$21,048 $(2,087) $14,925
======= ======= =======
The Company reached a settlement with the Internal Revenue Service with
respect to its tax audit of fiscal years 1992 through 1994. During 1997, the
Company made a payment of $2,016,000 of tax and related interest. Adequate
provisions had been made in prior years and the settlement did not have a
material effect on earnings for fiscal 1997. The Company's 1996 tax year is
currently under audit.
8. INVENTORIES
Inventories consist of the following:
OCTOBER 31,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
Raw materials............................................... $24,617 $25,167
Finished goods and work in process.......................... 46,958 52,485
------- -------
71,575 77,652
Other....................................................... 6,888 7,745
------- -------
Total............................................. $78,463 $85,397
======= =======
The values of inventories in the consolidated balance sheets are based on
the following accounting methods:
LIFO........................................................ $58,968 $57,594
FIFO........................................................ 19,495 27,803
------- -------
Total............................................. $78,463 $85,397
======= =======
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $11,300,000 and $12,300,000 at October
31, 1999 and 1998, respectively.
At the beginning of fiscal 1999, Quanex changed its inventory valuation
method for measuring segment results from LIFO to FIFO. The change has no impact
on consolidated results, which remain LIFO based. See Note 13 regarding industry
segment information.
38
41
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
OCTOBER 31,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS)
Land and land improvements.................................. $ 18,502 $ 18,376
Buildings................................................... 101,166 100,009
Machinery and equipment..................................... 591,942 545,677
Construction in progress.................................... 42,201 38,893
--------- ---------
753,811 702,955
Less accumulated depreciation and amortization.............. (346,970) (307,901)
--------- ---------
$ 406,841 $ 395,054
========= =========
The Company had commitments for the purchase or construction of capital
assets amounting to approximately $15 million at October 31, 1999.
10. ACCRUED EXPENSES
Accrued expenses consist of the following:
OCTOBER 31,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
Accrued contribution to pension funds....................... $ 1,783 $ 1,125
Interest.................................................... 2,364 2,544
Payroll, payroll taxes and employee benefits................ 28,745 24,497
State and local taxes....................................... 2,288 1,942
Other....................................................... 19,125 26,017
------- -------
$54,305 $56,125
======= =======
39
42
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
OCTOBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
"Bank Agreement" Revolver................................... $ 75,000 $ 80,000
Convertible subordinated debentures......................... 73,720 83,420
Piper Impact Europe "Credit Facility"....................... 22,703 22,363
Industrial Revenue and Economic Development Bonds,
unsecured, payable in annual installments through the year
2005, bearing interest ranging from 6.50% to 8.375%....... 3,275 3,275
State of Alabama Industrial Development Bonds............... 4,755 4,755
Scott County, Iowa Industrial Waste Recycling Revenue
Bonds..................................................... 3,000 --
Other....................................................... 7,213 6,737
-------- --------
$189,666 $200,550
Less maturities due within one year included in current
liabilities............................................... 10,545 12,248
-------- --------
$179,121 $188,302
======== ========
In July 1996, the Company entered into an unsecured $250 million Revolving
Credit and Term Loan Agreement ("Bank Agreement"). The Bank Agreement consists
of a revolving line of credit ("Revolver"). In July 1997, the term loan
provisions of the Bank Agreement expired. The Bank Agreement expires July 23,
2003, and provides for up to $25 million for standby letters of credit, limited
to the undrawn amount available under the Revolver. All borrowings under the
Revolver bear interest, at the option of the Company, at either (a) the prime
rate or the federal funds rate plus one percent, whichever is higher, or (b) a
Eurodollar based rate. At October 31, 1999 and 1998, the Company had $75 and $80
million, respectively, outstanding under the Revolver. The weighted average
interest rates on borrowings under the Revolver were 5.7%, 6.2%, and 6.6% in
1999, 1998 and 1997, respectively. As of October 31, 1999, the Company was in
compliance with all Bank Agreement covenants. Under the Company's most
restrictive loan covenants, retained earnings of approximately $48 million at
October 31, 1999 were available for dividends and other restricted payments.
On June 30, 1995, the Company exercised its right under the terms of its
Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for
an aggregate of $84,920,000 of its 6.88% Convertible Subordinated Debentures due
June 30, 2007 ("Debentures"). Interest is payable semi-annually on June 30 and
December 31 of each year. The Debentures are subject to mandatory annual sinking
fund payments sufficient to redeem 25% of the Debentures issued on each of June
30, 2005 and June 30, 2006, to retire a total of 50% of the Debentures before
maturity. The Debentures are subordinate to all senior indebtedness of the
Company and are convertible, at the option of the holder, into shares of the
Company's common stock at a conversion price of $31.50 per share.
During fiscal 1999 and 1998, respectively, the Company accepted unsolicited
block offers to buy back $9.7 and $1.5 million, respectively, principal amount
of its Convertible Subordinated Debentures. The outstanding balance as of
October 31, 1999 is $73,720,000.
40
43
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 28, 1997, Piper Impact Europe executed a stand-alone secured
credit facility ("Credit Facility") providing an initial available credit line
of 50 million Dutch Guilders ("NLG"). The available credit line is reduced each
quarter by the principal payments on the Medium Term Loan described below. At
October 31, 1999, the available credit line was 48 million NLG. At October 31,
1999 and 1998, 1 NLG was equal to .477 and .535 U.S. dollars, respectively. The
Credit Facility consists of a Roll-Over Term Loan, a Medium Term Loan and an
Overdraft Facility. The Roll-Over Term Loan provides NLG 15 million for loan
periods of 1, 2, 3, 6, or 12 months with repayment of outstanding borrowings on
October 27, 2002. Interest is payable on the repayment date at the Amsterdam
Interbank Offering Rate (AIBOR) plus 90 basis points. In the case of a loan
period of twelve months, interest is payable six months after the beginning of
the loan period and on the repayment date. The Medium Term Loan provides NLG 15
million at 6.375% payable quarterly in arrears from March 1, 1998, with
quarterly repayments of principal in equal amounts of NLG 500 thousand
commencing January 1, 1999 through April 1, 2006. The Overdraft Facility
provides an aggregate amount of NLG 20 million to cover overdrafts or up to NLG
15 million of loans for a period of one year, subject to annual renewal.
Overdrafts bear interest at the Bank's published rate for overdraft facilities
plus 1% per annum. Loans under the Overdraft Facility bear interest at AIBOR
plus 45 to 55 basis points. The terms of Overdraft Facility loans are selected
by Piper Impact Europe to be a period of 1, 2, 3, 6, or 12 months. Interest on
overdrafts is paid quarterly in arrears.
Interest on loans under the Overdraft Facility is payable on the repayment
date, however, in the case of a loan period of twelve months, interest is
payable six months after the beginning of the loan period and on the repayment
date. At October 31, 1999, and 1998, Piper Impact Europe had NLG 47.6 and 41.8
million, respectively, outstanding under the Credit Facility. As of October 31,
1999, Piper Impact Europe was in compliance with all Credit Facility covenants.
The State of Alabama Industrial Development bonds were assumed as part of
the Nichols Aluminum Alabama acquisition (See Note 2). These bonds mature August
1, 2004 with interest payable monthly. The bonds bear interest at the weekly
interest rate as determined by the remarketing agent under then prevailing
market conditions to be the minimum interest rate, which, if borne by the Bonds
on the effective date of such rate, would enable the remarketing agent to sell
the Bonds on such business day at a price (without regard to accrued interest)
equal to the principal amount of the bonds. The interest rate, however, may not
exceed 13% per annum. The weekly interest rate during the year ended October 31,
1999 ranged from 2.45% to 4.25%. These bonds are secured by a Letter of Credit.
On June 1, 1999, the Company borrowed $3 million through unsecured Scott
County, Iowa Variable Rate Demand Industrial Waste Recycling Revenue Bonds
Series 1999. The bonds require 15 annual principal payments of $200 thousand
beginning on July 1, 2000. The variable interest rate is established by the
remarketing agent based on the lowest weekly rate of interest that would permit
the sale of the bonds at par, on the basis of prevailing financial market
conditions. Interest is payable on the first business day of each calendar
month. Interest rates on these bonds during the five months that they have been
outstanding in fiscal 1999 have ranged from 3.0% to 4.0%.
Aggregate maturities of long-term debt at October 31, 1999, are as follows
(in thousands):
2000........................................................ $ 10,545
2001........................................................ 1,202
2002........................................................ 8,359
2003........................................................ 76,203
2004........................................................ 12,727
Thereafter.................................................. 80,630
--------
$189,666
========
41
44
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has a number of retirement plans covering substantially all
employees. The Company provides both defined benefit and defined contribution
plans. In general, the plant or location of his/her employment determines an
employee's coverage for retirement benefits. The single employer defined benefit
pension plans pay benefits to employees at retirement using formulas based upon
years of service and compensation rates near retirement. The Company's funding
policy is generally to make the minimum annual contributions required by
applicable regulations. The plans invest primarily in marketable equity and debt
securities.
The Company also provides certain healthcare and life insurance benefits
for certain eligible retired employees employed prior to January 1, 1993.
Certain employees may become eligible for those benefits if they reach normal
retirement age while working for the Company. The Company continues to fund
benefit costs on a pay-as-you-go basis; and, for fiscal year 1999, the Company
made benefit payments totaling $348,000, compared to $410,000 and $247,000 in
fiscal 1998 and 1997, respectively.
In fiscal 1999, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", which revises disclosures
about pension and other postretirement benefits. The following information is
provided in accordance with the requirements of this Statement.
A reconciliation of the beginning benefit obligation to the ending benefit
obligation follows:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------------- ---------------
OCTOBER 31,
-----------------------------------
1999 1998 1999 1998
------- ------- ------ ------
(IN THOUSANDS)
Benefit obligation at beginning of year.......... $27,665 $21,960 $7,984 $6,611
Service cost................................... 2,092 1,832 187 163
Interest cost.................................. 1,978 1,685 541 523
Amendments..................................... 818 38 -- --
Actuarial loss (gain).......................... (2,111) 2,854 (633) 1,103
Benefits paid from plan assets................. (556) (385) (348) (410)
Administrative expenses........................ (298) (321) -- --
Foreign currency translation effect............ (122) -- -- --
Piper Impact Europe benefit obligation......... 1,098 -- -- --
Other.......................................... -- 2 -- (6)
------- ------- ------ ------
Benefit obligation at end of year................ $30,564 $27,665 $7,731 $7,984
======= ======= ====== ======
A reconciliation of the beginning fair value of plan assets to the ending
fair value of plan assets follows:
PENSION BENEFITS
OCTOBER 31,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
Fair value of plan assets at beginning of year.............. $17,692 $16,253
Actual return on plan assets.............................. 2,491 433
Employer contributions.................................... 2,240 1,712
Employee contributions.................................... 47 --
Ins. premiums paid for surviving spouse coverage.......... (15) --
Benefits paid............................................. (556) (385)
Administrative expenses................................... (298) (321)
Foreign currency translation effect....................... (77) --
Piper Impact Europe fair value of plan assets............. 681 --
------- -------
Fair value of plan assets at end of year.................... $22,205 $17,692
======= =======
42
45
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the funded status of the plans with the amounts
recognized in the accompanying balance sheets is set forth below:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------------- -----------------
OCTOBER 31,
-------------------------------------
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS)
Funded status.................................. $(8,359) $(9,973) $(7,731) $(7,984)
Unrecognized transition asset.................. (602) (713) -- --
Unrecognized prior service cost................ 1,344 591 -- --
Unrecognized net loss.......................... 1,363 3,683 238 888
Foreign currency translation effect............ (12) -- -- --
Other.......................................... 22 -- 3 4
------- ------- ------- -------
Accrued benefit cost................. (6,244) (6,412) (7,490) (7,092)
Amounts recognized in the Balance Sheet:
Deferred benefit credit........................ (6,691) (7,832) (7,490) (7,092)
Accrued contribution to pension................ (1,783) (1,125) -- --
Intangible asset............................... 1,473 774 -- --
Accumulated other comprehensive income......... 757 1,771 -- --
------- ------- ------- -------
Accrued benefit cost................. $(6,244) $(6,412) $(7,490) $(7,092)
Below is data related to pension plans in which accumulated benefit
obligation exceeds plan assets.
PENSION POSTRETIREMENT
BENEFITS BENEFITS
---------------- -----------------
OCTOBER 31,
------------------------------------
1999 1998 1999 1998
------ ------- -------- ------
(IN THOUSANDS)
Accumulated benefit obligation.................... $7,319 $21,405 $7,731 $7,984
Fair value of plan assets......................... 5,576 17,692 -- --
Below are the assumptions used.
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------------------ ---------------------
OCTOBER 31,
------------------------------------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ----- ----- -----
(IN THOUSANDS)
Discount rate..................... 7.50% 6.75% 7.50% 7.50% 6.75% 7.50%
Expected return on plan assets.... 10.00% 10.00% 10.00% -- -- --
Rate of compensation increase..... 4.50% 4.00% 4.50% -- -- --
The assumed health care cost trend rate was 7.5% in 1999, decreasing
uniformly to 5.50% in the year 2003 and remaining level thereafter. If the
health care cost trend rate assumptions were increased by 1%, the accumulated
postretirement benefit obligation as of October 31, 1999 would be increased by
1.85%. The effect of this change on the sum of the service cost and interest
cost would be an increase of 1.44%. If the health care cost trend rate
assumptions were decreased by 1%, the accumulated postretirement benefit
obligation as of October 31, 1999 would be decreased by 1.65%. The effect of
this change on the sum of the service cost and interest cost would be a decrease
of 1.27%.
43
46
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension costs for the single employer defined benefit pension plans
were as follows:
YEARS ENDED OCTOBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Service Cost............................................ $ 2,092 $ 1,832 $ 1,371
Interest cost........................................... 1,978 1,685 1,511
Expected return on plan assets.......................... (1,978) (1,670) (1,354)
Amortization of unrecognized transition asset........... (111) (111) (47)
Amortization of unrecognized prior service cost......... 63 25 57
Amortization of unrecognized net loss................... 119 7 33
Other................................................... (63) -- --
------- ------- -------
Net periodic pension cost..................... $ 2,100 $ 1,768 $ 1,571
======= ======= =======
Net periodic costs for the postretirement benefit plans other than pensions
were as follows:
YEARS ENDED OCTOBER 31,
------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
Net periodic postretirement benefit cost:
Service cost.............................................. $187 $163 $148
Interest cost............................................. 541 523 472
Net amortization and deferral............................. 17 (10) 3
Other..................................................... 2 -- --
---- ---- ----
Net periodic postretirement benefit cost.......... $747 $676 $623
==== ==== ====
One of the Company's subsidiaries, Piper Impact Europe, participates in two
multi-employer plans. The plans provide defined benefits to substantially all of
Piper Impact Europe's employees. Amounts charged to pension cost and contributed
to the plans as of October 31, 1999 and 1998 totaled approximately NLG 2,021,000
and NLG 1,551,000 or approximately $1,000,000 and $800,000, respectively. There
was no pension cost in 1997 for these plans as Piper Impact Europe was acquired
on October 29, 1997. (See Note 2)
The Company has various defined contribution plans in effect for certain
eligible employees. The Company makes contributions to the plans subject to
certain limitations outlined in the plans. Contributions to these plans were
approximately $3,366,000, $2,978,000, and $2,919,000, during fiscal 1999, 1998,
and 1997, respectively.
The Company has a Supplemental Benefit Plan covering certain key officers
of the Company. Earned vested benefits under the Supplemental Benefit Plan were
approximately $4,829,000, $4,147,000, and $3,724,000 at October 31, 1999, 1998
and 1997, respectively. These benefits are funded with life insurance policies
purchased by the Company.
44
47
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INDUSTRY SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", for fiscal year ended 1998. SFAS No. 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 No. 131, the Company has three reportable segments:
engineered steel bars, aluminum mill sheet products, and engineered products.
The Company's previously reported "Aluminum Products Group" has been split into
two segments: "Aluminum Mill Sheet Products" and "Engineered Products". Prior
years' presentation has been restated to conform to the new segment reporting.
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.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies, with the exception of the
inventory valuation method. At the beginning of fiscal year 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 years' data have not been restated, however, information is provided below
to allow comparability.
The Company accounts for intersegment sales and transfers as if the sales
or transfers were to third parties, that is, at current market prices.
The Company's reportable segments are strategic business divisions that
offer different products and services. These groups are managed separately
because each business requires different expertise and marketing strategies. The
Company evaluates performance based on operating income.
45
48
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year-ended October 31, 1999, 12% of the Company's consolidated net
sales were made to one customer. These sales are included in the engineered
products segment.
ALUMINUM
YEAR ENDED ENGINEERED MILL ENGINEERED CORPORATE
OCTOBER 31, 1999 STEEL BARS SHEET PRODUCTS PRODUCTS & OTHER(1) CONSOLIDATED
- ---------------- ---------- -------------- ---------- ---------- ------------
(IN THOUSANDS)
Net Sales:
To unaffiliated companies........ $292,085 $290,648 $227,361 -- $810,094
Intersegment(2).................. 5,284 21,115 1 (26,400) --
-------- -------- -------- -------- --------
Total.................... $297,369 $311,763 $227,362 $(26,400) $810,094
======== ======== ======== ======== ========
Operating Income (loss)............ $ 60,446 $ 15,306 $ 12,153 $(16,148) $ 71,757
Depreciation and amortization:
Operating........................ $ 16,293 $ 12,313 $ 16,185 $ 531 $ 45,322
Other............................ -- 21 -- 540 561
-------- -------- -------- -------- --------
Total.................... $ 16,293 $ 12,334 $ 16,185 $ 1,071 $ 45,883
======== ======== ======== ======== ========
Capital expenditures(3)............ $ 37,750 $ 9,873 $ 12,628 $ 683 $ 60,934
Identifiable assets................ $241,783 $200,733 $209,153 $ 38,777 $690,446
- ---------------
(1) Included in "Corporate and Other" are intersegment eliminations, and
corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
(3) Includes capitalized interest.
For the year-ended October 31, 1998, 13% of the Company's consolidated net
sales were made to one customer. These sales are included in the engineered
products segment.
YEAR ENDED ENGINEERED ALUMINUM MILL ENGINEERED CORPORATE
OCTOBER 31, 1998 STEEL BARS SHEET PRODUCTS(1) PRODUCTS(4) & OTHER(2) CONSOLIDATED(4)
- ---------------- ---------- ----------------- ----------- ---------- ---------------
(IN THOUSANDS)
Net Sales:
To unaffiliated
companies............... $324,312 $243,168 $230,010 -- $797,490
Intersegment(3)............ 2,984 23,187 2 (26,173) --
-------- -------- -------- -------- --------
Total.............. $327,296 $266,355 $230,012 (26,173) $797,490
======== ======== ======== ======== ========
Operating Income (loss)(6)... $ 58,908 $ 7,788 $(52,606) $(11,826) $ 2,264
Depreciation and
amortization:
Operating.................. $ 13,097 $ 10,670 $ 17,928 $ 139 $ 41,834
Other...................... -- -- -- 566 566
-------- -------- -------- -------- --------
Total.............. $ 13,097 $ 10,670 $ 17,928 $ 705 $ 42,400
======== ======== ======== ======== ========
Capital expenditures(5)...... $ 31,116 $ 13,109 $ 16,442 $ 269 $ 60,936
Identifiable assets(6)....... $219,727 $198,596 $220,161 $ 35,804 $674,288
- ---------------
46
49
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) Identifiable assets include Nichols Aluminum Alabama, acquired on October 9,
1998.
(2) Included in "Corporate and Other" are intersegment eliminations, and
corporate expenses.
(3) Intersegment sales are conducted on an arm's-length basis.
(4) Operating income includes mostly non-cash non-recurring restructuring charge
of $58,500. See Note 4.
(5) Includes capitalized interest.
(6) As noted above, at the start of fiscal year 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 year's data have not been restated above, however, the following
information is provided to allow comparability. The effect of switching to
FIFO method of inventory valuation for segment reporting during 1998 would
have been as follows:
ENGINEERED ALUMINUM MILL ENGINEERED CORPORATE
STEEL BARS SHEET PRODUCTS PRODUCTS AND OTHER CONSOLIDATED
---------- -------------- ---------- --------- ------------
Operating Income --
increase/(decrease).............. (1,100) (5,011) (165) 6,276 0
Identifiable Assets --
increase/(decrease).............. 3,492 0 308 (3,800) 0
For the year ended October 31, 1997, 13% of the Company's consolidated net
sales were made to one customer. These sales are included in the engineered
products segment.
YEAR ENDED ENGINEERED ALUMINUM MILL ENGINEERED CORPORATE
OCTOBER 31, 1997 STEEL BARS SHEET PRODUCTS PRODUCTS(1) AND OTHER(2) CONSOLIDATED
- ---------------- ---------- -------------- ----------- ------------ ------------
(IN THOUSANDS)
Net Sales:
To unaffiliated companies...... $301,436 $237,836 $206,821 -- $746,093
Intersegment(3)................ 18,032 23,205 10 $(41,247) --
-------- -------- -------- -------- --------
Total.................. $319,468 $261,041 $206,831 $(41,247) $746,093
======== ======== ======== ======== ========
Operating Income (loss)(5)....... $ 50,762 $ 1,753 $ 15,444 $(12,951) $ 55,008
Depreciation and amortization:
Operating...................... $ 13,940 $ 10,154 $ 13,055 $ 149 $ 37,298
Other.......................... -- -- -- 567 567
-------- -------- -------- -------- --------
Total.................. $ 13,940 $ 10,154 $ 13,055 $ 716 $ 37,865
======== ======== ======== ======== ========
Capital expenditures(4).......... $ 35,220 $ 5,751 $ 27,830 $ 345 $ 69,146
Identifiable assets(5)........... $192,937 $163,637 $281,943 $ 47,188 $685,705
- ---------------
(1) Identifiable assets include Advanced Metal Forming C.V., acquired on October
29, 1997.
(2) Included in "Corporate and Other" are intersegment eliminations, corporate
expenses and net assets of discontinued operations.
(3) Intersegment sales are conducted on an arm's-length basis.
(4) Includes capitalized interest.
(5) As noted above, at the start of fiscal year 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 year's data have not been restated above, however, the following
information is provided to allow comparability. The effect of switching to
FIFO method of inventory valuation for segment reporting during 1997 would
have been as follows:
ENGINEERED ALUMINUM MILL ENGINEERED CORPORATE
STEEL BARS SHEET PRODUCTS PRODUCTS AND OTHER CONSOLIDATED
---------- -------------- ---------- --------- ------------
Operating Income --
increase/(decrease).............. 225 4,171 (71) (4,325) 0
Identifiable Assets --
increase/(decrease).............. 4,592 5,011 473 (10,076) 0
47
50
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC INFORMATION
YEAR ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net Sales(1)
United States............................................. $745,265 $741,067 713,596
Mexico.................................................... 17,183 15,680 17,396
Canada.................................................... 17,825 10,374 11,146
European countries........................................ 24,481 28,501 2,625
Other foreign countries................................... 5,340 1,868 1,330
-------- -------- --------
Total............................................. $810,094 $797,490 $746,093
======== ======== ========
- ---------------
(1) Net Sales are attributed to countries based on location of customer.
YEAR ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net Sales(2)
United States............................................. $777,441 $763,775 $746,093
The Netherlands........................................... 32,653 33,715 --
-------- -------- --------
$810,094 $797,490 $746,093
======== ======== ========
- ---------------
(2) Net sales are attributed to countries based on location of operations.
YEAR ENDED OCTOBER 31,
----------------------------
1999 1998 1997
------- ------ -------
Operating Income (Loss)(4)
United States............................................. $71,774 $ (144)(3) $55,008
The Netherlands........................................... (17) 2,408 --
------- ------ -------
$71,757 $2,264 $55,008
======= ====== =======
- ---------------
(3) Including the restructuring charge of $58.5 million. (See Note 4)
(4) Operating income (loss) is attributed to countries based on location of
operations.
YEAR ENDED OCTOBER 31,
-----------------------
1999 1998
---------- ----------
Identifiable Assets(5)
United States............................................. $648,145 $627,969
The Netherlands........................................... 42,301 46,319
-------- --------
Total............................................. $690,446 $674,288
======== ========
- ---------------
(5) Identifiable assets are attributed to countries based on location of
operations.
48
51
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. PREFERRED STOCK PURCHASE RIGHTS
The Company declared a dividend in 1986 of one Preferred Stock Purchase
Right (a "Right") on each outstanding share of its common stock. This action was
intended to assure that all shareholders would receive fair treatment in the
event of a proposed takeover of the Company. On April 26, 1989, the Company
amended the Rights to provide for additional protection to shareholders and to
provide the Board of Directors of the Company with needed flexibility in
responding to abusive takeover tactics. On April 15, 1999, the Second Amended
and Restated Rights Agreement went into effect. Each Right, when exercisable,
entitles the holder to purchase 1/100th of a share of the Company's Series A
Junior Participating Preferred Stock at an exercise price of $90. Each 1/100th
of a share of Series A Junior Participating Preferred Stock will be entitled to
a dividend equal to the greater of $.01 or the dividend declared on each share
of common stock, and will be entitled to 1/100th of a vote, voting together with
the shares of common stock. The Rights will be exercisable only if, without the
Company's prior consent, a person or group of persons acquires or announces the
intention to acquire 20% or more of the Company's common stock. If the Company
is acquired through a merger or other business combination transaction, each
Right will entitle the holder to purchase $120 worth of the surviving company's
common stock for $90. Additionally, if someone acquires 20% or more of the
Company's common stock, each Right not owned by the 20% or greater shareholder
would permit the holder to purchase $120 worth of the Company's common stock for
$90. The Rights are redeemable, at the option of the Company, at $.02 per Right
at any time until ten days after someone acquires 20% or more of the common
stock. The Rights expire April 15, 2009.
As a result of the Rights distribution, 150,000 of the 1,000,000 shares of
authorized Preferred Stock were reserved for issuance as Series A Junior
Participating Preferred Stock.
49
52
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. RESTRICTED STOCK AND STOCK OPTION PLANS
Key Employee Plans:
The Company has restricted stock and stock option plans which provide for
the granting of common shares or stock options to key employees. Under the
Company's restricted stock plan, common stock may be awarded to key employees.
The recipient is entitled to all of the rights of a shareholder, except that
during the forfeiture period the shares are nontransferable. The award vests
during the vesting period based on the price of the Company's stock. Upon
issuance of stock under the plan, unearned compensation equal to the market
value at the date of grant is charged to stockholders' equity and subsequently
amortized to expense over the restricted period. There were 6,000 restricted
shares granted in 1999. There were no restricted shares granted in 1998 or 1997.
No compensation expense was charged in 1999 or 1998 related to the restricted
stock. The amount charged to compensation expense in 1997 was $185,000, relating
to restricted stocks granted in 1994.
Under the Company's option plans, options are granted at prices determined
by the Board of Directors which may not be less than the fair market value of
the shares at the time the options are granted. Unless otherwise provided by the
Board at the time of grant, options become exercisable in 33 1/3% increments
maturing cumulatively on each of the first through third anniversaries of the
date of grant and must be exercised no later than ten years from the date of
grant. There were 276,776, 493,176, and 722,322 shares available for granting of
options at October 31, 1999, 1998, and 1997, respectively. Stock option
transactions for the three years ended October 31, 1999, were as follows:
SHARES AVERAGE
SHARES UNDER PRICE
EXERCISABLE OPTION PER SHARE
----------- --------- ---------
Balance at October 31, 1996.......................... 726,609 1,257,646 $22
-------
Granted............................................ 165,700 29
Exercised.......................................... (323,218) 18
Cancelled.......................................... (13,987) 25
---------
Balance at October 31, 1997.......................... 650,053 1,086,141 24
-------
Granted............................................ 264,550 21
Exercised.......................................... (95,416) 21
Cancelled.......................................... (35,404) 26
---------
Balance at October 31, 1998.......................... 770,075 1,219,871 23
-------
Granted............................................ 240,700 21
Exercised.......................................... (9,000) 15
Cancelled.......................................... (30,300) 24
---------
Balance at October 31, 1999.......................... 966,391 1,421,271 $23
======= =========
50
53
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 1, 1992, Carl E. Pfeiffer retired as the Chief Executive Officer
of the Company. In connection with such retirement, the Company replaced options
to purchase 60,000 shares of Common Stock at a weighted average exercise price
of $15.85 held by Mr. Pfeiffer, under the Company's employee stock option plans
with new options having the same exercise prices and expiration dates. Such
options were substantially similar to the options previously held by him with
the exception that vesting was not contingent upon his continued employment with
the Company and the options expired on various dates between October 25, 1999
and October 13, 2001, instead of one year after retirement. During the year
ended October 31, 1997, options for the entire 60,000 shares were exercised at
an average price of $15.85 per share.
Non-Employee Director Plans:
The Company has various non-employee Director plans, which are described
below:
1987 NON-EMPLOYEE DIRECTORS PLAN:
The Company's 1987 Non-employee Directors stock option plan provides for
the granting of stock options to non-employee Directors to purchase up to an
aggregate amount of 100,000 shares of common stock. The plan provides that each
non-employee Director and each future non-employee Director, as of the first
anniversary of the date of his/her election as a Director of the Company, will
be granted an option to purchase 10,000 shares of common stock at a price per
share of common stock equal to the fair market value of the common stock as of
the date of the grant. During 1998, the Board of Directors passed a resolution,
which reduced the number of options to be granted from 10,000 to 6,000.
Options become exercisable in 33 1/3% increments maturing cumulatively on
each of the first through third anniversaries of the date of the grant and must
be exercised no later than 10 years from the date of grant. No options may be
granted under the plan after June 22, 1997. There were no shares available for
granting of options at October 31, 1999, 1998 or 1997. Stock option transactions
for the three years ended October 31, 1999, were as follows:
SHARES AVERAGE
SHARES UNDER PRICE
EXERCISABLE OPTION PER SHARE
----------- ------- ---------
Balance at October 31, 1996........................... 20,000 40,000 $18
------
Granted............................................. -- --
Exercised........................................... (15,000) 18
Cancelled........................................... -- --
-------
Balance at October 31, 1997........................... 11,666 25,000 18
------
Granted............................................. -- --
Exercised........................................... (5,000) 14
Cancelled........................................... -- --
-------
Balance at October 31, 1998........................... 13,332 20,000 20
------
Granted............................................. -- --
Exercised........................................... -- --
Cancelled........................................... -- --
-------
Balance at October 31, 1999........................... 20,000 20,000 $20
------ -------
51
54
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1989 NON-EMPLOYEE DIRECTORS PLAN:
The Company's 1989 Non-employee Directors stock option plan provides for
the granting of stock options to non-employee Directors to purchase up to an
aggregate of 210,000 shares of common stock. Each non-employee Director as of
December 6, 1989 was granted an option to purchase 3,000 shares of common stock
at a price per share of common stock equal to the fair market value of the
common stock as of the date of grant. Also, each non-employee Director who is a
director of the Company on any subsequent October 31, while the plan is in
effect and shares are available for the granting of options hereunder, shall be
granted on such October 31, an option to purchase 3,000 shares of common stock
at a price equal to the fair market value of the common stock as of such October
31. During 1998, the Board of Directors passed a resolution, which decreased the
number of options to be granted annually as prescribed above from 3,000 to
2,000. Options become exercisable at any time commencing six months after the
grant and must be exercised no later than 10 years from the date of grant. No
option may be granted under the plan after December 5, 1999. There were no
shares available for granting of options at October 31, 1999 and 12,000, and
30,000 shares available for granting of options at October 31, 1998 and 1997,
respectively. Stock option transactions for the three years ended October 31,
1999, were as follows:
SHARES AVERAGE
SHARES UNDER PRICE
EXERCISABLE OPTION PER SHARE
----------- ------- ---------
Balance at October 31, 1996........................... 102,000 123,000 $22
-------
Granted............................................. 21,000 28
Exercised........................................... (30,000) 18
Cancelled........................................... -- --
-------
Balance at October 31, 1997........................... 93,000 114,000 24
-------
Granted............................................. 18,000 17
Exercised........................................... (3,000) 19
Cancelled........................................... -- --
-------
Balance at October 31, 1998........................... 111,000 129,000 23
-------
Granted............................................. 12,000 22
Exercised........................................... (5,000) 16
Cancelled........................................... -- --
-------
Balance at October 31, 1999........................... 124,000 136,000 $23
======= =======
1997 NON-EMPLOYEE DIRECTORS PLAN:
The Company's 1997 Non-Employee Directors stock option plan provides for
the granting of stock options to non-employee Directors to purchase up to an
aggregate of 400,000 shares of common stock. There are two types of grants under
this plan which are described below:
AUTOMATIC ANNUAL GRANTS
While this plan is in effect and shares are available for the granting of
options hereunder, each non-employee Director who is a director of the Company
on October 31 and who has not received options under the 1989 Non-Employee
Director plan shall be granted on such October 31, an option to purchase such
number of shares of common stock as is determined by the Board of Directors at a
price equal to the fair market value of the common stock as of such October 31.
These options are exercisable in full immediately upon the date of grant.
NEW DIRECTOR GRANTS
While this plan is in effect and shares are available for the granting of
options hereunder, there shall be granted to each non-employee Director who was
not granted an option under the 1987 Non-Employee Director Stock Option Plan as
of the date upon which such director shall have continuously served as a
director of the Company for a period of one year an option to purchase such
number of Quanex Corporation shares of stock as is determined by the Board of
Directors. These Plan options
52
55
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
become exercisable in 33 1/3% increments maturing cumulatively on each of the
first through third anniversaries of the date of the grant and must be exercised
no later than 10 years from the date of grant.
There were 382,000 shares available for granting of options at October 31,
1999. There were no transactions under this plan through October 31, 1998,
however below is the activity through October 31, 1999:
SHARES AVERAGE
SHARES UNDER PRICE
EXERCISABLE OPTION PER SHARE
----------- ------ ---------
Balance at October 31, 1998............................ -- -- --
Granted.............................................. 18,000 $21
Exercised............................................ -- --
Cancelled............................................ -- --
------
Balance at October 31, 1999............................ 2,000 18,000 $21
===== ======
STOCK BASED COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company continues to apply the rules for stock based compensation contained
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and discloses the required pro forma effect on net income and
earnings per share of the fair value based method of accounting for stock based
compensation as required by SFAS No. 123.
The following pro forma summary of the Company's consolidated results of
operations have been prepared as if the fair value based method of accounting
for stock based compensation as required by SFAS No. 123 had been applied:
YEARS ENDED OCTOBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Net income attributable to common stockholders.......... $39,716 $ 9,169 $69,184
SFAS No. 123 adjustment................................. (1,764) (1,495) (995)
------- ------- -------
Pro forma net attributable to common stockholders....... $37,952 $ 7,674 $68,189
======= ======= =======
Earnings per Common share:
Basic as reported..................................... $ 2.79 $ 0.65 $ 5.01
Basic pro forma....................................... $ 2.67 $ 0.54 $ 4.94
Diluted as reported................................... $ 2.59 $ 0.65 $ 4.38
Diluted pro forma..................................... $ 2.48 $ 0.54 $ 4.32
Fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions.
1999 1998 1997
------- ------- -------
Risk-free interest rate................................... 5.93% 4.49% 5.39%
Dividend yield............................................ 2.80% 3.00% 2.23%
Volatility factor......................................... 40.21% 31.57% 29.83%
Weighted average expected life............................ 5 years 5 years 5 years
53
56
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INSTRUMENTS
The Company uses futures contracts to hedge a portion of its exposure to
price fluctuations of aluminum. The exposure is related to the Company's backlog
of aluminum sales orders with committed prices as well as future aluminum sales
for which a sales price increase would lag a raw material cost increase. Firm
price commitments associated with these futures contracts do not extend beyond
December 2000. Hedging gains and losses are included in "Cost of sales" in the
income statement concurrently with the hedged sales. Unrealized gains and losses
related to open contracts are not reflected in the consolidated statements of
income. At October 31, 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. At October 31, 1999 and 1998, these contracts covered a notional
volume of 7,716,170 and 5,511,557 pounds of aluminum.
In the fourth quarter of fiscal 1996, the Company entered into interest
rate swap agreements, which effectively converted $100 million of its variable
rate debt under the Bank Agreement, to fixed rate. Under these agreements,
payments are made based on a fixed rate ($50 million at 7.025%, and $50 million
at 6.755%) and received on a LIBOR based variable rate (6.21% at October 31,
1999). Differentials to be paid or received under the agreements are recognized
as interest expense. The agreements mature in 2003. The unrealized losses
related to the interest rate swaps are $2.0 million on October 31, 1999 and $8.5
million on October 31, 1998 on the total notional amount of $100 million for
fiscal 1999 and fiscal 1998.
The Company utilizes foreign currency forward contracts to hedge
identifiable foreign currency commitments associated with transactions in the
regular course of the Company's foreign operations. These forward contracts
establish the exchange rates at which the Company will purchase a contracted
amount of foreign currency for a specified amount of US dollars. At October 31,
1999, there were no open contracts. At 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. Unrealized pretax gains
on these forward contracts totaled approximately $137 thousand at October 31,
1998.
In December 1997, the Company entered into a zero-cost range forward
(foreign currency swap) agreement on a notional value of 30 million Guilders
with a major financial institution to hedge its initial equity investment in its
Netherlands subsidiary, Piper Impact Europe. This agreement limits the Company's
exposure to large fluctuations in the US Dollar/Dutch Guilder exchange rate.
Under the terms of the agreement, Quanex has the option to let the agreement
expire at no cost if the exchange rate remains within an established range on
the expiration date of October 25, 2000. At October 31, 1998, there was no
effect on the financial statements from this agreement as the exchange rate
remained within this range. At October 31, 1999, the Company booked a $378
thousand gain to stockholders' equity's cumulative foreign currency translation
adjustment.
The fair values of the Company's financial assets approximate the carrying
values reported on the consolidated balance sheet. The fair value of long-term
debt was $186.0 million and $190.6 million, as of October 31, 1999 and 1998,
respectively, as compared to carrying values at October 31, 1999 and 1998 of
$189.7 million and $200.6 million, respectively.
The fair value of long-term debt was based on the quoted market price,
recent transactions, or based on rates available to the Company for instruments
with similar terms and maturities. The fair value of interest rate swaps was
estimated by discounting expected cash flows using quoted market interest rates.
The fair value of the aluminum and foreign currency instruments was determined
by obtaining the LME price per pound and the foreign currency translation rates
as of October 31, 1999 and valuing the outstanding notional volumes under the
agreements.
54
57
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. CONTINGENCIES
Quanex is subject to loss contingencies arising from federal, state, and
local environmental laws. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. The Company accrues its best
estimates of its remediation obligations and adjusts such accruals as further
information and circumstances develop. Those estimates may change substantially
depending on information about the nature and extent of contamination,
appropriate remediation technologies, and regulatory approvals. Costs of future
expenditures for environmental remediation are not discounted to their present
value. When environmental laws might be deemed to impose joint and several
liability for the costs of responding to contamination, the Company accrues its
allocable share of liability taking into account the number of companies
participating, their ability to pay their shares, the volumes and nature of the
wastes involved, the nature of anticipated response actions, and the nature of
the Company's alleged connections. It is management's opinion that the Company
has established appropriate reserves for environmental remediation obligations
at various of its plant sites and disposal facilities. Those amounts are not
expected to have a material adverse effect on the Company's financial condition.
Total remediation reserves, at October 31, 1999, were approximately $20 million.
These reserves include, without limitation, the Company's best estimate of
liabilities related to costs for further investigations, environmental
remediation, and corrective actions related to the acquisition of Piper Impact,
the acquisition of Nichols Aluminum Alabama and a facility previously part of
the former Tubing Operations. Actual cleanup costs at the Company's current
plant sites, former plants, and disposal facilities could be more or less than
the amounts accrued for remediation obligations. It is not possible at this
point to reasonably estimate the amount of any obligation for remediation in
excess of current accruals that would be material to Quanex's financial
statements because of uncertainties as to the extent of environmental impact and
concurrence of governmental authorities.
18. SUBSEQUENT EVENTS
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.
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.
55
58
QUANEX CORPORATION
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following sets forth the selected quarterly information for the years
ended October 31, 1999 and 1998.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1999:
Net sales.......................................... $183,103 $202,879 $206,619 $217,493
Gross profit....................................... 23,536 32,046 35,048 37,665
Income from continuing operations.................. 3,869 9,777 12,331 13,324
Extraordinary gain................................. -- 415 -- --
Net income......................................... 3,869 10,192 12,331 13,324
Earnings per share:
Basic:
Income from continuing operations............. 0.27 0.69 0.86 0.94
Extraordinary gain............................ -- 0.03 -- --
-------- -------- -------- --------
Net earnings (loss)........................... 0.27 0.72 0.86 0.94
Diluted............................................ $ 0.27 $ 0.66 $ 0.79 $ 0.85
1998:
Net sales.......................................... $180,982 $203,428 $204,854 $208,226
Gross profit....................................... 17,219 27,395 30,876 38,046
Income from continuing operations(1)............... 2,293 7,756 10,285 (24,211)
Gain on sale of discontinued operations............ 13,606 -- -- (560)
Net income(1)...................................... 15,899 7,756 10,285 (24,771)
Earnings per share:
Basic:
Income from continuing operations(1).......... 0.16 0.55 0.73 (1.71)
Gain on sale of discontinued operations....... 0.97 -- -- (0.04)
-------- -------- -------- --------
Net earnings (loss)(1)........................ 1.13 0.55 0.73 (1.75)
Diluted............................................ $ 1.11 $ 0.51 $ 0.66 $ (1.75)
- ---------------
(1) Includes an after-tax non-recurring restructuring charge of $38,025 or $2.68
per share.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS & END
DESCRIPTION OF YEAR EXPENSES WRITE-OFFS OTHER OF YEAR
- ----------- ---------- ----------- ---------- ----- ----------
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended October 31, 1999.............. $11,752 $ 921 $(188) $(331) $12,154
Year ended October 31, 1998.............. $10,338 $1,088 $(202) $ 528 $11,752
Year ended October 31, 1997.............. $ 7,703 $2,674 $( 39) $ -- $10,338
56
59
QUANEX CORPORATION
QUARTERLY FINANCIAL RESULTS
(FROM CONTINUING OPERATIONS)
1999 1998 1997
------ ------ ------
NET SALES (millions)
January..................................................... 183.10 180.98 167.96
April....................................................... 202.87 203.43 186.00
July........................................................ 206.62 204.85 196.58
October..................................................... 217.50 208.23 195.55
------ ------ ------
Total............................................. 810.09 797.49 746.09
GROSS PROFIT (millions)
January..................................................... 23.54 17.22 20.61
April....................................................... 32.05 27.39 26.14
July........................................................ 35.05 30.88 28.68
October..................................................... 37.66 38.05 26.62
------ ------ ------
Total............................................. 128.30 113.54 102.05
INCOME (LOSS) FROM CONTINUING OPERATIONS (millions)
January..................................................... 3.87 2.29 3.37
April....................................................... 9.78 7.76 7.34
July........................................................ 12.33 10.28 8.61
October(1).................................................. 13.32 (24.21) 8.40
------ ------ ------
Total............................................. 39.30 (3.88) 27.72
INCOME (LOSS) FROM CONTINUING OPERATIONS PER BASIC COMMON
SHARE
January..................................................... .27 .16 .25
April....................................................... .69 .55 .53
July........................................................ .86 .73 .62
October(1).................................................. .94 (1.71) .60
------ ------ ------
Year.............................................. 2.76 (.27) 2.01
QUARTERLY COMMON STOCK DIVIDENDS
January..................................................... .16 .16 .15
April....................................................... .16 .16 .15
July........................................................ .16 .16 .15
October..................................................... .16 .16 .16
------ ------ ------
Total............................................. .64 .64 .61
COMMON STOCK SALES PRICE (High & Low)
January..................................................... 23 7/8 30 7/1 29 1/8
16 13/16 27 1/1 24 1/4
April....................................................... 26 1/4 33 3/1 27 7/8
15 3/8 28 1/2 23 3/8
July........................................................ 29 32 3/1 34 1/8
25 1/8 27 1/4 25 1/8
October..................................................... 27 3/8 27 7/8 36 1/2
20 1/8 15 5/8 26 1/4
- ---------------
(1) Fiscal 1998 fourth quarter income (loss) from continuing operations includes
an after-tax non-recurring restructuring charge of $38 million or $2.68 per
share.
57
60
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, information on directors
and executive officers of the Registrant is incorporated herein by reference
from the Registrant's Definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the close of the fiscal year ended October
31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) to Form 10-K, information on executive
compensation is incorporated herein by reference from the Registrant's
Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the close of the fiscal year ended October 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3) to Form 10-K, information on security
ownership of certain beneficial owners and management is incorporated herein by
reference from the Registrant's Definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the close of the fiscal year ended
October 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-K, information on certain
relationships and related transactions is incorporated herein by reference from
the Registrant's Definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days after the close of the fiscal year ended October 31, 1999.
58
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
PAGE
----
Independent Auditors' Report................................ 24
Consolidated Balance Sheets............................... 26
Consolidated Statements of Income......................... 27
Consolidated Statements of Stockholders' Equity........... 28
Consolidated Statements of Cash Flow...................... 29
Notes to Consolidated Financial Statements................ 30
2. Financial Statement Schedule
Schedule II -- Valuation and qualifying accounts.......... 56
Schedules not listed or discussed above have been omitted as
they are either inapplicable or the required information has
been given in the consolidated financial statements or the
notes thereto.
3. Exhibits................................................. 60
59
62
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3.1 -- Restated Certificate of Incorporation of the Registrant
dated as of November 10, 1995 filed as Exhibit 3.1 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1995 and incorporated herein by
reference.
*3.2 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant dated as of February 27,
1997.
*3.3 -- Amendment to Certificate of Designation, Preferences and
Rights of Series A Junior Participating Preferred Stock
of the Registrant dated as of April 15, 1999.
*3.4 -- Certificate of Correction of Amendment to Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock dated as of April 16, 1999.
3.5 -- Amended and Restated Bylaws of the Registrant, as amended
through August 26, 1999 filed as Exhibit 3 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 31, 1999, and incorporated herein by
reference.
4.1 -- Form of Registrant's Common Stock certificate, filed as
Exhibit 4.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1987, and
incorporated herein by reference.
4.2 -- Second Amended and Restated Rights agreement dated as of
April 15, 1999, between The Registrant and American Stock
Transfer & Trust Co. as Rights Agent, filed as Exhibit
4.1 to the Registrant's Form 8-K dated April 15, 1999,
and incorporated herein by reference.
4.3 -- Amended and Restated Certificate of Designation,
Preferences and Rights of the Registrant's Series A
Junior Participating Preferred Stock, filed as Exhibit 1
to Amendment No. 1 to the Registrant's Form 8-A dated
April 28, 1989, and incorporated herein by reference.
4.4 -- Form of Indenture relating to the Registrant's 6.88%
Convertible Subordinated Exhibit Debentures due 2007
between the Registrant and Chemical Bank, as Trustee,
filed as 19.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1992, and
incorporated herein by reference.
4.5 -- $250,000,000 Revolving Credit and Term Loan Agreement
dated as of July 23, 1996, among the Company, Comerica
Bank, as Agent, and Harris Trust and Savings Bank and
Wells Fargo Bank (Texas), NA as Co-Agents, filed as
Exhibit 4.1 of the Company's Report on Form 8-K, dated
August 9, 1996, and incorporated herein by reference.
+10.1 -- Quanex Corporation 1988 Stock Option Plan, as amended,
and form of Stock Option year Agreement filed as Exhibit
10.4 to the Registrant's Annual Report on Form 10-K for
the ended October 31, 1988, together with the amendment
filed as Exhibit 10.17 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31,
1995, and incorporated herein by reference.
*+10.2 -- Amendment to the Quanex Corporation 1988 Stock Option
Plan, dated of December 1997.
*+10.3 -- Amendment to the Quanex Corporation 1988 Stock Option
Plan, dated of December 9, 1999.
*+10.4 -- Quanex Corporation Deferred Compensation Plan, as amended
and restated, dated September 29, 1999.
*+10.5 -- First Amendment to Quanex Corporation Deferred
Compensation Plan, dated December 7, 1999.
60
63
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
+10.6 -- Quanex Corporation 1978 Stock Option Plan, as amended,
filed as Exhibit 10.6 to the Annual Report on Form 10-K
for the year ended October 31, 1988, together with the
amendment filed as Exhibit 10.16 of the Registrant's
Quarterly Report Form 10-Q for the quarter ended January
31, 1995, and incorporated herein by reference.
*+10.7 -- Amendment to Quanex Corporation 1978 Stock Option Plan,
dated December 1997.
*+10.8 -- Quanex Corporation Executive Incentive Compensation Plan,
as amended and restated, dated October 12, 1995.
*+10.9 -- Quanex Corporation Supplemental Benefit Plan, as amended
and restated effective June 1, 1999.
*+10.10 -- Form of Change in Control Agreement, between the
Registrant and each executive officer of the Registrant.
+10.11 -- Quanex Corporation Stock Option Loan Plan for Key
Officers, filed as Exhibit 10.13 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1988, and incorporated herein by reference.
+10.12 -- Quanex Corporation 1987 Non-Employee Director Stock
Option Plan, as amended, and the related form of Stock
Option Agreement, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1988, together with the amendment filed
as Exhibit 10.14 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1995, and
incorporated herein by reference.
*+10.13 -- Amendment to the Quanex Corporation 1987 Non-Employee
Director Stock Option Plan, dated December 1997.
*+10.14 -- Amendment to the Quanex Corporation 1987 Non-Employee
Director Stock Option Plan, dated December 9, 1999.
+10.15 -- Quanex Corporation 1989 Non-Employee Director Stock
Option Plan, as amended, filed as Exhibit 4.4 of the
Registrant's Form S-8, Registration No. 33-35128,
together with the amendment filed as Exhibit 10.15 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995, and incorporated herein
by reference.
*+10.16 -- Amendment to the Quanex Corporation 1989 Non-Employee
Director Stock Option Plan, dated December 1997.
*+10.17 -- Amendment to the Quanex Corporation 1989 Non-Employee
Director Stock Option Plan, dated December 9, 1999.
+10.18 -- Quanex Corporation Employee Stock Option and Restricted
Stock Plan, as amended, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1994, and incorporated herein by
reference.
*+10.19 -- Amendment to the Quanex Corporation Employee Stock Option
and Restricted Stock Plan, dated December 1997.
*+10.20 -- Amendment to the Quanex Corporation Employee Stock Option
and Restricted Stock Plan, dated December 9, 1999.
+10.21 -- Retirement Agreement dated as of September 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1992, and
incorporated herein by reference.
+10.22 -- Stock Option Agreement dated as of October 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1992, and
incorporated herein by reference.
61
64
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
+10.23 -- Deferred Compensation Agreement dated as of July 31,
1992, between the Registrant and Carl E. Pfeiffer, filed
as Exhibit 10.22 to the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1992, and
incorporated herein by reference.
+10.24 -- Quanex Corporation Non-Employee Director Retirement Plan,
filed as Exhibit 10.18 of the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1994, and
incorporated herein by reference.
+10.25 -- Quanex Corporation 1996 Employee Stock Option and
Restricted Stock Plan, filed as Exhibit 10.19 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1996, and incorporated herein by
reference.
*+10.26 -- Amendment to Quanex Corporation 1996 Employee Stock
Option and Restricted Stock Plan, dated December 1997.
*+10.27 -- Amendment to Quanex Corporation 1996 Employee Stock
Option and Restricted Stock Plan, dated December 9, 1999.
+10.28 -- Quanex Corporation Deferred Compensation Trust filed as
Exhibit 4.8 of the Registrant's Registration Statement on
Form S-3, Registration No. 333-36635, and incorporated
herein by reference.
*+10.29 -- Amendment to Quanex Corporation Deferred Compensation
Trust, dated December 9, 1999.
10.30 -- Quanex Corporation 1997 Non-Employee Director Stock
Option Plan filed as Exhibit 10.21 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1997 and incorporated herein by reference.
*+10.31 -- Amendment to Quanex Corporation 1997 Non-Employee
Director Stock Option Plan, dated December 9, 1999.
10.32 -- Asset Purchase Agreement dated July 31, 1996, among the
Company, Piper Impact, Inc., a Delaware corporation,
Piper Impact, Inc., a Tennessee corporation, B. F.
Sammons And M. W. Robbins, filed as Exhibit 2.1 of the
Company's Report on Form 8-K, dated August 9, 1996, and
incorporated herein by reference.
10.33 -- Stock Purchase Agreement dated April 18, 1997, by and
among Niagara Corporation, Niagara Cold Drawn Corp., and
Quanex Corporation filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated May 5, 1997, and
incorporated herein by reference.
10.34 -- Purchase Agreement dated December 3, 1997, among Quanex
Corporation, Vision Metals Holdings, Inc., and Vision
Metals, Inc., filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated December 3, 1997, and
incorporated herein by reference.
10.35 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Trailer Company dated
May 1, 1963, filed as Exhibit 10.22 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1998 and incorporated herein by reference.
10.36 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Corporation dated May
1, 1964, filed as Exhibit 10.23 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1998 and incorporated herein by reference.
10.37 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Corporation dated
October 1, 1965, filed as Exhibit 10.24 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1998 and incorporated herein by
reference.
62
65
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
10.38 -- Lease Agreement between The Industrial Development Board
of the City of Decatur (Alabama) and Fruehauf Corporation
dated December 1, 1978, filed as Exhibit 10.25 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1998 and incorporated herein by
reference.
10.39 -- Assignment and Assumption Agreement between Fruehauf
Trailer Corporation and Decatur Aluminum Corp.
(subsequently renamed Nichols Aluminum-Alabama, Inc.)
dated October 9, 1998, filed as Exhibit 10.26 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1998 and incorporated herein by
reference.
10.40 -- Agreement between The Industrial Development Board of the
City of Decatur and Decatur Aluminum Corp. (subsequently
renamed Nichols Aluminum-Alabama, Inc.) dated September
23, 1998, filed as Exhibit 10.27 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1998 and incorporated herein by reference.
*21 -- Subsidiaries of the Registrant.
*23 -- Consent of Deloitte & Touche LLP.
*27 -- Financial Data Schedule
- ---------------
+ Management Compensation or Incentive Plan
* Filed herewith
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant
has not filed with this Annual Report on Form 10-K certain instruments defining
the rights of holders of long-term debt of the Registrant and its subsidiaries
because the total amount of securities authorized under any of such instruments
does not exceed 10% of the total assets of the Registrant and its subsidiaries
on a consolidated basis. The Registrant agrees to furnish a copy of any such
agreements to the Securities and Exchange Commission upon request.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the quarter ended
October 31, 1999.
63
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUANEX CORPORATION
By: /s/ VERNON E. OECHSLE January 7, 2000
-------------------------------------------------
Vernon E. Oechsle
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ VERNON E. OECHSLE January 7, 2000
-------------------------------------------------
Vernon E. Oechsle
Chairman of the Board and
Chief Executive Officer
By: /s/ JAMES H. DAVIS January 7, 2000
-------------------------------------------------
James H. Davis
President and
Chief Operating Officer
(Principal Operating Officer)
By: /s/ CARL E. PFEIFFER January 7, 2000
-------------------------------------------------
Carl E. Pfeiffer
Director
By: /s/ JOHN D. O'CONNELL January 7, 2000
-------------------------------------------------
John D. O'Connell
Director
By: /s/ DONALD G. BARGER, JR. January 7, 2000
-------------------------------------------------
Donald G. Barger, Jr.
Director
64
67
By: /s/ VINCENT R. SCORSONE January 7, 2000
-------------------------------------------------
Vincent R. Scorsone
Director
By: /s/ MICHAEL J. SEBASTIAN January 7, 2000
-------------------------------------------------
Michael J. Sebastian
Director
By: /s/ RUSSELL M. FLAUM January 7, 2000
-------------------------------------------------
Russell M. Flaum
Director
By: /s/ SUSAN F. DAVIS January 7, 2000
-------------------------------------------------
Susan F. Davis
Director
By: /s/ TERRY M. MURPHY January 7, 2000
-------------------------------------------------
Terry M. Murphy
Vice President -- Finance and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ VIREN M. PARIKH January 7, 2000
-------------------------------------------------
Viren M. Parikh
Controller
(Principal Accounting Officer)
65
68
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3.1 -- Restated Certificate of Incorporation of the Registrant
dated as of November 10, 1995 filed as Exhibit 3.1 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1995 and incorporated herein by
reference.
*3.2 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant dated as of February 27,
1997.
*3.3 -- Amendment to Certificate of Designation, Preferences and
Rights of Series A Junior Participating Preferred Stock
of the Registrant dated as of April 15, 1999.
*3.4 -- Certificate of Correction of Amendment to Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock dated as of April 16, 1999.
3.5 -- Amended and Restated Bylaws of the Registrant, as amended
through August 26, 1999 filed as Exhibit 3 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 31, 1999, and incorporated herein by
reference.
4.1 -- Form of Registrant's Common Stock certificate, filed as
Exhibit 4.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1987, and
incorporated herein by reference.
4.2 -- Second Amended and Restated Rights agreement dated as of
April 15, 1999, between The Registrant and American Stock
Transfer & Trust Co. as Rights Agent, filed as Exhibit
4.1 to the Registrant's Form 8-K dated April 15, 1999,
and incorporated herein by reference.
4.3 -- Amended and Restated Certificate of Designation,
Preferences and Rights of the Registrant's Series A
Junior Participating Preferred Stock, filed as Exhibit 1
to Amendment No. 1 to the Registrant's Form 8-A dated
April 28, 1989, and incorporated herein by reference.
4.4 -- Form of Indenture relating to the Registrant's 6.88%
Convertible Subordinated Exhibit Debentures due 2007
between the Registrant and Chemical Bank, as Trustee,
filed as 19.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1992, and
incorporated herein by reference.
4.5 -- $250,000,000 Revolving Credit and Term Loan Agreement
dated as of July 23, 1996, among the Company, Comerica
Bank, as Agent, and Harris Trust and Savings Bank and
Wells Fargo Bank (Texas), NA as Co-Agents, filed as
Exhibit 4.1 of the Company's Report on Form 8-K, dated
August 9, 1996, and incorporated herein by reference.
+10.1 -- Quanex Corporation 1988 Stock Option Plan, as amended,
and form of Stock Option year Agreement filed as Exhibit
10.4 to the Registrant's Annual Report on Form 10-K for
the ended October 31, 1988, together with the amendment
filed as Exhibit 10.17 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31,
1995, and incorporated herein by reference.
*+10.2 -- Amendment to the Quanex Corporation 1988 Stock Option
Plan, dated of December 1997.
*+10.3 -- Amendment to the Quanex Corporation 1988 Stock Option
Plan, dated of December 9, 1999.
*+10.4 -- Quanex Corporation Deferred Compensation Plan, as amended
and restated, dated September 29, 1999.
*+10.5 -- First Amendment to Quanex Corporation Deferred
Compensation Plan, dated December 7, 1999.
66
69
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
+10.6 -- Quanex Corporation 1978 Stock Option Plan, as amended,
filed as Exhibit 10.6 to the Annual Report on Form 10-K
for the year ended October 31, 1988, together with the
amendment filed as Exhibit 10.16 of the Registrant's
Quarterly Report Form 10-Q for the quarter ended January
31, 1995, and incorporated herein by reference.
*+10.7 -- Amendment to Quanex Corporation 1978 Stock Option Plan,
dated December 1997.
*+10.8 -- Quanex Corporation Executive Incentive Compensation Plan,
as amended and restated, dated October 12, 1995.
*+10.9 -- Quanex Corporation Supplemental Benefit Plan, as amended
and restated effective June 1, 1999.
*+10.10 -- Form of Change in Control Agreement, between the
Registrant and each executive officer of the Registrant.
+10.11 -- Quanex Corporation Stock Option Loan Plan for Key
Officers, filed as Exhibit 10.13 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1988, and incorporated herein by reference.
+10.12 -- Quanex Corporation 1987 Non-Employee Director Stock
Option Plan, as amended, and the related form of Stock
Option Agreement, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1988, together with the amendment filed
as Exhibit 10.14 of the Registrant's Quarterly Report on
Form 10-Q For the quarter ended January 31, 1995, and
incorporated herein by reference.
*+10.13 -- Amendment to the Quanex Corporation 1987 Non-Employee
Director Stock Option Plan, dated December 1997.
*+10.14 -- Amendment to the Quanex Corporation 1987 Non-Employee
Director Stock Option Plan, dated December 9, 1999.
+10.15 -- Quanex Corporation 1989 Non-Employee Director Stock
Option Plan, as amended, filed as Exhibit 4.4 of the
Registrant's Form S-8, Registration No. 33-35128,
together with the amendment filed as Exhibit 10.15 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995, and incorporated herein
by reference.
*+10.16 -- Amendment to the Quanex Corporation 1989 Non-Employee
Director Stock Option Plan, dated December 1997.
*+10.17 -- Amendment to the Quanex Corporation 1989 Non-Employee
Director Stock Option Plan, dated December 9, 1999.
+10.18 -- Quanex Corporation Employee Stock Option and Restricted
Stock Plan, as amended, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1994, and incorporated herein by
reference.
*+10.19 -- Amendment to the Quanex Corporation Employee Stock Option
and Restricted Stock Plan, dated December 1997.
*+10.20 -- Amendment to the Quanex Corporation Employee Stock Option
and Restricted Stock Plan, dated December 9, 1999.
+10.21 -- Retirement Agreement dated as of September 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1992, and
incorporated herein by reference.
+10.22 -- Stock Option Agreement dated as of October 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1992, and
incorporated herein by reference.
67
70
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
+10.23 -- Deferred Compensation Agreement dated as of July 31,
1992, between the Registrant and Carl E. Pfeiffer, filed
as Exhibit 10.22 to the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1992, and
incorporated herein by reference.
+10.24 -- Quanex Corporation Non-Employee Director Retirement Plan,
filed as Exhibit 10.18 of the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1994, and
incorporated herein by reference.
+10.25 -- Quanex Corporation 1996 Employee Stock Option and
Restricted Stock Plan, filed as Exhibit 10.19 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1996, and incorporated herein by
reference.
*+10.26 -- Amendment to Quanex Corporation 1996 Employee Stock
Option and Restricted Stock Plan, dated December 1997.
*+10.27 -- Amendment to Quanex Corporation 1996 Employee Stock
Option and Restricted Stock Plan, dated December 9, 1999.
+10.28 -- Quanex Corporation Deferred Compensation Trust filed as
Exhibit 4.8 of the Registrant's Registration Statement on
Form S-3, Registration No. 333-36635, and incorporated
herein by reference.
*+10.29 -- Amendment to Quanex Corporation Deferred Compensation
Trust, dated December 9, 1999.
10.30 -- Quanex Corporation 1997 Non-Employee Director Stock
Option Plan filed as Exhibit 10.21 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1997 and incorporated herein by reference.
*+10.31 -- Amendment to Quanex Corporation 1997 Non-Employee
Director Stock Option Plan, dated December 9, 1999.
10.32 -- Asset Purchase Agreement dated July 31, 1996, among the
Company, Piper Impact, Inc., a Delaware corporation,
Piper Impact, Inc., a Tennessee corporation, B. F.
Sammons And M. W. Robbins, filed as Exhibit 2.1 of the
Company's Report on Form 8-K, dated August 9, 1996, and
incorporated herein by reference.
10.33 -- Stock Purchase Agreement dated April 18, 1997, by and
among Niagara Corporation, Niagara Cold Drawn Corp., and
Quanex Corporation filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated May 5, 1997, and
incorporated herein by reference.
10.34 -- Purchase Agreement dated December 3, 1997, among Quanex
Corporation, Vision Metals Holdings, Inc., and Vision
Metals, Inc., filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated December 3, 1997, and
incorporated herein by reference.
10.35 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Trailer Company dated
May 1, 1963, filed as Exhibit 10.22 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1998 and incorporated herein by reference.
10.36 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Corporation dated May
1, 1964, filed as Exhibit 10.23 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1998 and incorporated herein by reference.
10.37 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Corporation dated
October 1, 1965, filed as Exhibit 10.24 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1998 and incorporated herein by
reference.
68
71
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
10.38 -- Lease Agreement between The Industrial Development Board
of the City of Decatur (Alabama) and Fruehauf Corporation
dated December 1, 1978, filed as Exhibit 10.25 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1998 and incorporated herein by
reference.
10.39 -- Assignment and Assumption Agreement between Fruehauf
Trailer Corporation and Decatur Aluminum Corp.
(subsequently renamed Nichols Aluminum-Alabama, Inc.)
dated October 9, 1998, filed as Exhibit 10.26 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1998 and incorporated herein by
reference.
10.40 -- Agreement between The Industrial Development Board of the
City of Decatur and Decatur Aluminum Corp. (subsequently
renamed Nichols Aluminum-Alabama, Inc.) dated September
23, 1998, filed as Exhibit 10.27 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1998 and incorporated herein by reference.
*21 -- Subsidiaries of the Registrant.
*23 -- Consent of Deloitte & Touche LLP.
*27 -- Financial Data Schedule
- ---------------
+ Management Compensation or Incentive Plan
* Filed herewith
69