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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, 2000
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
------------------- -----------------------------------------
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, 2000, computed by reference to the closing
price for the Common Stock on the New York Stock Exchange, Inc. on that date,
was $267,952,763. Such calculation assumes only the registrant's officers and
directors were affiliates of the registrant.
At December 31, 2000, there were outstanding 13,438,102 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, 2000, for its Annual Meeting
of Stockholders to be held on February 22, 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
PART I
Item 1. Business ........................................................................ 1
General .................................................................. 1
Manufacturing Processes, Markets and Product Sales by Business Segment ... 2
Raw Materials and Supplies ............................................... 5
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 ....... 11
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 ..................................... 23
Item 9. Disagreements on Accounting and Financial Disclosure ............................ 57
PART III
Item 10. Directors and Executive Officers of the Registrant .............................. 57
Item 11. Executive Compensation .......................................................... 57
Item 12. Security Ownership of Certain Beneficial Owners and Management .................. 57
Item 13. Certain Relationships and Related Transactions .................................. 57
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................. 58
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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 transportation,
industrial machinery and capital equipment, homebuilding and remodeling,
defense, food packaging and other commercial industries.
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 January 2000, Quanex completed the purchase of Golden Aluminum, an
aluminum sheet production facility based in Fort Lupton, Colorado. Renamed
Nichols Aluminum-Golden, the acquisition of the Fort Lupton mill increased 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 50
million pounds annually of high-grade aluminum sheet for a variety of
applications, including tab and end stock for beverage cans and other food
packaging, computer disks, home furnishing, and other consumer durable products.
In April 2000, Quanex completed the purchase of Imperial Products, Inc., a
leading manufacturer of value added exterior door components. The newly acquired
company, renamed Imperial Fabricated Products, produces sophisticated
residential exterior-door products for customers nationwide. Imperial Fabricated
Products expands the products and markets of the Engineered Products Group of
Quanex.
In July 2000, the Company completed the sale of Piper Impact Europe. For
business segment purposes, the remaining Piper Impact facilities were separated
from the Engineered Products Group in the third quarter.
In November 2000, Quanex completed the purchase of Temroc Metals, Inc.,
an aluminum extrusion and fabrication company based in Hamel, Minnesota. The
newly acquired facility expands the Company's Engineered Products Groups'
current markets to include outdoor recreational, medical and energy industries,
complementing their existing aluminum fabrication, and roll forming businesses.
The Company also has invested significantly in technologically advanced
continuous manufacturing processes to meet demanding quality specifications and
to achieve additional cost efficiencies.
In the Company's 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 approximately $220 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 700,000 tons
per year. Phases I through V of the MACSTEEL expansions have been completed. In
Phase V, finished in December 2000, the Company installed additional equipment
at each of the MACSTEEL plants in Jackson, Michigan, and at Ft. Smith, Arkansas
to maximize the casting and shipping capacity. This project increased engineered
steel bar shipping capacity by approximately 13% to 700,000 tons annually. Phase
V also included projects at MACSTEEL Heat Treating, based in Huntington,
Indiana, where a third processing line was built, and at Kenosha,
Wisconsin-based MACSTEEL NitroSteel, where efficiency enhancing equipment has
been installed. In May 2000, the Company announced Phase VI which will boost
capacity for
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MACPLUS cold-finished steel bars. The project includes installation of two
additional bar turning and polishing lines, one at the plant in Jackson,
Michigan which is scheduled for completion by 2001 year-end and one at the Ft.
Smith, Arkansas plant, scheduled for completion by 2002 year-end. After the
project is complete, MACSTEEL will have a total of six MACPLUS lines.
In November 2000, Quanex completed a $4 million capital project at AMSCO,
which provides an additional 40,000 square feet of manufacturing space and
equipment to expand existing lines and produce new products.
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 four business segments: (i) engineered
steel bars, (ii) aluminum mill sheet products, (iii) engineered products, and
(iv) Piper Impact. 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, 2000, no one customer
accounted for 10% or more of the Company's sales. For the years ended October
31, 1999 and 1998, one customer, Autoliv Inc., accounted for 12% and 13%,
respectively, of Company sales.
Quanex operates 16 manufacturing facilities in ten states in the United
States. 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)
MARKET Fiscal Year Ended October 31,
MARKETS DESCRIPTION QUANEX PRODUCTS 2000 1999 1998
- ------- ----------- --------------- -------- -------- --------
TRANSPORTATION Auto/Truck Steel bars, impact- $ 394.1 $ 384.1 $ 352.9
extruded components, aluminum 42.2% 47.4% 44.2%
sheet
Other Transportation Steel bars, treated $ 34.0 $ 30.1 $ 31.8
(including ship/ tubes and bars, aluminum sheet 3.6% 3.7% 4.0%
railroad,
recreational
vehicles
and military
transportation)
TOTAL TRANSPORTATION $ 428.1 $ 414.2 $ 384.7
45.8% 51.1% 48.2%
-------- -------- --------
ALUMINUM Residential and Aluminum sheet, fabricated $ 318.5 $ 293.9 $ 334.8
BUILDING Commercial Building aluminum products, 34.1% 36.3% 42.0%
PRODUCTS Materials, Other aluminum coil, coated
aluminum coil
-------- -------- --------
INDUSTRIAL General Industrial Specialized forgings, $ 45.8 $ 37.8 $ 29.9
MACHINERY Machinery (including impact-extruded 4.9% 4.7% 3.8%
AND CAPITAL mining, agriculture products, steel bars
EQUIPMENT and construction)
Capital Equipment Steel bars, treated bars $ 16.4 $ 12.3 $ 10.4
(including material and tubes, partition 1.8% 1.5% 1.3%
handling, machine products, impact-extruded
tools, and products
office/household)
TOTAL INDUSTRIAL MACHINERY $ 62.2 $ 50.1 $ 40.3
AND CAPITAL EQUIPMENT 6.7% 6.2% 5.1%
-------- -------- --------
OTHER $ 125.4 $ 51.9 $ 37.7
13.4% 6.4% 4.7%
-------- -------- --------
TOTAL SALES $ 934.2 $ 810.1 $ 797.5
100.0% 100.0% 100.0%
-------- -------- --------
SALES ($ MILLIONS)
MARKET Fiscal Year Ended October 31,
MARKETS DESCRIPTION QUANEX PRODUCTS 1997 1996
- ------- ----------- --------------- -------- --------
TRANSPORTATION Auto/Truck Steel bars, impact- $ 322.3 $ 207.2
extruded components, aluminum 43.2% 33.4%
sheet
Other Transportation Steel bars, treated $ 32.8 $ 22.0
(including ship/ tubes and bars, aluminum sheet 4.4% 3.6%
railroad,
recreational
vehicles
and military
transportation)
TOTAL TRANSPORTATION $ 355.1 $ 229.2
47.6% 37.0%
-------- --------
ALUMINUM Residential and Aluminum sheet, fabricated $ 327.5 $ 313.1
BUILDING Commercial Building aluminum products, 43.9% 50.5%
PRODUCTS Materials, Other aluminum coil, coated
aluminum coil
-------- --------
INDUSTRIAL General Industrial Specialized forgings, $ 24.9 $ 47.4
MACHINERY Machinery (including impact-extruded 3.3% 7.6%
AND CAPITAL mining, agriculture products, steel bars
EQUIPMENT and construction)
Capital Equipment Steel bars, treated bars $ 17.5 $ 22.0
(including material and tubes, partition 2.4% 3.6%
handling, machine products, impact-extruded
tools, and products
office/household)
TOTAL INDUSTRIAL MACHINERY $ 42.4 $ 69.4
AND CAPITAL EQUIPMENT 5.7% 11.2%
-------- --------
OTHER $ 21.1 $ 8.4
2.8% 1.3%
-------- --------
TOTAL SALES $ 746.1 $ 620.1
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, one located in Ft. Smith, Arkansas,
and the other located in 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 Piper Impact 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, food packaging, and service center markets. The division comprises
five 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"), Decatur, Alabama
("NAA") and Nichols Aluminum-Golden ("NAG"), an aluminum production facility in
Fort Lupton, Colorado.
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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 NAD, NAL or NAA, 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.
Operations at NAG include melting and casting aluminum into sheet, cold
rolling to specific gauge, annealing, leveling, custom coating and slitting to
width. NAG manufactures high quality aluminum for engineered applications in
niche markets such as end tab stock for food packaging, metal components for
computer disks, and home accessory products.
Engineered Products
The Company's Engineered Products segment consists of aluminum and steel
fabrication operations conducted at AMSCO in Rice Lake, Wisconsin, two
Homeshield Fabricated Products ("HFP") plants in Chatsworth, Illinois, Imperial
Fabricated Products ("IFP") in Richmond, Indiana, and aluminum extrusion and
fabrication operations conducted at Temroc Metals ("TM") in Hamel, Minnesota.
The Engineered Products Group manufactures aluminum window and patio door
screens, window frames, residential exterior door products, 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, 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. IFP produces sophisticated residential exterior door
thresholds, astragals, patio door systems and other miscellaneous door
components. TM produces high quality aluminum extrusions and fabricated parts
for numerous industries including industrial, architectural, recreational,
computer, electronics, appliances, medical and energy.
Piper Impact
The Piper Impact division includes two impact-extrusion facilities in New
Albany, Mississippi, dedicated to aluminum and steel impact-extruded products.
Piper Impact is a technological leader 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, coldforming 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.
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.
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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, AMSCO and Homeshield Fabricated
Products' primary raw material is coated and uncoated aluminum sheet purchased
primarily from Nichols Aluminum. Raw materials utilized at Imperial Fabricated
Products include aluminum, wood and vinyl. Imperial's primary raw material is
aluminum, which is available from a number of suppliers. Prices for aluminum are
typically set on a monthly basis based upon market rates. In addition, Imperial
purchases two types of wood materials - hardwood and softwood, which it
purchases at market prices. Temroc's raw materials consist primarily of aluminum
billet, which it purchases from several suppliers on the open market.
Piper Impact's raw materials consist of aluminum bars and slugs that it
purchases on the open market, and steel bars that it purchases from MACSTEEL.
BACKLOG
At October 31, 2000, Quanex's backlog of orders to be shipped in the next twelve
months was $157.8 million. This compares to $164.1 million at October 31, 1999.
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, engineered products and impact
extruded 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 aluminum extrusion facilities, primarily on the basis of custom
engineering, quality, service, and price.
Piper Impact competes with several other impact extrusion companies, and
companies that offer other technologies that can provide similar products, on
the basis of design, quality, price and service.
SALES AND DISTRIBUTION
The Company's four 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. Piper
Impact sells directly to OEM's.
SEASONAL NATURE OF BUSINESS
The Company's aluminum mill sheet and Engineered 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
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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 or 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, 2000, for Quanex's current
plants, former operating locations, and disposal facilities were approximately
$18 million. Of that, approximately 80% is allocated to the cleanup of
historical soil and groundwater contamination and other corrective measures at a
plant operated by the Company's Piper Impact division in New Albany,
Mississippi. Depending upon such factors as 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.
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Quanex incurred approximately $5 million and $7 million during fiscal 2000
and 1999, respectively, in expenses in order to comply with existing or proposed
environmental regulations. The Company estimates expenses at various of its
facilities during fiscal 2001 will be approximately $5 million for continuing
compliance with environmental regulations. Capital expenditures for these
environmental regulations during fiscal 2000 and 1999 were immaterial and are
expected to be immaterial for fiscal 2001 as well. 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
2001, but it is not possible at this time to reasonably estimate the amount of
these expenditures.
EMPLOYEES
At October 31, 2000, the Company employed 3,302 persons. Of the total employed,
28% were covered by collective bargaining agreements. In January of 2000, a
three year agreement was ratified by the United Steel Workers representing 253
employees at MACSTEEL's Arkansas plant. No collective bargaining agreements will
expire during the fiscal year ending October 31, 2001.
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 543,000
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
Fort Lupton, Colorado Nichols Aluminum Golden 238,000
Leased (4 leases expiring 2003, 2004, 2005 and 2018):
Decatur, Alabama Nichols Aluminum Alabama 410,000
Owned: ENGINEERED PRODUCTS
Rice Lake, Wisconsin AMSCO 336,000
Chatsworth, Illinois Homeshield Fabricated Products (two plants) 212,000
Richmond, Indiana Imperial Fabricated Products 76,000
Hamel, Minnesota Temroc 140,000
Owned: PIPER IMPACT
New Albany, Mississippi Piper Impact (two plants) 683,000
Leased (expires 2010): EXECUTIVE OFFICES
Houston, Texas Quanex Corporation 21,000
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ITEM 3. LEGAL PROCEEDINGS
On or about August, 2, 1999, the United States District Court for the Southern
District of Texas entered a consent decree resolving the federal government's
allegations that the Company and Vision Metals, Inc. had violated water
discharge requirements at the Company's former plant in Rosenberg, Texas. The
consent decree required the Company to pay in three installments an aggregate
civil penalty of $466,421 plus interest. Pursuant to the purchase agreement by
which Vision Metals acquired the Rosenberg facility and assumed certain
environmental liabilities, Vision Metals had acknowledged its responsibility for
the penalty and made the first two payments, totaling $310,946 plus interest.
Because Vision Metals filed a bankruptcy petition on or about November 13, 2000,
it is unclear whether Vision Metals will be able to make timely payment of the
remaining $155,475 plus interest.
On or about September 27, 1999, US EPA 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 Jackson plant had been in violation of the effluent
limitations in its water discharge permit on 236 days from March 31, 1994 to
July 1999 and directed the plant to comply with that permit. In response, the
MACSTEEL Michigan Division undertook a technical analysis of wastewater handling
at its Jackson plant and implemented improvements to its treatment system. By
letter dated September 22, 2000, US EPA Region V sent to MACSTEEL Michigan
Division an administrative complaint seeking a civil penalty of $137,500 for
violations of the discharge permit's effluent limitations and sampling
requirements before the improvements were implemented.
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.
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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
Quarter Ended: 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
January ...................... .16 .16 .16 .15 .15
April ........................ .16 .16 .16 .15 .15
July ......................... .16 .16 .16 .15 .15
October ...................... .16 .16 .16 .16 .15
-------- -------- -------- -------- --------
Total ............... .64 .64 .64 .61 .60
QUARTERLY COMMON STOCK SALES PRICE
(High & Low) Quarter Ended: 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
January ...................... 26 9/16 23 7/8 30 7/16 29 1/8 21 1/8
19 1/16 16 13/16 27 1/16 24 1/4 18
April ........................ 23 11/16 26 1/4 33 13/16 27 7/8 22 3/8
16 1/8 15 3/8 28 1/2 23 3/8 19 5/8
July ......................... 18 5/8 29 32 3/16 34 1/8 23 7/8
14 3/8 25 1/8 27 1/4 25 1/8 19 3/8
October ...................... 20 11/16 27 3/8 27 7/8 36 1/2 28 3/4
17 1/16 20 1/8 15 5/8 26 1/4 19 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 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, 2000, the aggregate amount available for dividends and other restricted
payments under its credit facilities was approximately $25 million.
There were 5,893 holders of Quanex common stock on record as of December
31, 2000.
ITEM 6. SELECTED FINANCIAL DATA
GLOSSARY OF TERMS
The exact definitions of commonly used financial terms and ratios vary somewhat
among different companies and investment analysts. The following list gives the
definition of certain financial terms that are used in this report:
Capital expenditures: Additions to property, plant and equipment.
Book value per common share: Stockholders' equity less the stated value of
preferred stock divided by the number of common shares outstanding.
Asset turnover: Net sales divided by average total assets.
Current ratio: Current assets divided by current liabilities.
Return on investment: The sum of net income and the after-tax effect of interest
expense less capitalized interest divided by the sum of the averages for
long-term debt and stockholders' equity.
Return on common stockholders' equity: Net income attributable to common
stockholders divided by average common stockholders' equity.
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ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY 1995 - 2000 ($ THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal years ended October 31, 2000 1999 1998
-------- -------- --------
REVENUES AND EARNINGS
Net sales(1) 934,203 810,094 797,490
Cost of sales including operating depreciation and amortization 810,732 681,799 683,954
-------- -------- --------
Gross profit 123,471 128,295 113,536
Piper Impact Asset Impairment Charge 56,300(2) 58,500(2)
Loss on sale of Piper Impact Europe 14,280(3)
Other depreciation and amortization 3,308 3,434 5,059
Selling, general and administrative expenses 53,545 53,104 47,713
-------- -------- --------
Operating income (loss) (3,962) 71,757 2,264
Percent of net sales (0.4) 8.9 0.3
Other income (expense)-net 1,870 1,383 2,278
Interest expense-net 13,314 12,791 10,506
-------- -------- --------
Income (loss) before income taxes, extraordinary items, cumulative effect
of accounting change, and income from discontinued operations (15,406) 60,349 (5,964)
Income taxes (credit) (5,383) 21,048 (2,087)
-------- -------- --------
Income (loss) from continuing operations (10,023) 39,301 (3,877)
Income from discontinued operations 0 0 0
Gain on sale of discontinued operations 0 0 13,046
Extraordinary items - early extinguishment of debt, net of taxes 358 415 --
-------- -------- --------
Net income (loss) (9,665) 39,716 9,169
Percent of net sales (1.0) 4.9 1.1(6)
-------- -------- --------
PER SHARE DATA
Basic Earnings per share:
Income (loss) from continuing operations (0.73) 2.76 (0.27)
Income from discontinued operations -- -- --
Gain on sale of discontinued operations -- -- 0.92
Extraordinary items and cumulative effect of accounting change 0.03 0.03 --
Net earnings (loss) (0.70)(7) 2.79 0.65(6)
Cash dividends declared 0.64 0.64 0.64
Book value 19.90 21.24 19.19
Average shares outstanding (000) 13,727 14,234 14,149
Market closing price range
High 26 9/16 28 15/16 33 1/2
Low 14 3/8 15 1/2 16
-------- -------- --------
FINANCIAL POSITION - YEAR END
Working capital 104,944 76,247 62,979
Property, plant and equipment - net 338,248 406,841 395,054
Other assets 71,665 71,218 69,422
Total assets 645,859 690,446 674,288
-------- -------- --------
Noncurrent deferred income taxes 27,620 43,910 33,412
Long-term debt 191,657 179,121 188,302
Stockholders' equity 266,497 301,061 272,044
Total capitalization 458,154 480,182 460,346
Long-term debt percent of capitalization 41.8 37.3 40.9
-------- -------- --------
OTHER DATA
Asset turnover 1.4 1.2 1.2
Current ratio 1.8 to 1 1.6 to 1 1.4 to 1
Return on average investment - percent (0.2)(7) 10.0 3.4(6)
Return on average common equity - percent (3.4)(7) 13.9 3.4(6)
-------- -------- --------
Working capital provided by operations(4) 90,441 94,905 82,830
Depreciation and amortization 48,445 45,883 42,400
Capital expenditures 42,355 60,934 60,936
Backlog for shipment in next 12 months 157,830 164,128 183,847
-------- -------- --------
Number of stockholders 5,697 5,113 5,720
Average number of employees 3,361 3,393 3,261
Sales per employee 278 239 245
-------- -------- --------
FINANCIAL SUMMARY 1995 - 2000 ($ THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal years ended October 31, 1997 1996 1995
-------- -------- --------
REVENUES AND EARNINGS
Net sales(1) 746,093 620,069 603,985
Cost of sales including operating depreciation and amortization 644,041 526,886 521,521
-------- -------- --------
Gross profit 102,052 93,183 82,464
Piper Impact Asset Impairment Charge
Loss on sale of Piper Impact Europe
Other depreciation and amortization 3,669 1,791 1,258
Selling, general and administrative expenses 43,375 44,959 33,746
-------- -------- --------
Operating income (loss) 55,008 46,433 47,460
Percent of net sales 7.4 7.5 7.9
Other income (expense)-net 1,637 4,544 1,721
Interest expense-net 14,002 11,360 8,870
-------- -------- --------
Income (loss) before income taxes, extraordinary items, cumulative effect
of accounting change, and income from discontinued operations 42,643 39,617 40,311
Income taxes (credit) 14,925 16,639 16,931
-------- -------- --------
Income (loss) from continuing operations 27,718 22,978 23,380
Income from discontinued operations 5,176 9,912 10,480
Gain on sale of discontinued operations 36,290
Extraordinary items - early extinguishment of debt, net of taxes -- (2,522) (2,021)
-------- -------- --------
Net income (loss) 69,184 30,368 31,839
Percent of net sales 9.3(5) 4.9 5.3
-------- -------- --------
PER SHARE DATA
Basic Earnings per share:
Income (loss) from continuing operations 2.01 1.70 1.44
Income from discontinued operations 0.37 0.73 0.78
Gain on sale of discontinued operations 2.63 -- --
Extraordinary items and cumulative effect of accounting change -- (0.19) (0.15)
Net earnings (loss) 5.01 2.24 2.07
Cash dividends declared 0.61 0.60 0.59
Book value 19.13 14.50 12.81
Average shares outstanding (000) 13,807 13,524 13,443
Market closing price range
High 36 1/2 28 5/8 26
Low 23 3/8 18 3/8 18 3/8
-------- -------- --------
FINANCIAL POSITION - YEAR END
Working capital 52,818 88,238 53,629
Property, plant and equipment - net 379,071 319,165 233,982
Other assets 119,738 117,142 55,989
Total assets 685,705 638,948 466,458
-------- -------- --------
Noncurrent deferred income taxes 48,111 40,454 45,740
Long-term debt 201,858 253,513 111,894
Stockholders' equity 268,823 197,009 172,814
Total capitalization 470,681 450,522 284,708
Long-term debt percent of capitalization 42.9 56.3 39.3
-------- -------- --------
OTHER DATA
Asset turnover 1.1 1.0 1.3
Current ratio 1.4 to 1 1.8 to 1 1.4 to 1
Return on average investment - percent 16.7(5) 9.8 11.1
Return on average common equity - percent 29.7(5) 16.4 17.4
-------- -------- --------
Working capital provided by operations(4) 73,321 60,378 57,767
Depreciation and amortization 37,865 36,499 29,062
Capital expenditures 69,146 34,737 21,629
Backlog for shipment in next 12 months 225,498 123,382 94,464
-------- -------- --------
Number of stockholders 5,488 3,425 3,659
Average number of employees 2,994 1,950 1,653
Sales per employee 249 318 365
-------- -------- --------
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 1997-1995,
respectively of $187,123, $275,641 and $287,210.
(2) During fiscal 2000 and 1998, Piper Impact recorded a $56.3 million and
$58.5 million, respectively, asset impairment charge as described by
Statement of Financial Accounting Standards No. 121. See Footnote 4 to the
financial statements for further information.
(3) See Note 3 to the financial statements for further information regarding
the loss on the sale of Piper Impact Europe.
(4) 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.
(5) Includes gain on sale of discontinued operations.
(6) Includes effect of Piper Impact's asset impairment charge ($58.5 million in
FY 1998) and gain on sale of discontinued operations ($13 million in
FY 1998).
(7) Includes effect of Piper Impact's asset impairment charge ($56.3 million in
FY 2000) and the loss on sale of Piper Impact Europe ($14.3 million in FY
2000).
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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, energy 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 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: (Dollars in millions)
FISCAL YEAR ENDED OCTOBER 31,
2000 1999 1998
Dollar % of Dollar % of Dollar % of
Amount Sales Amount Sales Amount Sales
-------- -------- -------- -------- -------- --------
Net Sales .................................. $ 934.2 100% $ 810.1 100% $ 797.5 100%
Cost of Sales ............................ 766.1 82 639.9 79 647.2 81
Selling, general and admin. .............. 53.5 5 53.1 6 47.7 6
Depreciation and amortization ............ 47.9 5 45.3 6 41.8 5
Piper Impact Impairment Charge ........... 56.3 6 -- -- 58.5 7
Loss on sale of Piper Impact Europe ...... 14.3 2 -- -- -- --
-------- -------- -------- -------- -------- --------
Operating Income ........................... (3.9) 0% 71.8 9% 2.3 1%
Interest Expense ........................... (15.3) (2) (14.4) (2) (14.9) (2)
Capitalized Interest ....................... 1.9 0 1.6 0 4.4 1
Other, net ................................. 1.9 0 1.4 0 2.2 0
Income tax benefit (expense) ............... 5.4 1 (21.1) (2) 2.1 0
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations ... $ (10.0) (1)% $ 39.3 5% $ (3.9) 0%
======== ======== ========
For the eighth consecutive year, the Company's continuing operations
achieved higher sales over 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, were focused toward capacity expansions, value-added
product offerings, quality improvements, and enhanced customer service
capabilities.
Acquisitions/Divestitures Since October 31, 1997
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
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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.
In January 2000, the Company purchased from Alcoa, Inc. the Golden
Aluminum production facility based in Fort Lupton, Colorado. Quanex acquired the
assets of the facility for $9 million plus working capital valued at
approximately $13 million. The newly acquired facility became part of Quanex's
flat-rolled aluminum sheet business - Nichols Aluminum (the Aluminum Mill Sheet
Products segment). It was renamed Nichols Aluminum-Golden, Inc. ("Nichols
Aluminum-Golden"), a wholly owned subsidiary of Quanex.
Operations at Nichols Aluminum-Golden include melting and casting aluminum
into sheet made from a blend of primary P1020 ingot and selected grades of scrap
metal, cold rolling it to specific gauge, annealing, leveling, custom coating
and slitting to width. Nichols Aluminum-Golden can produce more than 50 million
pounds annually of high quality metal for engineered applications in niche
markets, such as end and tab stock for food and beverage packaging, metal
components for computer disks, and home accessory products.
In April 2000, the Company acquired the stock of Imperial Products, Inc.,
a leading manufacturer of value-added exterior door components based in
Richmond, Indiana, for approximately $15 million. Imperial Products, Inc., now
doing business as Imperial Fabricated Products ("Imperial"), operates as a
wholly owned subsidiary of Quanex. This acquisition expands the specialized
design and manufacturing operations of Quanex's Engineered Products Group.
In July 2000, the Company sold Piper Impact Europe, an impact-extrusion
facility based in the Netherlands, to the plant's existing management group for
a nominal amount. The transaction was structured as a sale of stock. As a result
of this transaction, the Company recorded a pretax charge of $14.3 million for
the fiscal third quarter ending July 31, 2000. In connection with the sale, the
Company's range forward foreign currency agreement with a notional amount of 30
million Guilders was closed. This agreement was entered into to protect the
Company's investment in Piper Impact Europe from foreign currency fluctuations.
The settlement of this agreement resulted in a gain, which was offset against
the charge on the sale of Piper Impact Europe.
On November 30, 2000, the Company completed the purchase of all of the
Capital stock of Temroc Metals, Inc., a Minnesota corporation ("Temroc") for
approximately $21 million in cash. Temroc, as a surviving corporation, became a
wholly owned subsidiary of the Company. Temroc has production facilities in
Hamel, Minnesota, where it manufactures customized aluminum extrusions and
fabricated metal products for recreational vehicles, architectural products,
electronics and other markets. Temroc has become part of the Company's
Engineered Products Group and will continue to operate as a manufacturer of
aluminum extrusions and fabricated metal products.
Business Segments
Business segments are reported in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131. 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.
During the fiscal third quarter ended July 31, 2000, internal management
structure changes were made to increase the emphasis and focus on two separate
lines of business. These changes affected the way in which operating decisions
are made and performance is assessed. In accordance with SFAS No. 131, the
industry segment disclosure has been revised to reflect these changes and the
previously reported "engineered products" segment has been split. Piper Impact,
which includes Piper Impact, the two New Albany, Mississippi based facilities,
as well as Piper Impact Europe (until it was sold in July 2000), has been
separated out of the "Engineered Products" segment into a separate reporting
segment named "Piper Impact". The "Engineered Products" segment now reflects the
results of AMSCO, Homeshield Fabricated Products and Imperial Fabricated
Products. Previous year's information has also been restated to reflect this
change.
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As such, the Company has four reportable segments: engineered steel bars,
aluminum mill sheet products, engineered products and Piper Impact. 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 aluminum window and patio door screens, window frames,
exterior door components and other roll formed products and stamped shapes. The
Piper Impact segment manufactures impact-extruded aluminum and steel parts.
The following table sets forth selected operating data for the Company's four
business segments:
Years Ended October 31,
------------------------------------------------
2000 1999 1998(3)
------------ ------------ ------------
(In thousands)
Engineered Steel Bars:
Net sales ................................ $ 344,245 $ 297,369 $ 327,296
Operating income ......................... 57,702 60,446 58,908
Depreciation and amortization ............ 18,775 16,293 13,097
Identifiable assets ...................... $ 267,476 $ 241,783 $ 219,727
Aluminum Mill Sheet Products:(1)(4)
Net sales ................................ $ 404,355 $ 311,763 $ 266,355
Operating income ......................... 21,529 15,306 7,788
Depreciation and amortization ............ 12,965 12,334 10,670
Identifiable assets ...................... $ 227,365 $ 200,733 $ 198,596
Engineered Products:(5)
Net sales ................................ $ 104,948 $ 92,668 $ 92,045
Operating income (loss) .................. 14,301 13,006 10,825
Depreciation and amortization ............ 3,443 3,349 3,761
Identifiable assets ...................... $ 65,527 $ 46,977 $ 48,025
Piper Impact:(2)(6)
Net sales ................................ $ 105,632 $ 134,694 $ 137,967
Operating income (loss) .................. (82,470) (853) (63,431)
Depreciation and amortization ............ 12,362 12,836 14,167
Identifiable assets ...................... $ 54,518 $ 162,176 $ 172,136
- ----------
(1) 1998 results include three weeks of Nichols Aluminum Alabama's operations
acquired October 9, 1998. See Note 2 to financial statements.
(2) During 1998, Piper Impact recorded a $58.5 million asset
impairment/restructuring charge as described by SFAS No. 121. This
impairment/restructuring charge is included in operating income. See Note 4
to financial statements.
(3) 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 has not been
restated above. See Note 13 to the consolidated financial statements for
further information.
(4) Fiscal 2000 results include Nichols Aluminum-Golden operations since the
acquisition date of January 25, 2000. See Note 2 to the consolidated
financial statements.
(5) Fiscal 2000 results include Imperial Fabricated Products operations
acquired April 3, 2000. See Note 2 to the consolidated financial
statements.
(6) Fiscal 2000 results include the one-time $14.3 million loss on the sale of
Piper Impact Europe and $56.3 million asset impairment charge relating to
Piper Impact facilities in New Albany, Mississippi. See Note 3 and 4 to the
consolidated financial statements.
The engineered steel bar business posted record annual net sales while
working on its Phase V capital expansion program which was completed in December
2000. Operating income, however, was down from the previous year due largely to
higher outside processing and raw material costs as well as higher depreciation
charges. Phase V will raise the annual shipping capacity to 700,000 tons at
MACSTEEL and 25,000 tons at the Heat Treat facility. Also, work has begun at
both mills for Phase VI, which will increase their MACPLUS capacity, our highest
value-added product line.
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The aluminum mill sheet business had a record year in both net sales and
operating income. These records resulted from the acquisition of Nichols
Aluminum-Golden, operational advancements throughout the division and healthy
margins. Some of the operational advancements include the results of the new
rotary furnaces at the casting facility in Davenport, Iowa, penetration into
more value-added markets and the improvements accomplished in quality and
delivery performance.
The engineered products business had increased net sales and operating
income, largely as a result of the acquisition of Imperial Fabricated Products.
With this acquisition, the Company was able to add new customers and new
markets.
Piper Impact's results have been adversely impacted by declining aluminum
air bag product sales and higher manufacturing costs associated with new product
development as well as cellular manufacturing implementation. While Piper Impact
is aggressively developing new products that it hopes will replace the declining
aluminum air bag components business, the results are slow. Piper made good
progress in the second half of the year reducing its costs and these efforts are
continuing. In view of the losses experienced and the anticipated future erosion
in the volume of aluminum airbag components at Piper Impact, an impairment
charge was taken in the fourth quarter. See Note 4 to the financial statements.
The impairment charge represents another step in the Company's process of
evaluating strategic alternatives for this business, including its possible
sale.
Outlook
The Company's first fiscal quarter is historically its least profitable quarter
of each year as there are fewer production days and the Company's customers
experience holiday shutdowns. Additionally, the business outlook for Quanex's
first fiscal quarter 2001 finds the Company's transportation and housing markets
slowing significantly from fiscal 2000 levels. However, because of the
acquisitions made since January 2000 and the expected operational improvements
at Piper Impact, the Company anticipates, at this time, a modest impact from the
slowdown in these markets on overall net sales and operating income in the
first fiscal quarter of 2001 compared to the same period last year.
The Company currently expects that the overall business levels for the
balance of fiscal year 2001 should be similar to those experienced during 2000.
Domestic and global market factors will continue to impact the Company and any
further slowdown in the U.S. economy would affect demand and pricing for many of
the Company's products. Continuing global pricing pressures in the Engineered
Steel Bar business and reduced demand for aluminum airbag components in the
Piper Impact business offer significant challenges to our operations in
maintaining operating margins. Improvement in financial results will depend
upon, among other things, whether the strength of the economy improves, together
with the markets which the Company serves, successful new product development
efforts at the Piper Impact business and whether the fiscal 2000 margin levels
at aluminum mill sheet products can be sustained.
2000 Compared to 1999
Net Sales - Consolidated net sales for fiscal 2000 were $934.2 million,
representing an increase of $124.1 million, or 15%, when compared to fiscal
1999. This increase reflects higher net sales at all of the business segments
except Piper Impact. The acquisitions of Nichols Aluminum-Golden in January of
2000 and Imperial Fabricated Products in April of 2000 contributed to this
increase.
Net sales from the Company's engineered steel bar business for fiscal 2000,
were $344.2 million, representing an increase of $46.9 million, or 16%, when
compared to fiscal 1999. This increase was principally due to increased sales
volumes as a result of strong primary transportation markets.
Net sales for fiscal 2000 from the Company's aluminum mill sheet products
business increased by $92.6 million, or 30%, to $404.4 million when compared to
fiscal 1999. This increase was due to increased volume from the seasonally
strong construction market, increased selling prices resulting from sales of
more value-added painted product and the acquisition of Nichols Aluminum-Golden
in January 2000.
Net sales from the Company's engineered products business for fiscal 2000
were $104.9 million, representing an increase of $12.3 million, or 13%, from
last year. The increase was largely due to the acquisition of Imperial
Fabricated Products in April of 2000.
Net sales for fiscal 2000 for the Company's Piper Impact business declined
by $29.1 million, or 22%, to $105.6 million when compared to fiscal 1999. These
results were impacted by the sale of Piper Impact Europe in July of 2000 as well
as declining aluminum air bag product sales and competitive pricing pressures.
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Operating income - Consolidated operating income for fiscal 2000 was $66.6
million, excluding the $14.3 million loss on the sale of Piper Impact Europe and
the $56.3 million asset impairment charge. This represents a decrease of $5.1
million, or 7%, when compared to the operating income of $71.8 million in fiscal
1999. During fiscal 2000, the aluminum mill sheet products business and the
engineered products business had increased operating income while the engineered
steel bar and Piper Impact businesses had lower operating income.
Operating income from the Company's engineered steel bar business was
$57.7 million for fiscal 2000, representing a decrease of $2.7 million, or 5%,
when compared to fiscal 1999. This lower operating income resulted despite
higher net sales. The major factors in such decrease were lower realized spread
as a result of higher material costs and pricing pressures as well as higher
costs associated with outside processing. Depreciation expense for fiscal 2000
was also higher than the prior year due to the recent completion of certain
capital projects.
Operating income for fiscal 2000 from the Company's aluminum mill sheet
products business was $21.5 million, representing an increase of $6.2 million,
or 41%, from last year. This increase was largely due to significantly higher
sales attributable to increased volume and sale of more value-added products,
stable spreads and contribution from Nichols Aluminum-Golden, acquired in
January 2000.
Operating income from the Company's engineered products business was $14.3
million for fiscal 2000, representing an increase of $1.3 million, or 10%, from
last year. The increase was due largely to increased volume and sale of more
value-added, higher margin products, as well as the acquisition of Imperial
Fabricated Products in April 2000.
Operating losses from the Company's Piper Impact business for fiscal 2000
were $11.9 million, excluding the one-time loss on the sale of Piper Impact
Europe of $14.3 million and the $56.3 million asset impairment charge. See Note
4 to the financial statements. The operating loss for fiscal 1999 was $853
thousand. The declining results are largely due to reduced sales of aluminum
automotive airbag components, higher material costs and higher manufacturing
costs associated with new product development as well as cellular manufacturing
implementation.
In addition to the four operating segments mentioned above, operating
expenses for corporate and other for fiscal 2000 were $15.0 million,
representing a decrease of $1.1 million from the $16.1 million recorded in
fiscal 1999. 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 $441 thousand, or 1%, in fiscal 2000 as
compared to last year. This increase is largely a result of the acquisitions of
Nichols Aluminum-Golden and Imperial Fabricated Products as well as increased
selling volume at most business segments.
Depreciation and amortization - Depreciation and amortization increased by
$2.6 million, or 6%, in fiscal 2000 as compared to last year. The increase is
principally due to increased depreciation at the engineered steel bar, aluminum
mill sheet products and engineered products businesses for recently completed
projects, partially offset by lower depreciation at the Piper Impact business.
Interest expense - Interest expense increased by $853 thousand in fiscal
2000 primarily resulting from additional borrowings made during the fiscal year
to finance the acquisitions as well as higher interest rates.
Capitalized interest - Capitalized interest increased by $330 thousand in
fiscal 2000 as compared to fiscal 1999 primarily due to the completion of the
Phase V capital project underway at MACSTEEL during 2000.
Other, net - "Other, net" increased by $487 thousand in fiscal 2000 as
compared to last year primarily as a result of increased investment income.
Income from continuing operations - The Company earned income from
continuing operations of $35.9 million in fiscal 2000 excluding the $9.3 million
(net of tax) loss on the sale of Piper Impact Europe and the $36.6 million (net
of tax) asset impairment charge. This represents a decrease of $3.4 million, or
9%, when compared to fiscal 1999 income from continuing operations of $39.3
million. The decrease (excluding the loss on the sale of Piper Impact Europe and
the Piper Impact asset impairment charge) in fiscal 2000 was principally due to
lower operating earnings at the engineered steel bar and Piper Impact business
segments partially offset by improved results in the other two business
segments.
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Net income/loss - Fiscal 2000 net loss was $9.7 million, compared to net
income of $39.7 million for fiscal 1999. Included in the net loss for fiscal
2000 was a $9.3 million (after-tax) loss on the sale of Piper Impact Europe and
a $36.6 million (after-tax) impairment charge associated with Piper Impact.
Additionally, fiscal 2000 net loss included $358 thousand extraordinary gain on
the early extinguishment of debt. Included in net income for fiscal 1999 were
$415 thousand extraordinary gain on early extinguishment of debt.
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 and
engineered products businesses, partially offset by lower net sales at the
Company's engineered steel bar and Piper Impact 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 $92.7 million, representing an increase of $623 thousand, or 1% from last
year. The increase was largely due to increased demand for traditional window
and door products.
Net sales for fiscal 1999 from the Company's Piper Impact business were
$134.7 million, representing a decrease of $3.3 million, or 2%. The decrease was
largely due to reduced demand for older generation aluminum airbag components,
partially offset by sales of new non-airbag product lines.
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 $58.5
million impairment/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).
Operating income from the Company's engineered products business was $13.0
million for fiscal 1999, representing an increase of $2.2 million, or 20%, when
compared to fiscal 1998. The increase was largely due to increased net sales and
lower material costs.
Operating loss from the Company's Piper Impact business was $853 thousand
for fiscal 1999. For comparison purposes, fiscal 1998 operating loss of $63.4
million should be adjusted for the asset
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impairment/restructuring charge of $58.5 million and the decreased amortization
expense of $2.4 million. When compared to the adjusted operating loss of $2.5
million, fiscal 1999 operating loss represents an improvement of $1.7 million or
66%. The improvement was largely due to lower material costs and some success at
cost management measures.
In addition to the four 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 Piper Impact and engineered
products businesses.
Interest expense - Interest expense decreased by $500 thousand in fiscal
1999 primarily resulting from the purchase of $9.7 million principal amount of
convertible 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 four 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 impairment/restructuring
charge of $38.0 million at Piper Impact and an after-tax gain of $13.0 million
on the sale of discontinued operations.
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LIQUIDITY AND CAPITAL RESOURCES
Total capitalization at October 31, 2000 was $458.4 million, consisting of
$191.9 million of debt and $266.5 million of equity. The debt-to-capitalization
ratio at the end of fiscal 2000 was 41.9% compared with 38.7% at the end of
fiscal 1999. The higher debt-to-capitalization ratio results primarily from the
borrowings made to finance acquisitions and the decreased equity due to the loss
on sale of Piper Europe as well as the asset impairment charge.
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, 2000, there was
$110 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, 2000, retained earnings of approximately
$25 million were available for dividends and other restricted payments. As of
October 31, 2000, the Company was in compliance with all covenants under the
Bank Agreement.
During fiscal 2000, the Company accepted unsolicited block offers to buy
back $10.4 million principal amount of the 6.88% Convertible Subordinated
Debentures for $9.6 million in cash. An after tax extraordinary gain of $358
thousand was recorded on these transactions. 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, 2000 was $63.3
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.
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. During the fiscal year ended October 31, 2000, the Company
repurchased 834,300 shares for $17.2 million. See Note 15 to the financial
statements.
At October 31, 2000, 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.
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 2000 was $77.9 million. This
represents an increase of $182 thousand, or less than 1%, compared to fiscal
1999.
Investment Activities
Net cash used by investment activities in fiscal 2000 was $79.6 million compared
to $62.7 million in fiscal 1999. Fiscal 2000 cash from investing activities
included the acquisitions of Nichols Aluminum-Golden and Imperial Fabricated
Products. There were no acquisitions or divestitures in fiscal 1999. Capital
expenditures decreased from $60.8 million in 1999 to $42.3 million in 2000. The
Company estimates that fiscal 2001 capital expenditures will approximate $70
million.
Financing Activities
Net cash used by financing activities for fiscal 2000 was $1.8 million, compared
to $15.4 million in the prior year. During fiscal 2000, the Company had bank
borrowings of $33.4 million, however it used $9.6 million to purchase
subordinated debentures and $17.2 million to purchase Quanex common stock.
During fiscal 1999, the Company used $8.8 million to purchase subordinated
debentures.
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Dividend payments amounted to approximately $9 million in both fiscal 2000 and
fiscal 1999. Proceeds from the issuance of stock totaled $1.0 million in fiscal
2000 compared to $1.6 million in fiscal 1999.
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 SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
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 deferred the effective date of SFAS No. 133
until the Company's year ending October 31, 2001. The Company adopted SFAS No.
133 as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities an amendment of FASB Statement No. 133", issued
in June 2000, subsequent to the fiscal year ended October 31, 2000. See Note 17
to the financial statements for further discussion of its effect.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101. SAB No. 101 provides the staff's views in
applying Generally Accepted Accounting Principles ("GAAP") to revenue
recognition in financial statements. It does not change any of the existing
rules on revenue recognition. All registrants are expected to apply the
accounting and disclosures described in this bulletin. The staff, however, will
not object if registrants that have not applied this accounting do not restate
prior financial statements provided they report a change in accounting principle
in accordance with APB Opinion No. 20, Accounting Changes, no later than the
first fiscal quarter of the fiscal year beginning after December 15, 1999.
However, SAB No. 101B delays the implementation of SAB No. 101 until no later
than the fourth quarter of fiscal years beginning after December 15, 1999. The
Company will be analyzing SAB No. 101 to determine what, if any, impact or
additional disclosure requirements are necessary. Any such impact will be
addressed and reflected in the fourth fiscal quarter of the Company's year
ending October 31, 2001 in accordance with SAB No. 101B.
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 17 to the
Consolidated Financial Statements.
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, 2000 and 1999, the Company had fixed-rate debt totaling $74
and $90 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 17 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 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 $117.6 and $99 million at October 31, 2000 and 1999, respectively. 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,
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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 (6.76% and 6.21% at
October 31, 2000 and 1999, respectively). At October 31, 2000 and 1999, the
unrealized losses related to the interest rate swap agreements are $918 thousand
and $2.0 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 $1.5
and $1.9 million as of October 31, 2000 and 1999, respectively. However, it
should be noted that any change in value of these contracts, real or
hypothetical, would be substantially offset by an inverse change in the value of
the underlying hedged item.
Foreign Currency Exchange Rate Risk
The Company utilized a range forward zero-cost agreement to protect its initial
equity investment in its Netherlands subsidiary, Piper Impact Europe, from
fluctuations in US Dollar/Dutch Guilder exchange rates. This agreement, which
was entered into with a major financial institution, had a notional value of 30
million guilders. By establishing minimum and maximum exchange rates, this
agreement limited the potential devaluation of the Company's initial investment
in its subsidiary while also limiting any potential appreciation. During the
third quarter ended July 31, 2000, the Company sold the Piper Impact Europe
subsidiary. As such, this range forward agreement was closed, realizing a gain
of approximately $1.7 million. This gain was offset against the loss on the sale
of Piper Impact Europe, as the investment in Piper Impact Europe was the
underlying hedged item. At October 31, 1999, the Company booked a gain to
stockholder's equity of $378 thousand.
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, 2000
and 1999, the Company had open futures contracts for aluminum pounds with fair
values of $17.6 and $5.3 million, respectively. The contracts had unrealized
losses of $372 thousand and unrealized gains of $117 thousand at October 31,
2000 and 1999, respectively, and covered a notional volume of 25,738,940 and
7,716,170 pounds of aluminum, respectively. A hypothetical 10% change from the
October 31, 2000 and 1999 average London Metal Exchange ("LME") ingot price of
$.682 and $.688, respectively, per pound would increase or decrease the
unrealized pretax gains/losses related to these contracts by approximately $1.8
million and $530 thousand, respectively. However, it should be noted that any
change in the value of these contracts, real or hypothetical, would be
substantially 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, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. 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 30, 2000
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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
accounting principles generally accepted in the United States of America 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
================================================================================
October 31, 2000 1999
- ----------- ---------- ----------
(In thousands)
ASSETS
Current assets:
Cash and equivalents ......................................................... $ 22,409 $ 25,874
Accounts and notes receivable, less allowance for doubtful
accounts of $11,240,000 in 2000 and $12,154,000 in 1999 ..................... 98,465 87,204
Inventories .................................................................. 101,274 78,463
Deferred income taxes ........................................................ 12,771 19,146
Prepaid expenses ............................................................. 1,027 1,700
---------- ----------
Total current assets ...................................................... 235,946 212,387
Property, plant and equipment, net ............................................. 338,248 406,841
Goodwill, net .................................................................. 47,539 48,990
Other assets ................................................................... 24,126 22,228
---------- ----------
$ 645,859 $ 690,446
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 77,339 $ 70,187
Accrued expenses ............................................................. 50,189 54,305
Current maturities of long-term debt ......................................... 256 10,545
Income taxes payable ......................................................... 3,218 1,103
---------- ----------
Total current liabilities ................................................. 131,002 136,140
Long-term debt ................................................................. 191,657 179,121
Deferred pension credits ....................................................... 7,026 6,691
Deferred postretirement welfare benefits ....................................... 7,634 7,490
Deferred income taxes .......................................................... 27,620 43,910
Other liabilities .............................................................. 14,423 16,033
---------- ----------
Total liabilities ......................................................... 379,362 389,385
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized;
issued & outstanding - none in 2000 and 1999 ............................... -- --
Common stock, $.50 par value, 50,000,000 shares authorized;
14,220,666 and 14,269,800 shares issued in 2000 and 1999, respectively...... 7,110 7,135
Additional paid-in capital ................................................... 111,061 110,317
Retained earnings ............................................................ 165,841 186,867
Unearned compensation ........................................................ (467) (171)
Accumulated other comprehensive income ....................................... (301) (765)
---------- ----------
283,244 303,383
Less common stock held by rabbi trust - 147,689 and 94,606 shares in 2000
and 1999, respectively ..................................................... (3,349) (2,322)
Less cost of shares of common stock in treasury (677,526 in 2000 and none
in 1999) ................................................................... (13,398) --
---------- ----------
Total stockholders' equity ................................................ 266,497 301,061
---------- ----------
$ 645,859 $ 690,446
========== ==========
See notes to consolidated financial statements.
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Quanex Corporation
CONSOLIDATED STATEMENTS OF INCOME
================================================================================
Years ended October 31, 2000 1999 1998
----------------------- ---------- ---------- ----------
(In thousands, except per share amounts)
Net sales ................................................................. $ 934,203 $ 810,094 $ 797,490
Costs and expenses:
Cost of sales ........................................................... 766,119 639,911 647,179
Selling, general and administrative ..................................... 53,545 53,104 47,713
Depreciation and amortization ........................................... 47,921 45,322 41,834
Loss on sale of Piper Impact Europe ..................................... 14,280 -- --
Piper Impact asset impairment charge .................................... 56,300 -- 58,500
---------- ---------- ----------
Operating income (loss) ................................................... (3,962) 71,757 2,264
Other income (expense):
Interest expense ........................................................ (15,255) (14,402) (14,904)
Capitalized interest .................................................... 1,941 1,611 4,398
Other, net .............................................................. 1,870 1,383 2,278
---------- ---------- ----------
Income (loss) from continuing operations before income taxes and
extraordinary gain ...................................................... (15,406) 60,349 (5,964)
Income tax benefit (expense) .............................................. 5,383 (21,048) 2,087
---------- ---------- ----------
Income (loss) from continuing operations before extraordinary gain ........ (10,023) 39,301 (3,877)
Gain on sale of discontinued operations, net of income
taxes ................................................................... -- -- 13,046
---------- ---------- ----------
Income (loss) before extraordinary gain ................................... (10,023) 39,301 9,169
Extraordinary gain on early extinguishment of debt,
net of income taxes ..................................................... 358 415 --
---------- ---------- ----------
Net income (loss) attributable to common stockholders ..................... $ (9,665) $ 39,716 $ 9,169
========== ========== ==========
Earnings (loss) per common share:
Basic:
Continuing operations ................................................ $ (0.73) $ 2.76 $ (0.27)
Gain on sale of discontinued operations .............................. -- -- 0.92
Extraordinary gain ................................................... 0.03 0.03 --
---------- ---------- ----------
Total basic net earnings (loss) ................................... $ (0.70) $ 2.79 $ 0.65
========== ========== ==========
Diluted:
Continuing operations ................................................ $ (0.73) $ 2.56 $ (0.27)
Gain on sale of discontinued operations .............................. -- -- .92
Extraordinary gain ................................................... 0.03 0.03 --
---------- ---------- ----------
Total diluted net earnings (loss) ................................. $ (0.70) $ 2.59 $ 0.65
========== ========== ==========
Weighted average number of shares outstanding
Basic ................................................................ 13,727 14,234 14,149
Diluted .............................................................. 13,727 16,776 14,149
See notes to consolidated financial statements.
26
29
Quanex Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
================================================================================
Common
Stock
Common Stock Held by Additional
Years Ended October 31, 2000, ------------------------------ Rabbi Paid-in Retained
1999, and 1998 Shares Amount Trust Capital Earnings
- ----------------------------- ------------ ------------ ------------ ------------ ------------
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
Comprehensive loss:
Net loss ................................... (9,665)
Adjustment for minimum pension liability
(net of tax expense of $103) ............
Foreign currency translation adjustment ....
Total Comprehensive loss ................
Common dividends ($.64 per share) .......... (8,884)
Common stock held by Rabbi Trust ........... (1,027)
Cost of common stock in treasury ...........
Other ...................................... (49,134) (25) 744 (2,477)
------------ ------------ ------------ ------------ ------------
Balance at October 31, 2000 .................. 14,220,666 $ 7,110 $ (3,349) $ 111,061 $ 165,841
Other Comprehensive Income
------------------------------
Minimum Foreign Treasury Total
Years Ended October 31, 2000, Pension Currency Stock and Stockholders'
1999, and 1998 Liability Translation Other Equity
- ----------------------------- ------------ ------------ ------------ ------------
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: ........................ 39,716
Net income .................................
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
Comprehensive loss:
Net loss ................................... (9,665)
Adjustment for minimum pension liability
(net of tax expense of $103) ............ 161 161
Foreign currency translation adjustment .... 303 303
------------
Total Comprehensive loss ................ (9,201)
Common dividends ($.64 per share) .......... (8,884)
Common stock held by Rabbi Trust ........... (1,027)
Cost of common stock in treasury ........... (13,398) (13,398)
Other ...................................... (296) (2,054)
------------ ------------ ------------ ------------
Balance at October 31, 2000 .................. $ (301) $ -- $ (13,865) $ 266,497
See notes to consolidated financial statements.
27
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Quanex Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW
================================================================================
Years Ended October 31, 2000 1999 1998
----------------------- ---------- ---------- ----------
(In thousands)
OPERATING ACTIVITIES:
Net Income (Loss) ............................................................ $ (9,665) $ 39,716 $ 9,169
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Piper Impact asset impairment charge (net of deferred taxes of $19,705
and $20,475 in fiscal 2000 and 1998, respectively)................. 36,595 -- 38,025
Loss on sale of Piper Impact Europe (net of taxes of $4,998)............... 9,282 -- --
Extraordinary gain on early extinguishment of debt (net of taxes of $193
and $223 in fiscal 2000 and 1999, respectively).................... (358) (415) --
Gain on sale of discontinued operations (net of taxes) .................... -- -- (13,046)
Depreciation and amortization ............................................. 48,445 45,883 42,400
Deferred income taxes ..................................................... 5,483 10,150 6,059
Deferred pension and postretirement benefits .............................. 659 (429) 223
Changes in assets and liabilities net of effects from acquisitions and
dispositions:
Decrease (increase) in accounts and notes receivable ...................... (9,149) (2,665) 3,664
Decrease (increase) in inventory .......................................... (12,474) 6,485 (10,994)
Increase (decrease) in accounts payable ................................... 5,412 (4,648) (2,262)
Decrease in accrued expenses .............................................. (6,314) (1,510) (346)
Other, net (including income tax refund) .................................. 9,954 (14,879) (8,822)
---------- ---------- ----------
Cash provided by operating activities ................................... 77,870 77,688 64,070
INVESTMENT ACTIVITIES:
Acquisition of Decatur Aluminum Corp., net of cash and equivalents acquired... -- -- (9,573)
Acquisition of Golden Aluminum, net of cash and equivalents acquired.......... (20,148) -- --
Acquisition of Imperial Fabricated Products, net of cash and equivalents
acquired..................................................................... (15,303) -- --
Net proceeds from sale of LaSalle Steel Company .............................. -- -- 1,366
Net proceeds from sale of the Tubing Operations .............................. -- -- 30,068
Capital expenditures, net of retirements ..................................... (42,327) (60,848) (58,513)
Other, net ................................................................... (1,809) (1,832) (3,168)
---------- ---------- ----------
Cash used by investment activities ...................................... (79,587) (62,680) (39,820)
---------- ---------- ----------
Cash provided (used) by operating and investment activities ............. (1,717) 15,008 24,250
FINANCING ACTIVITIES:
Bank borrowings (repayments), net ............................................ 33,394 1,035 (17,124)
Purchase of subordinated debentures .......................................... (9,586) (8,799) (1,500)
Purchase of Quanex common stock .............................................. (17,185) -- --
Common dividends paid ........................................................ (8,884) (9,124) (9,059)
Issuance of common stock, net ................................................ 1,002 1,567 3,183
Other, net ................................................................... (556) (60) (429)
---------- ---------- ----------
Cash used by financing activities ....................................... (1,815) (15,381) (24,929)
---------- ---------- ----------
Effect of exchange rate changes on cash and equivalents ........................ 67 (32) 107
---------- ---------- ----------
Decrease in cash and equivalents ............................................... (3,465) (405) (572)
Cash and equivalents at beginning of period .................................... 25,874 26,279 26,851
---------- ---------- ----------
Cash and equivalents at end of period .......................................... $ 22,409 $ 25,874 $ 26,279
========== ========== ==========
See notes to consolidated financial statements.
28
31
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" or "Quanex"), 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 four industry segments: manufacturing of
engineered steel bars, aluminum mill sheet products, engineered products and
Piper Impact's impact extrusion 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 2000, 1999, and 1998, cash paid for
income taxes was $10,650,000, $22,005,000, and $20,860,000, respectively. These
amounts are before refunds of $7,290,000, $1,181,000, and $172,000,
respectively. Cash paid for interest for fiscal 2000, 1999, and 1998 was
$14,421,000, $13,931,000, and $14,404,000, 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
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 all other
acquisitions (See Note 2). At October 31, 2000 and 1999, accumulated
amortization was approximately $11,746,000 and $11,035,000, respectively.
In accordance with SFAS No. 121, 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.
29
32
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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. Prior to the sale
of Piper Impact Europe, the Company used 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 protected the investment in Piper Impact
Europe were recorded as a foreign currency translation adjustment in the equity
section of the financial statements when exchange rates went outside of the
limits set forth in the agreement. 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 17 for further
discussion of such financial instruments.
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 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 deferred the effective date of SFAS No. 133 until the Company's year
ending October 31, 2001. The Company adopted SFAS No. 133, as amended by SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities an amendment of FASB Statement No. 133", issued in June 2000,
subsequent to the fiscal year ended October 31, 2000. See Note 17 for further
discussion of its effect.
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.
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.
30
33
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECLASSIFICATION
Certain amounts for prior periods have been reclassified in the accompanying
consolidated financial statements to conform to fiscal 2000 presentations.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101. SAB No. 101 provides the staff's views in applying
Generally Accepted Accounting Principles ("GAAP") to revenue recognition in
financial statements. It does not change any of the existing rules on revenue
recognition. All registrants are expected to apply the accounting and
disclosures described in this bulletin. The staff, however, will not object if
registrants that have not applied this accounting do not restate prior financial
statements provided they report a change in accounting principle in accordance
with APB Opinion No. 20, Accounting Changes, no later than the first fiscal
quarter of the fiscal year beginning after December 15, 1999. However, SAB No.
101B delays the implementation of SAB No. 101 until no later than the fourth
quarter of fiscal years beginning after December 15, 1999. The Company will be
analyzing SAB No. 101 to determine what, if any, impact or additional disclosure
requirements are necessary. Any such impact will be addressed and reflected in
the fourth fiscal quarter of the Company's year ending October 31, 2001 in
accordance with SAB No. 101B.
2. ACQUISITIONS
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.
On January 25, 2000, the Company completed the purchase from Alcoa, Inc.
of the Golden Aluminum production facility based in Fort Lupton, Colorado.
Quanex acquired the assets of the facility for $9 million plus working capital
valued at approximately $13 million. The newly acquired facility has become part
of Quanex's flat-rolled aluminum sheet business - Nichols Aluminum (the Aluminum
Mill Sheet Products segment). It has been renamed Nichols Aluminum-Golden, Inc.,
("Nichols Aluminum-Golden") a wholly owned subsidiary of Quanex.
Operations at Nichols Aluminum-Golden include melting and casting aluminum
into sheet made from a blend of primary P1020 ingot and selected grades of scrap
metal, cold rolling it to specific gauge, annealing, leveling, custom coating
and slitting to width. Nichols Aluminum-Golden can produce more than 50 million
pounds annually of high quality metal for engineered applications in niche
markets, such as end and tab stock for food and beverage packaging, metal
components for computer disks, and home accessory products.
On April 3, 2000, the Company acquired the stock of Imperial Products,
Inc., a leading manufacturer of value-added exterior door components based in
Richmond, Indiana, for approximately $15 million. Imperial Products, Inc., now
doing business as Imperial Fabricated Products ("Imperial"), operates as a
wholly owned subsidiary of Quanex. This acquisition expands the specialized
design and manufacturing operations of Quanex's Engineered Products Group. Based
on preliminary purchase accounting, goodwill associated with Imperial is
approximately $11 million.
Also see Note 19 for acquisitions made subsequent to the fiscal 2000 year
end.
31
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Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. DISCONTINUED OR DISPOSED 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.
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 was previously classified as "Steel Tubes".
On July 19, 2000, the Company sold Piper Impact Europe, an
impact-extrusion facility based in the Netherlands, to the plant's existing
management group for a nominal amount. The transaction was structured as a sale
of stock. As a result of this transaction, the Company recorded a pretax charge
of $14.3 million for the fiscal third quarter ending July 31, 2000. In
connection with the sale, the Company's range forward foreign currency agreement
with a notional amount of 30 million Guilders was cashed in. This agreement was
entered into to protect the Company's investment in Piper Impact Europe from
foreign currency fluctuations. The settlement of this agreement resulted in a
gain, which was offset against the loss on the sale of Piper Impact Europe.
4. PIPER IMPACT IMPAIRMENT DISCLOSURE
Under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", companies must review the carrying amount
of long-lived assets and certain intangibles, including related goodwill,
whenever events or changes in circumstances indicate that the carrying amount of
an asset or a group of assets may not be recoverable.
Fiscal 1998
During the year ended October 31, 1998, the Company recorded an asset
impairment/restructuring charge of $58.5 million related to Piper Impact.
Components of this special charge included $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. The charge resulted in an after-tax impact on net income of $38.0
million or $2.68 per share.
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 steel plant which was new at the time, as described in SFAS No. 121.
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 the estimated fair value was less than
the carrying value of the assets. Fair value of Piper Impact's net assets was
determined by discounting estimated future cashflows using a discount rate
commensurate with the risks involved. Considerable management judgment is
necessary to estimate fair value. Accordingly, actual results may vary
significantly from management's estimates.
32
35
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. PIPER IMPACT IMPAIRMENT DISCLOSURE - (CONTINUED)
Fiscal 2000
An asset impairment charge in the amount of $56.3 million was recorded in the
fourth quarter of fiscal 2000 related to the property, plant and equipment of
Piper Impact. The impairment charge resulted in an after-tax impact on net
income of $36.6 million or $2.67 per share.
Piper Impact experienced declines in sales and operating cash flow during
fiscal 1999 and fiscal 2000. The declining results were primarily due to
decreased demand for aluminum airbag components from Piper Impact's most
significant customer. The management of Piper Impact conducted negotiations with
this customer during October of 2000 in an attempt to obtain a price increase
and a commitment for 100% future sourcing of impacted aluminum airbag components
with Piper as well as increased future sourcing of impacted steel airbag parts.
Although negotiations continue, the management of Piper Impact became less
optimistic about any near-term prospects for price increase without losing a
significant amount of business from this customer. Additionally, opportunities
for new products did not materialize at a rate necessary to offset the declining
volume of airbag components. Consequently, in the fourth quarter of fiscal 2000,
it became necessary to once again assess Piper Impact for asset impairment as
required under SFAS No. 121.
Management again performed an evaluation of the recoverability of all of
the assets of Piper Impact, this time including the steel plant, as described in
SFAS No. 121. Management concluded from the results of this evaluation that a
significant impairment of long-lived assets had occurred. An impairment charge
was required because the estimated fair value was less than the carrying value
of the assets. Fair value of Piper Impact's net assets was determined by
discounting estimated future cashflows using a discount rate commensurate with
the risks involved. Considerable management judgment is necessary to estimate
fair value. Accordingly, actual results may vary significantly from management's
estimates.
5. EXTRAORDINARY ITEM
During fiscal 2000, the Company accepted unsolicited block offers to buy back
$10.4 million principal amount of the 6.88% Convertible Subordinated Debentures
for $9.6 million in cash. An after-tax extraordinary gain of $358 thousand was
recorded on these transactions.
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.
33
36
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. EARNINGS PER SHARE
The computational components of basic and diluted earnings (loss) per share are
as follows (shares and dollars in thousands except per share amounts):
For the Year Ended October 31, 2000
------------------------------------------------
Numerator Denominator Per Share
(Loss) (Shares) Amount
------------ ------------ ------------
BASIC AND DILUTED(1) EPS
Loss from continuing operations ................................ $ (10,023) 13,727 $ (0.73)
Extraordinary gain on early extinguishment of debt ............. 358 0.03
------------ ------------
Total basic net loss ......................................... $ (9,665) $ (0.70)
============ ============
For the Year Ended October 31, 1999
------------------------------------------------
Numerator Denominator Per Share
(Loss) (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
(Income/ Denominator Per Share
Loss) (Shares) Amount
------------ ------------ ------------
BASIC AND DILUTED(1) 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
============ ============
(1) The effect of certain securities or debentures are anti-dilutive and,
therefore, not included in the diluted earnings per share calculation. As a
result, diluted EPS is the same as basic EPS.
34
37
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
(In thousands)
Current:
Federal ............................................ $ 10,890 $ 17,819 $ 9,312
State .............................................. 847 1,066 4,190
Foreign ............................................ (1,067) (372) 507
------------ ------------ ------------
10,670 18,513 14,009
Deferred ............................................. (16,053) 2,535 (16,096)
------------ ------------ ------------
Income taxes from continuing operations .............. (5,383) 21,048 (2,087)
Income taxes from sale of discontinued operations .... -- -- 3,441
Income taxes from extinguishment of debt ............. 192 223 --
------------ ------------ ------------
Total ............................................ $ (5,191) $ 21,271 $ 1,354
============ ============ ============
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,
------------------------------
2000 1999
------------ ------------
(In thousands)
Deferred tax liability:
Property, plant and equipment ......................................... $ 34,555 $ 50,502
Other ................................................................. 24,002 16,085
------------ ------------
58,557 66,587
------------ ------------
Deferred tax assets:
Intangibles ........................................................... 15,221 14,411
Postretirement benefit obligation ..................................... 3,381 3,345
Other employee benefit obligations .................................... 10,281 9,448
Environmental accruals ................................................ 7,662 7,234
Other ................................................................. 7,163 7,385
------------ ------------
43,708 41,823
------------ ------------
Net deferred tax liability .............................................. $ 14,849 $ 24,764
============ ============
Deferred income tax non-current liability ............................... $ 27,620 $ 43,910
Deferred tax current assets ............................................. (12,771) (19,146)
------------ ------------
Net deferred tax liability ............................................ $ 14,849 $ 24,764
============ ============
No U.S. deferred taxes were provided on the Company's foreign subsidiary's
cumulative undistributed losses of $(1,782,000). The foreign subsidiary was sold
in July 2000.
35
38
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. INCOME TAXES - (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,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
(In thousands)
Income tax expense (benefit) at statutory tax rate ......... $ (5,392) $ 21,123 $ (2,087)
Increase (decrease) in taxes resulting from:
State income taxes, net of federal effect ................ (148) 1,118 (250)
Goodwill ................................................. 420 334 345
Other items, net ......................................... (263) (1,527) (95)
------------ ------------ ------------
$ (5,383) $ 21,048 $ (2,087)
============ ============ ============
The Company reached a settlement with the Internal Revenue Service with
respect to the tax audit of fiscal year 1996. During November 2000, the Company
made a tax payment of $493,000. Adequate provision had been made in prior years
and the settlement did not have a material effect on earnings.
8. INVENTORIES
Inventories consist of the following:
October 31,
-----------------------------
2000 1999
------------ ------------
(In thousands)
Raw materials ............................................................... $ 26,473 $ 24,617
Finished goods and work in process .......................................... 67,981 46,958
------------ ------------
94,454 71,575
Other ..................................................................... 6,820 6,888
------------ ------------
Total ................................................................... $ 101,274 $ 78,463
============ ============
The values of inventories in the consolidated balance sheets are based on the
following accounting methods:
LIFO ........................................................................ $ 69,028 $ 58,968
FIFO ........................................................................ 32,246 19,495
------------ ------------
Total ................................................................... $ 101,274 $ 78,463
============ ============
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $10,000,000 and $11,300,000 at October
31, 2000 and 1999, 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.
36
39
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
October 31,
------------------------------
2000 1999
------------ ------------
(In thousands)
Land and land improvements ................................. $ 19,435 $ 18,502
Buildings .................................................. 98,031 101,166
Machinery and equipment .................................... 535,841 591,942
Construction in progress ................................... 28,685 42,201
------------ ------------
681,992 753,811
Less accumulated depreciation and amortization ............. (343,744) (346,970)
------------ ------------
$ 338,248 $ 406,841
============ ============
The Company had commitments for the purchase or construction of capital
assets amounting to approximately $15 million at October 31, 2000.
10. ACCRUED EXPENSES
Accrued expenses consist of the following:
October 31,
-----------------------------
2000 1999
------------ ------------
(In thousands)
Accrued contribution to pension funds ...................... $ 1,492 $ 1,783
Interest ................................................... 2,314 2,364
Payroll, payroll taxes and employee benefits ............... 28,298 28,745
State and local taxes ...................................... 2,910 2,288
Other ...................................................... 15,175 19,125
------------ ------------
$ 50,189 $ 54,305
============ ============
37
40
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
October 31,
-----------------------------
2000 1999
------------ ------------
(In thousands)
"Bank Agreement" Revolver ............................................ $ 110,000 $ 75,000
Convertible subordinated debentures .................................. 63,337 73,720
Piper Impact Europe "Credit Facility" ................................ -- 22,703
Industrial Revenue and Economic Development Bonds, unsecured,
principle due in the years 2005 and 2010, 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 .......... 2,800 3,000
Other ................................................................ 7,746 7,213
------------ ------------
$ 191,913 $ 189,666
Less maturities due within one year included in current
liabilities ........................................................ 256 10,545
------------ ------------
$ 191,657 $ 179,121
============ ============
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, 2000 and 1999, the Company had $110 and
$75 million, respectively, outstanding under the Revolver. The weighted average
interest rates on borrowings under the Revolver were 7.0%, 5.7%, and 6.2%, in
2000, 1999 and 1998, respectively. As of October 31, 2000, the Company was in
compliance with all Bank Agreement covenants. Under the Company's most
restrictive loan covenants, retained earnings of approximately $25 million at
October 31, 2000 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 2000, 1999 and 1998, respectively, the Company accepted
unsolicited block offers to buy back $10.4, $9.7 and $1.5 million, respectively,
principal amount of its Convertible Subordinated Debentures. The outstanding
balance as of October 31, 2000 is $63,337,000.
Prior to its sale in fiscal 2000 (see Note 3), Piper Impact Europe had a
stand-alone secured credit facility ("Credit Facility") which was executed in
October 1997 which provided an initial available credit line of 50 million Dutch
Guilders ("NLG"). The available credit line was reduced each quarter by the
principal payments on the Medium Term Loan described below. At October 31, 1999
1 NLG was equal to .477 U.S. dollars. The Credit Facility consisted of a
Roll-Over Term Loan, a Medium Term Loan and an Overdraft Facility. The Roll-Over
Term Loan provided NLG 15 million for loan periods of 1, 2, 3, 6, or 12 months
with repayment of outstanding borrowings on October 27, 2002. Interest was
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
was payable six months after the beginning of the loan period and on the
repayment date. The Medium Term Loan provided NLG 15 million at 6.375% payable
quarterly in arrears from March 1, 1998, with quarterly
38
41
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. LONG-TERM DEBT AND FINANCING ARRANGEMENTS - (CONTINUED)
repayments of principal in equal amounts of NLG 500 thousand commencing January
1, 1999 through April 1, 2006. The Overdraft Facility provided 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 bore interest at
the Bank's published rate for overdraft facilities plus 1% per annum. Loans
under the Overdraft Facility bore interest at AIBOR plus 45 to 55 basis points.
The terms of Overdraft Facility loans were selected by Piper Impact Europe to be
a period of 1, 2, 3, 6, or 12 months. Interest on overdrafts was paid quarterly
in arrears.
Interest on loans under the Overdraft Facility was payable on the
repayment date; however, in the case of a loan period of twelve months, interest
was payable six months after the beginning of the loan period and on the
repayment date. At October 31, 1999, Piper Impact Europe had NLG 47.6
outstanding under the Credit Facility. As of October 31, 2000, these debt
instruments were no longer part of the Company as Piper Impact Europe was sold
in July of 2000.
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, 2000 ranged from 3.10% to 6.25%. 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 2000 have ranged from 3.2% to 6.1%.
Aggregate maturities of long-term debt at October 31, 2000, are as follows
(in thousands):
2001 .............................................. $ 256
2002 .............................................. 252
2003 .............................................. 110,257
2004 .............................................. 12,354
2005 .............................................. 221
Thereafter ........................................ 68,573
--------
$191,913
========
39
42
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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. For fiscal year 2000, the Company made
benefit payments totaling $422,000, compared to $348,000 and $410,000 in fiscal
1999 and 1998, respectively.
A reconciliation of the beginning benefit obligation to the ending benefit
obligation follows:
Pension Postretirement
Benefits Benefits
October 31,
-----------------------------------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands)
Benefit obligation at beginning of year .......... $ 30,564 $ 27,665 $ 7,731 $ 7,984
Service cost ................................... 2,000 2,092 108 187
Interest cost .................................. 2,215 1,978 516 541
Amendments ..................................... 323 818 (735) --
Actuarial loss (gain) .......................... (1,432) (2,111) (100) (633)
Benefits paid from plan assets ................. (442) (556) (422) (348)
Administrative expenses ........................ (279) (298) -- --
Foreign currency translation effect ............ -- (122) -- --
Piper Impact Europe benefit obligation ......... (1,049) 1,098 -- --
-------- -------- -------- --------
Benefit obligation at end of year ................ $ 31,900 $ 30,564 $ 7,098 $ 7,731
======== ======== ======== ========
A reconciliation of the beginning fair value of plan assets to the ending
fair value of plan assets follows:
Pension
Benefits
October 31,
-------------------------
2000 1999
-------- --------
(In thousands)
Fair value of plan assets at beginning of year ........ $ 22,205 $ 17,692
Actual return on plan assets ........................ 1,343 2,491
Employer contributions .............................. 1,865 2,240
Employee contributions .............................. -- 47
Ins. premiums paid for surviving spouse coverage .... -- (15)
Benefits paid ....................................... (442) (556)
Administrative expenses ............................. (279) (298)
Foreign currency translation effect ................. -- (77)
Piper Impact Europe fair value of plan assets ....... (696) 681
-------- --------
Fair value of plan assets at end of year .............. $ 23,996 $ 22,205
======== ========
40
43
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS - (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,
----------------------------------------------------
2000 1999 2000 1999
------- ------- ------- -------
(In thousands)
Funded status ............................... $(7,904) $(8,359) $(7,098) $(7,731)
Unrecognized transition asset ............... (490) (602) -- --
Unrecognized prior service cost ............. 1,559 1,344 (680) --
Unrecognized net loss ....................... 440 1,363 142 238
Foreign currency translation effect ......... -- (12) -- --
Other ....................................... -- 22 2 3
------- ------- ------- -------
Accrued benefit cost ...................... $(6,395) $(6,244) $(7,634) $(7,490)
Amounts recognized in the Balance Sheet:
Deferred benefit credit ..................... $(7,026) $(6,691) $(7,634) $(7,490)
Accrued contribution to pension ............. (1,492) (1,783) -- --
Intangible asset ............................ 1,631 1,473 -- --
Accumulated other comprehensive income ...... 492 757 -- --
------- ------- ------- -------
Accrued benefit cost ...................... $(6,395) $(6,244) $(7,634) $(7,490)
Below is data related to pension plans in which the accumulated benefit
obligation exceeds plan assets.
Pension Postretirement
Benefits Benefits
October 31,
---------------------------------------------
2000 1999 2000 1999
------ ------ ------ ------
(In thousands)
Accumulated benefit obligation .............. $7,392 $7,319 $7,098 $7,731
Fair value of plan assets ................... 6,194 5,576 -- --
Below are the assumptions used.
Pension Postretirement
Benefits Benefits
October 31,
--------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- -------
(In thousands)
Discount rate ....................... 7.75% 7.50% 6.75% 7.75% 7.50% 6.75%
Expected return on plan assets ...... 10.00% 10.00% 10.00% -- -- --
Rate of compensation increase ....... 4.50% 4.50% 4.00% -- -- --
The assumed health care cost trend rate was 8.0% in 2000, decreasing
uniformly to 5.75% in the year 2008 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, 2000 would be increased by
1.96%. The effect of this change on the sum of the service cost and interest
cost would be an increase of 1.55%. If the health care cost trend rate
assumptions were decreased by 1%, the accumulated postretirement benefit
obligation as of October 31, 2000 would be decreased by 1.76%. The effect of
this change on the sum of the service cost and interest cost would be a decrease
of 1.38%.
41
44
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS - (CONTINUED)
Net pension costs for the single employer defined benefit pension plans
were as follows:
Years Ended October 31,
-------------------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Service Cost .......................................... $ 2,000 $ 2,092 $ 1,832
Interest cost ......................................... 2,215 1,978 1,685
Expected return on plan assets ........................ (2,228) (1,978) (1,670)
Amortization of unrecognized transition asset ......... (111) (111) (111)
Amortization of unrecognized prior service cost ....... 109 63 25
Amortization of unrecognized net loss ................. -- 119 7
Other ................................................. 104 (63) --
------- ------- -------
Net periodic pension cost .......................... $ 2,089 $ 2,100 $ 1,768
======= ======= =======
Net periodic costs for the postretirement benefit plans other than
pensions were as follows:
Years Ended October 31,
------------------------------
2000 1999 1998
----- ----- -----
(In thousands)
Net periodic postretirement benefit cost:
Service cost .......................................... $ 109 $ 187 $ 163
Interest cost ......................................... 516 541 523
Net amortization and deferral ......................... (60) 17 (10)
Other ................................................. -- 2 --
----- ----- -----
Net periodic postretirement benefit cost .............. $ 565 $ 747 $ 676
===== ===== =====
One of the Company's subsidiaries, Piper Impact Europe, which was sold in
July of 2000, participated in two multi-employer plans. The plans provided
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,
2000, and 1999, totaled approximately NLG 1,302,000 and NLG 2,021,000 or
approximately $575,000 and $1,000,000, respectively.
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 $3,978,000, $3,366,000, and $2,978,000, during fiscal 2000, 1999,
and 1998, 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 $5,923,000, $4,829,000, $4,147,000, at October 31, 2000, 1999 and
1998, respectively. These benefits are funded with life insurance policies
purchased by the Company.
42
45
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
During the fiscal year ended October 31, 2000, internal management
structure changes were made to increase the needed emphasis and focus on two
separate lines of business. These changes affected the way in which operating
decisions are made and performance is assessed. In accordance with SFAS No. 131,
the industry segment disclosure has been revised to reflect these changes and
the previously reported "engineered products" segment has been split. Piper
Impact, which includes the two New Albany, Mississippi based facilities, as well
as Piper Impact Europe, has been segregated from the "Engineered Products"
segment into a separate reporting segment named "Piper Impact". The "Engineered
Products" segment now reflects the results of AMSCO, Homeshield Fabricated
Products and Imperial Fabricated Products. Previous year's information has been
restated to reflect this change.
As such, the Company has four reportable segments: engineered steel bars,
aluminum mill sheet products, engineered products and Piper Impact. The
engineered steel bar segment consists of engineered steel bars manufacturing,
steel bar and tube heat treating services as well as 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 aluminum window and patio door screens, window frames,
exterior door components and other roll-formed products and stamped shapes. The
Piper Impact segment manufactures impact-extruded aluminum and steel parts.
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 though 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.
43
46
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. INDUSTRY SEGMENT INFORMATION - (CONTINUED)
For the year-ended October 31, 2000, no one customer represented 10% or
more of the consolidated net sales of the Company.
YEAR ENDED Engineered Aluminum Mill Engineered Piper Corporate
OCTOBER 31, 2000 Steel Bars Sheet Products(4) Products(5) Impact(6) & Other(1) Consolidated
---------------- ---------- ----------------- ----------- --------- ---------- ------------
(In thousands)
Net Sales:
To unaffiliated companies ....... $ 339,348 $ 384,275 $ 104,948 $ 105,632 $ -- $ 934,203
Intersegment(2) ................. 4,897 20,080 -- -- (24,977) --
--------- --------- --------- --------- --------- ---------
Total ......................... $ 344,245 $ 404,355 $ 104,948 $ 105,632 $ (24,977) $ 934,203
========= ========= ========= ========= ========= =========
Operating Income (Loss) ........... $ 57,702 $ 21,529 $ 14,301 $ (82,470) $ (15,024) $ (3,962)
Depreciation and amortization:
Operating ....................... $ 18,775 $ 12,943 $ 3,443 $ 12,362 $ 398 $ 47,921
Other ........................... -- 22 -- -- 502 524
--------- --------- --------- --------- --------- ---------
Total ......................... $ 18,775 $ 12,965 $ 3,443 $ 12,362 $ 900 $ 48,445
========= ========= ========= ========= ========= =========
Capital expenditures(3) ........... $ 27,374 $ 4,709 $ 3,586 $ 5,290 $ 1,396 $ 42,355
Identifiable assets ............... $ 267,476 $ 227,365 $ 65,527 $ 54,518 $ 30,973 $ 645,859
(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.
(4) Fiscal 2000 results include Nichols Aluminum-Golden operations since the
acquisition date of January 25, 2000. See Note 2 to the financial
statements.
(5) Fiscal 2000 results include Imperial Fabricated Products operations since
the acquisition date of April 3, 2000. See Note 2 to the financial
statements.
(6) Fiscal 2000 results include the $14.3 million pretax loss on the sale of
Piper Impact Europe and the $56.3 million pretax asset impairment charge
on Piper Impact. See Notes 3 and 4 to the financial statements.
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 Piper Impact
segment.
YEAR ENDED Engineered Aluminum Mill Engineered Piper Corporate
OCTOBER 31, 1999 Steel Bars Sheet Products Products Impact & Other(1) Consolidated
---------------- ---------- -------------- ---------- --------- ---------- ------------
(In thousands)
Net Sales:
To unaffiliated companies ....... $ 292,085 $ 290,648 $ 92,667 $ 134,694 $ -- $ 810,094
Intersegment(2) ................. 5,284 21,115 1 -- (26,400) --
--------- --------- --------- --------- --------- ---------
Total ......................... $ 297,369 $ 311,763 $ 92,668 $ 134,694 $ (26,400) $ 810,094
========= ========= ========= ========= ========= =========
Operating Income (Loss) ........... $ 60,446 $ 15,306 $ 13,006 $ (853) $ (16,148) $ 71,757
Depreciation and amortization:
Operating ....................... $ 16,293 $ 12,313 $ 3,349 $ 12,836 $ 531 $ 45,322
Other ........................... -- 21 -- -- 540 561
--------- --------- --------- --------- --------- ---------
Total ......................... $ 16,293 $ 12,334 $ 3,349 $ 12,836 $ 1,071 $ 45,883
========= ========= ========= ========= ========= =========
Capital expenditures(3) ........... $ 37,750 $ 9,873 $ 1,680 $ 10,948 $ 683 $ 60,934
Identifiable assets ............... $ 241,783 $ 200,733 $ 46,977 $ 162,176 $ 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.
44
47
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. INDUSTRY SEGMENT INFORMATION - (CONTINUED)
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 Piper Impact
segment.
YEAR ENDED Engineered Aluminum Mill Engineered Piper Corporate
OCTOBER 31, 1998 Steel Bars Sheet Products(1) Products Impact(4) & Other(2) Consolidated(4)
---------------- ---------- ----------------- ---------- --------- ---------- ---------------
(In thousands)
Net Sales:
To unaffiliated companies ....... $ 324,312 $ 243,168 $ 92,043 $ 137,967 $ -- $ 797,490
Intersegment(3) ................. 2,984 23,187 2 -- (26,173) --
--------- --------- --------- --------- --------- ---------
Total ......................... $ 327,296 $ 266,355 $ 92,045 $ 137,967 $ (26,173) $ 797,490
========= ========= ========= ========= ========= =========
Operating Income (loss)(6) ........ $ 58,908 $ 7,788 $ 10,825 $ (63,431) $ (11,826) $ 2,264
Depreciation and amortization:
Operating ....................... $ 13,097 $ 10,670 $ 3,761 $ 14,167 $ 139 $ 41,834
Other ........................... -- -- -- -- 566 566
--------- --------- --------- --------- --------- ---------
Total ......................... $ 13,097 $ 10,670 $ 3,761 $ 14,167 $ 705 $ 42,400
========= ========= ========= ========= ========= =========
Capital expenditures(5) ........... $ 31,116 $ 13,109 $ 1,973 $ 14,469 $ 269 $ 60,936
Identifiable assets(6) ............ $ 219,727 $ 198,596 $ 48,025 $ 172,136 $ 35,804 $ 674,288
(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 an asset impairment/restructuring charge of
$58,500. See Note 4 to the financial statements.
(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 Piper Corporate
Steel Bars Sheet Products Products Impact and Other Consolidated
Operating Income - increase/(decrease) (1,100) (5,011) (165) 0 6,276 0
Identifiable Assets - increase/(decrease) 3,492 0 308 0 (3,800) 0
GEOGRAPHIC INFORMATION
YEAR ENDED OCTOBER 31,
--------------------------------------
NET SALES(1) 2000 1999 1998
-------- -------- --------
United States ................ $867,550 $745,265 $741,067
Mexico ....................... 23,571 17,183 15,680
Canada ....................... 18,124 17,825 10,374
European countries ........... 19,781 24,481 28,501
Other foreign countries ...... 5,177 5,340 1,868
-------- -------- --------
Total ...................... $934,203 $810,094 $797,490
======== ======== ========
(1) Net Sales are attributed to countries based on location of customer.
45
48
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. INDUSTRY SEGMENT INFORMATION - (CONTINUED)
YEAR ENDED OCTOBER 31,
--------------------------------------
NET SALES(2) 2000 1999 1998
-------- -------- --------
United States ................ $916,623 $777,441 $763,775
The Netherlands .............. 17,580 32,653 33,715
-------- -------- --------
$934,203 $810,094 $797,490
======== ======== ========
(2) Net sales are attributed to countries based on location of operations.
YEAR ENDED OCTOBER 31,
-------------------------------------------
OPERATING INCOME (LOSS)(4) 2000 1999 1998
-------- -------- --------
United States .................. $ 12,754 (3) $ 71,774 $ (144)(3)
The Netherlands ................ (16,716)(5) (17) 2,408
-------- -------- --------
$ (3,962) $ 71,757 $ 2,264
======== ======== ========
(3) Including the asset impairment charge of $56.3 million in FY 2000 and
$58.5 million in FY 1998. See Note 4.
(4) Operating income (loss) is attributed to countries based on location of
operations.
(5) Including the loss on sale of Piper Impact Europe. See Note 3.
YEAR ENDED OCTOBER 31,
-----------------------
IDENTIFIABLE ASSETS(6) 2000 1999
-------- --------
United States ................ $645,859 $648,145
The Netherlands .............. -- 42,301
-------- --------
Total ...................... $645,859 $690,446
======== ========
(6) Identifiable assets are attributed to countries based on location of
operations.
46
49
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
15. STOCK REPURCHASE PROGRAM
In December 1999, Quanex announced that its Board of Directors approved a
program to repurchase up to 2 million shares of the Company's common stock in
the open market or in privately negotiated transactions. During the fiscal year
ended October 31, 2000, the Company repurchased 834,300 shares at a cost of
$17.2 million. The Company retired 156,700 of these shares purchased at a cost
of approximately $3.8 million.
For shares purchased by the Company and retired: 1) Common stock is
charged for the par value of the shares, 2) additional paid in capital is
charged for the pro-rata portion associated with those shares and 3) retained
earnings is charged for the remainder of the cost of the retired shares. For the
shares purchased and retired in the nine months ended July 31, 2000, the equity
was reduced as shown below:
Repurchase Common Additional Retained
Cost Stock Paid in Capital Earnings
---------- ------ --------------- --------
(In thousands)
$3,785 $78 $1,222 $2,485
The Company accounted for the remaining shares purchased as treasury
stock. The cost of such shares of $13.4 million at October 31, 2000 is reflected
as a reduction of stockholders' equity in the balance sheet.
47
50
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
16. 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 awards vest over a
specified time period. 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 22,750 and 6,000 restricted shares granted in 2000 and 1999,
respectively. There were no restricted shares granted in 1998. The amount
charged to compensation expense in 2000 was $57,000, relating to restricted
stocks granted in 1999. No compensation expense was charged in 1999 or 1998
related to the restricted stock.
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 650,194, 276,776, and 493,176 shares available for granting of
options at October 31, 2000, 1999, and 1998, respectively. Stock option
transactions for the three years ended October 31, 2000, were as follows:
Shares Average
Shares Under Price
Exercisable Option Per Share
----------- --------- ---------
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
=========
Granted ......................... 244,250 18
Exercised ....................... (3,000) 9
Cancelled ....................... (40,418) 26
---------
Balance at October 31, 2000 ....... 1,140,150 1,622,103 $ 22
========= =========
48
51
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
16. RESTRICTED STOCK AND STOCK OPTION PLANS - (CONTINUED)
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, 2000, 1999, or 1998. Stock option
transactions for the three years ended October 31, 2000, were as follows:
Shares Average
Shares Under Price
Exercisable Option Per Share
----------- ------- ---------
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
=======
Granted ......................... -- --
Exercised ....................... -- --
Cancelled ....................... -- --
-------
Balance at October 31, 2000 ....... 20,000 20,000 $ 20
======= =======
49
52
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
16. RESTRICTED STOCK AND STOCK OPTION PLANS - (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, 2000 and 1999,
respectively and 12,000 shares available for granting of options at October 31,
1998. Stock option transactions for the three years ended October 31, 2000, were
as follows:
Shares Average
Shares Under Price
Exercisable Option Per Share
----------- -------- ---------
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
========
Granted ......................... -- --
Exercised ....................... (1,000) 17
Cancelled ....................... -- --
--------
Balance at October 31, 2000 ....... 135,000 135,000 $ 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
50
53
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
16. RESTRICTED STOCK AND STOCK OPTION PLANS - (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 364,000, 382,000 and 400,000 shares available for granting of options
at October 31, 2000, 1999 and 1998, respectively. There were no transactions
under this plan through October 31, 1998, however below is the activity for the
periods ending October 31, 1999 and 2000:
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
=======
Granted ....................... 18,000 20
Exercised ..................... -- --
Cancelled ..................... -- --
-------
Balance at October 31, 2000 ....... 25,333 36,000 $ 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,
----------------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands)
Net income (loss) attributable to common stockholders ...... $ (9,665) $ 39,716 $ 9,169
SFAS No. 123 adjustment .................................... (1,619) (1,764) (1,495)
---------- ---------- ----------
Pro forma net attributable to common stockholders .......... $ (11,284) $ 37,952 $ 7,674
========== ========== ==========
Earnings (loss) per Common share:
Basic as reported ...................................... $ (0.70) $ 2.79 $ 0.65
Basic pro forma ........................................ $ (0.82) $ 2.67 $ 0.54
Diluted as reported .................................... $ (0.70) $ 2.59 $ 0.65
Diluted pro forma ...................................... $ (0.82) $ 2.48 $ 0.54
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.
2000 1999 1998
------- ------- -------
Risk-free interest rate ..................... 5.75% 5.93% 4.49%
Dividend yield .............................. 3.33% 2.80% 3.00%
Volatility factor ........................... 42.89% 40.21% 31.57%
Weighted average expected life .............. 5 years 5 years 5 years
51
54
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company routinely enters into metal exchange forward contracts to hedge
price risk of forecasted aluminum raw material purchases. The Company's risk
management policy as it relates to metal exchange forward contracts is to enter
into such contracts to hedge its exposure to price fluctuations of aluminum raw
material purchases that relate to the Company's backlog of aluminum sales orders
with committed prices as well as a certain level of forecasted aluminum sales
for which a sales price increase would lag a raw material cost increase. As of
October 31, 2000, open forward contracts have maturity dates extending through
October 2003. At October 31, 2000 and 1999, these contracts covered notional
volumes of 25,738,940 and 7,716,170 pounds and had fair values of ($372)
thousand and $117 thousand, respectively. Through October 31, 2000, the fair
value of these contracts is not reflected on the balance sheet, and hedging
gains and losses are included in "Cost of Sales" in the income statement
concurrently with the related sales of inventory.
In 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. The Company's risk management policy related to
these swap agreements is to hedge the exposure to interest rate movements on a
portion of its long-term debt. Under the 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 (6.76% at October 31, 2000).
Differentials to be paid or received under the agreements are recognized as
interest expense. The agreements mature in 2003. The fair value of the swaps as
of October 31, 2000 and 1999 is ($918) thousand and ($2.0) million,
respectively.
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 limited the
Company's exposure to large fluctuations in the US Dollar/Dutch Guilder exchange
rate. Under the terms of the agreement, Quanex had the option to let the
agreement expire at no cost if the exchange rate remained within an established
range on the expiration date of October 25, 2000. At October 31, 1999, the
Company booked a $378 thousand gain to the stockholders' equity cumulative
foreign currency translation adjustment. During the third quarter ended July 31,
2000, the Company sold the Piper Impact Europe subsidiary. As such, this range
forward agreement was closed, realizing a gain of approximately $1.7 million.
This gain was offset against the loss on the sale of Piper Impact Europe as the
investment in Piper Impact Europe was the underlying hedged item.
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 $184.3 million and $186.0 million, as of October 31, 2000 and 1999,
respectively, as compared to carrying values at October 31, 2000 and 1999 of
$191.9 million and $189.7 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 forward contracts was determined by obtaining the
difference between the contract price per pound and the forward LME price per
pound as of October 31, 2000 and multiplying by the outstanding notional volumes
under the contract.
Effective November 1, 2000, the Company adopted SFAS No. 133, which
requires the Company to measure all derivatives at fair value and to recognize
them in the balance sheet as an asset or liability, depending on the Company's
rights or obligations under the applicable derivative contract. If certain
conditions are met, a derivative may be specifically designated as (a) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation.
The Company has designated the metal exchange forward contracts as cash
flow hedges of forecasted aluminum raw material purchases. On November 1, 2000,
the Company recorded a derivative liability of $372 thousand representing the
fair value of these contracts as of that date. A corresponding amount, net of
taxes of $145 thousand, was recorded to other comprehensive income.
52
55
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT - (CONTINUED)
Gains and losses related to the forward contracts that are reported in other
comprehensive income will be reclassified into earnings in the periods in which
the related inventory is sold. As of November 1, 2000, approximately $275
thousand is expected to be reclassified from other comprehensive income into
earnings over the next twelve months. Gains and losses on these contracts,
including amounts recorded related to hedge ineffectiveness, will be reflected
in "Cost of Sales" in the income statement.
The Company has designated the interest rate swap agreements as cash flow
hedges of future interest payments on its variable rate long-term debt. On
November 1, 2000, the Company recorded a derivative liability of $918 thousand,
representing the fair value of the swaps as of that date. A corresponding
amount, net of income taxes of $358 thousand, was recorded to other
comprehensive income. Gains and losses related to the swap agreements will be
reclassified into earnings in the periods in which the related hedged interest
payments are made. As of November 1, 2000, approximately $334 thousand is
expected to be reclassified into earnings over the next twelve months. Gains and
losses on these agreements, including amounts recorded related to hedge
ineffectiveness, will be reflected in "Interest expense" in the income
statement.
18. 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, 2000, were approximately $18 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.
19. SUBSEQUENT EVENTS
On November 30, 2000, Quanex completed the purchase of all of the Capital stock
of Temroc Metals, Inc., ("Temroc") a Minnesota corporation for approximately $21
million in cash. Temroc, as a surviving corporation, became a wholly owned
subsidiary of the Company. Temroc is a leading aluminum extrusion and
fabrication company based in Hamel, Minnesota.
Temroc has production facilities in Hamel, Minnesota, where it
manufactures customized aluminum extrusions and fabricated metal products for
recreational vehicles, architectural products, electronics and other markets.
Temroc has become part of the Company's Engineered Products Group and will
continue to operate as a manufacturer of aluminum extrusions and fabricated
metal products.
The purchase price will be allocated to the assets and liabilities of
Temroc based on their estimated fair values. The Company anticipates that the
purchase price and associated acquisition expenses will exceed the fair value of
Temroc's net assets, with the excess to be recorded as goodwill.
53
56
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
19. SUBSEQUENT EVENTS - (CONTINUED)
To finance the acquisition, the Company borrowed against its existing $250
million unsecured revolving credit and term loan facility with a group of six
banks.
54
57
Quanex Corporation
SUPPLEMENTARY FINANCIAL DATA
================================================================================
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following sets forth the selected quarterly information for the years ended
October 31, 2000 and 1999.
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands except per share amounts)
2000:
Net sales ........................................ $ 199,294 $ 243,271 $ 254,144 $ 237,494
Gross profit ..................................... 22,236 30,565 19,598 (19,508)
Income (loss) from continuing operations(1) ...... 4,175 9,029 715 (23,942)
Extraordinary gain ............................... -- 358 -- --
Net income (loss) ................................ 4,175 9,387 715 (23,942)
Earnings per share:
Basic:
Income (loss) from continuing operations ....... 0.29 0.66 0.05 (1.78)
Extraordinary gain ............................. -- 0.02 -- --
--------- --------- --------- ---------
Net earnings (loss) ............................ 0.29 0.68 0.05 (1.78)
Diluted .......................................... $ 0.29 $ 0.63 $ 0.05 $ (1.78)
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 ................................... 0.27 0.72 0.86 0.94
Diluted .......................................... $ 0.27 $ 0.66 $ 0.79 $ 0.85
(1) Includes an after-tax asset impairment charge of $36,595.
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, 2000 ............. $12,154 $ 738 $(1,284) $ (368) $11,240
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
55
58
QUARTERLY FINANCIAL RESULTS
(from continuing operations)
NET SALES (millions) 2000 1999 1998
-------- -------- --------
January ......................................................................... 199.29 183.10 180.98
April ........................................................................... 243.27 202.87 203.43
July ............................................................................ 254.14 206.62 204.85
October ......................................................................... 237.50 217.50 208.23
-------- -------- --------
Total ................................................................. 934.20 810.09 797.49
GROSS PROFIT (LOSS) (millions)
January ......................................................................... 22.24 23.54 17.22
April ........................................................................... 30.57 32.05 27.39
July ............................................................................ 19.60 35.05 30.88
October ......................................................................... (19.51) 37.66 38.05
-------- -------- --------
Total ................................................................. 52.90 128.30 113.54
INCOME (LOSS) FROM CONTINUING OPERATIONS (millions)
January ......................................................................... 4.18 3.87 2.29
April ........................................................................... 9.03 9.78 7.76
July(1) ......................................................................... 0.71 12.33 10.28
October(2) ...................................................................... (23.94) 13.32 (24.21)
-------- -------- --------
Total ................................................................. (10.02) 39.30 (3.88)
INCOME (LOSS) FROM CONTINUING OPERATIONS PER BASIC COMMON SHARE
January ......................................................................... .29 .27 .16
April ........................................................................... .66 .69 .55
July(1) ......................................................................... .05 .86 .73
October(2) ...................................................................... (1.78) .94 (1.71)
-------- -------- --------
Year .................................................................. (0.73) 2.76 (.27)
QUARTERLY COMMON STOCK DIVIDENDS
January ......................................................................... .16 .16 .16
April ........................................................................... .16 .16 .16
July ............................................................................ .16 .16 .16
October ......................................................................... .16 .16 .16
-------- -------- --------
Total ................................................................. .64 .64 .64
COMMON STOCK SALES PRICE (High & Low)
January ......................................................................... 26 9/16 23 7/8 30 7/16
19 1/16 16 13/16 27 1/16
April ........................................................................... 23 11/16 26 1/4 33 13/16
16 1/8 15 3/8 28 1/2
July ............................................................................ 18 5/8 29 32 3/16
14 3/8 25 1/8 27 1/4
October ......................................................................... 20 11/16 27 3/8 27 7/8
17 1/16 20 1/8 15 5/8
(1) Fiscal 2000 third quarter income (loss) from continuing operations
includes an after-tax loss of $9.3 million on the sale of Piper Impact
Europe.
(2) Fiscal 2000 fourth quarter income (loss) from continuing operations
includes an after-tax asset impairment charge of $36.6 or $2.67 per share.
(3) Fiscal 1998 fourth quarter income (loss) from continuing operations
includes an after-tax asset impairment/restructuring charge of $38 million
or $2.68 per share.
56
59
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, 2000.
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, 2000.
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, 2000.
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, 2000.
57
60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
----
(a) 1. Financial Statements
Independent Auditors' Report........................................ 23
Consolidated Balance Sheet.......................................... 25
Consolidated Statements of Income................................... 26
Consolidated Statements of Stockholders' Equity..................... 27
Consolidated Statements of Cash Flow................................ 28
Notes to Consolidated Financial Statements.......................... 29
2. Financial Statement Schedule
Schedule II - Valuation and qualifying accounts..................... 55
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.............................................................. 59
58
61
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 (Reg. No. 001-05725) 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, filed as Exhibit 3.2 of
the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for
the fiscal year ended October 31, 1999 and incorporated herein by
reference.
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, filed as Exhibit 3.3 of the Registrant's Annual
Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended
October 31, 1999 and incorporated herein by reference.
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, filed as Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
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 (Reg. No. 001-05725) 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 (Reg. No. 001-05725)
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 Current
Report on Form 8-K (Reg. No. 001-05725) dated April 15, 1999, and
incorporated herein by reference.
4.3 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 (Reg. No. 001-05725) for the quarter ended April
30, 1992, and incorporated herein by reference.
4.4 $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, (Reg. No.
001-05725) 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 year ended October 31, 1988,
together with the amendment filed as Exhibit 10.17 of the Registrant's
Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter
ended January 31, 1995, and incorporated herein by reference.
+10.2 Amendment to the Quanex Corporation 1988 Stock Option Plan, dated as
of December 1997, filed as Exhibit 10.2 of the Registrant's Annual
Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended
October 31, 1999 and incorporated herein by reference.
+10.3 Amendment to the Quanex Corporation 1988 Stock Option Plan, dated as
of December 9, 1999, filed as Exhibit 10.3 of the Registrant's Annual
Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended
October 31, 1999 and incorporated herein by reference.
59
62
+10.4 Quanex Corporation Deferred Compensation Plan, as amended and
restated, dated September 29, 1999, filed as Exhibit 10.4 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.5 First Amendment to Quanex Corporation Deferred Compensation Plan,
dated December 7, 1999, filed as Exhibit 10.5 of the Registrant's
Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year
ended October 31, 1999 and incorporated herein by reference.
+10.6 Quanex Corporation Executive Incentive Compensation Plan, as amended
and restated, dated October 12, 1995, filed as Exhibit 10.8 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.7 Quanex Corporation Supplemental Benefit Plan, as amended and restated
effective June 1, 1999, filed as Exhibit 10.9 of the Registrant's
Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year
ended October 31, 1999 and incorporated herein by reference
+10.8 Form of Change in Control Agreement, between the Registrant and each
executive officer of the Registrant, filed as Exhibit 10.10 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.9 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 (Reg. No.
001-05725) 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 (Reg. No. 001-05725) for the quarter ended January 31,
1995, and incorporated herein by reference.
+10.10 Amendment to the Quanex Corporation 1987 Non-Employee Director Stock
Option Plan, dated December 1997, filed as Exhibit 10.13 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.11 Amendment to the Quanex Corporation 1987 Non-Employee Director Stock
Option Plan, dated December 9, 1999, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.12 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 (Reg.
No. 001-05725) for the quarter ended January 31, 1995, and
incorporated herein by reference.
+10.13 Amendment to the Quanex Corporation 1989 Non-Employee Director Stock
Option Plan, dated December 1997, filed as Exhibit 10.16 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.14 Amendment to the Quanex Corporation 1989 Non-Employee Director Stock
Option Plan, dated December 9, 1999, filed as Exhibit 10.17 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.15 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 (Reg. No. 001-05725) for the year ended October 31, 1994,
and incorporated herein by reference.
+10.16 Amendment to the Quanex Corporation Employee Stock Option and
Restricted Stock Plan, dated December 1997, filed as Exhibit 10.19 of
the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for
the fiscal year ended October 31, 1999 and incorporated herein by
reference.
60
63
+10.17 Amendment to the Quanex Corporation Employee Stock Option and
Restricted Stock Plan, dated December 9, 1999, filed as Exhibit 10.20
of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725)
for the fiscal year ended October 31, 1999 and incorporated herein by
reference.
*+10.18 Amendment to the Quanex Corporation Employee Stock Option and
Restricted Stock Plan, effective July 1, 2000.
+10.19 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 (Reg. No. 001-05725) for the
year ended October 31, 1992, and incorporated herein by reference.
+10.20 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 (Reg. No. 001-05725) for the
year ended October 31, 1992, and incorporated herein by reference.
+10.21 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 (Reg. No. 001-05725) for the
year ended October 31, 1992, and incorporated herein by reference.
+10.22 Quanex Corporation Non-Employee Director Retirement Plan, filed as
Exhibit 10.18 of the Registrant's Annual Report on Form 10-K (Reg. No.
001-05725) for the year ended October 31,1994, and incorporated herein
by reference.
+10.23 Amendment to Quanex Corporation Non-Employee Director Retirement Plan
dated May 25, 1995, filed as Exhibit 10.3 of the Registrant's
Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the fiscal
quarter ended January 31, 2000 and incorporated herein by reference.
+10.24 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 (Reg. No. 001-05725) for the year ended October 31, 1996, and
incorporated herein by reference.
+10.25 Amendment to Quanex Corporation 1996 Employee Stock Option and
Restricted Stock Plan, dated December 1997, filed as Exhibit 10.26 of
the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for
the fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.26 Amendment to Quanex Corporation 1996 Employee Stock Option and
Restricted Stock Plan, dated December 9, 1999, filed as Exhibit 10.27
of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725)
for the fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.27 Amendment to Quanex Corporation 1996 Employee Stock Option and
Restricted Stock Plan, effective February 23, 2000, filed as Exhibit
10.2 of the Registrant's Quarterly Report on Form 10-Q (Reg. No.
001-05725) for the fiscal quarter ended January 31, 2000 and
incorporated herein by reference.
*+10.28 Amendment to Quanex Corporation 1996 Employee Stock Option and
Restricted Stock Plan, effective July 1, 2000.
+10.29 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.
+10.30 Amendment to Quanex Corporation Deferred Compensation Trust, dated
December 9, 1999, filed as Exhibit 10.29 of the Registrant's Annual
Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended
October 31, 1999 and incorporated herein by reference.
+10.31 Quanex Corporation 1997 Non-Employee Director Stock Option Plan filed
as Exhibit 10.21 of the Registrant's Annual Report on Form 10-K (Reg.
No. 001-05725) for the year ended October 31, 1997 and incorporated
herein by reference.
61
64
+10.32 Amendment to Quanex Corporation 1997 Non-Employee Director Stock
Option Plan, dated December 9, 1999, filed as Exhibit 10.31 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
*10.33 Amendment to Quanex Corporation 1997 Key Employee Stock Plan,
effective July 1, 2000.
10.34 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 (Reg. No. 001-05725), dated August 9,
1996, and incorporated herein by reference.
10.35 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 (Reg. No.
001-05725), dated May 5, 1997, and incorporated herein by reference.
10.36 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 (Reg. No.
001-05725), dated December 3, 1997, and incorporated herein by
reference.
10.37 Acquisition Agreement and Plan of Merger, dated October 23, 2000,
between Quanex Corporation ("Company"), Quanex Five, Inc., a Delaware
corporation and wholly owned subsidiary of the Company, and Temroc
Metals, Inc., a Minnesota corporation, filed as Exhibit 2.1 to the
Company's Report on Form 8-K (Reg. No. 001-05725), dated November 30,
2000, and incorporated herein by reference.
10.38 First Amendment to Agreement and Plan of Merger dated November 15,
2000 between Quanex Corporation ("Company"), Quanex Five, Inc., a
Delaware corporation and wholly owned subsidiary of the Company, and
Temroc Metals, Inc., a Minnesota corporation, filed as Exhibit 3.1 to
the Company's Report on Form 8-K (Reg. No. 001-05725), dated November
30, 2000 and incorporated herein by reference.
10.39 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 (Reg. No.
001-05725) for the year ended October 31, 1998 and incorporated herein
by reference.
10.40 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 (Reg. No.
001-05725) for the year ended October 31, 1998 and incorporated herein
by reference.
10.41 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 (Reg. No.
001-05725) for the year ended October 31, 1998 and incorporated herein
by reference.
10.42 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
(Reg. No. 001-05725) for the year ended October 31, 1998 and
incorporated herein by reference.
10.43 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 (Reg. No. 001-05725)
for the year ended October 31, 1998 and incorporated herein by
reference.
10.44 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 (Reg. No.
001-05725) for the year ended October 31, 1998 and incorporated herein
by reference.
*21 Subsidiaries of the Registrant.
62
65
*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, 2000.
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 5, 2001
------------------------------
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 5, 2001
------------------------------
VERNON E. OECHSLE
Chairman of the Board and
Chief Executive Officer
By: /s/ CARL E. PFEIFFER January 5, 2001
------------------------------
CARL E. PFEIFFER
Director
By: /s/ DONALD G. BARGER, JR. January 5, 2001
------------------------------
DONALD G. BARGER, JR.
Director
By: /s/ VINCENT R. SCORSONE January 5, 2001
------------------------------
VINCENT R. SCORSONE
Director
By: /s/ MICHAEL J. SEBASTIAN January 5, 2001
------------------------------
MICHAEL J. SEBASTIAN
Director
By: /s/ RUSSELL M. FLAUM January 5, 2001
------------------------------
RUSSELL M. FLAUM
Director
67
By: /s/ SUSAN F. DAVIS January 5, 2001
------------------------------
SUSAN F. DAVIS
Director
By: /s/ TERRY M. MURPHY January 5, 2001
------------------------------
TERRY M. MURPHY
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ VIREN M. PARIKH January 5, 2001
------------------------------
VIREN M. PARIKH
Controller
(Principal Accounting Officer)
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 (Reg. No. 001-05725) 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, filed as Exhibit 3.2 of
the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for
the fiscal year ended October 31, 1999 and incorporated herein by
reference.
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, filed as Exhibit 3.3 of the Registrant's Annual
Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended
October 31, 1999 and incorporated herein by reference.
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, filed as Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
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 (Reg. No. 001-05725) 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 (Reg. No. 001-05725)
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 Current
Report on Form 8-K (Reg. No. 001-05725) dated April 15, 1999, and
incorporated herein by reference.
4.3 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 (Reg. No. 001-05725) for the quarter ended April
30, 1992, and incorporated herein by reference.
4.4 $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, (Reg. No.
001-05725) 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 year ended October 31, 1988,
together with the amendment filed as Exhibit 10.17 of the Registrant's
Quarterly Report on Form 10-Q (Reg. No. 001-05725) 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, filed as Exhibit 10.2 of the Registrant's Annual Report
on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October
31, 1999 and incorporated herein by reference.
+10.3 Amendment to the Quanex Corporation 1988 Stock Option Plan, dated of
December 9, 1999, filed as Exhibit 10.3 of the Registrant's Annual
Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended
October 31, 1999 and incorporated herein by reference.
69
+10.4 Quanex Corporation Deferred Compensation Plan, as amended and
restated, dated September 29, 1999, filed as Exhibit 10.4 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.5 First Amendment to Quanex Corporation Deferred Compensation Plan,
dated December 7, 1999, filed as Exhibit 10.5 of the Registrant's
Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year
ended October 31, 1999 and incorporated herein by reference.
+10.6 Quanex Corporation Executive Incentive Compensation Plan, as amended
and restated, dated October 12, 1995, filed as Exhibit 10.8 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.7 Quanex Corporation Supplemental Benefit Plan, as amended and restated
effective June 1, 1999, filed as Exhibit 10.9 of the Registrant's
Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year
ended October 31, 1999 and incorporated herein by reference
+10.8 Form of Change in Control Agreement, between the Registrant and each
executive officer of the Registrant, filed as Exhibit 10.10 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.9 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 (Reg. No.
001-05725) 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 (Reg. No. 001-05725) for the quarter ended January 31,
1995, and incorporated herein by reference.
+10.10 Amendment to the Quanex Corporation 1987 Non-Employee Director Stock
Option Plan, dated December 1997, filed as Exhibit 10.13 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.11 Amendment to the Quanex Corporation 1987 Non-Employee Director Stock
Option Plan, dated December 9, 1999, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.12 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 (Reg.
No. 001-05725) for the quarter ended January 31, 1995, and
incorporated herein by reference.
+10.13 Amendment to the Quanex Corporation 1989 Non-Employee Director Stock
Option Plan, dated December 1997, filed as Exhibit 10.16 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.14 Amendment to the Quanex Corporation 1989 Non-Employee Director Stock
Option Plan, dated December 9, 1999, filed as Exhibit 10.17 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.15 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 (Reg. No. 001-05725) for the year ended October 31, 1994,
and incorporated herein by reference.
+10.16 Amendment to the Quanex Corporation Employee Stock Option and
Restricted Stock Plan, dated December 1997, filed as Exhibit 10.19 of
the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for
the fiscal year ended October 31, 1999 and incorporated herein by
reference.
70
+10.17 Amendment to the Quanex Corporation Employee Stock Option and
Restricted Stock Plan, dated December 9, 1999, filed as Exhibit 10.20
of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725)
for the fiscal year ended October 31, 1999 and incorporated herein by
reference.
*+10.18 Amendment to the Quanex Corporation Employee Stock Option and
Restricted Stock Plan, effective July 1, 2000.
+10.19 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 (Reg. No. 001-05725) for the
year ended October 31, 1992, and incorporated herein by reference.
+10.20 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 (Reg. No. 001-05725) for the
year ended October 31, 1992, and incorporated herein by reference.
+10.21 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 (Reg. No. 001-05725) for the
year ended October 31, 1992, and incorporated herein by reference.
+10.22 Quanex Corporation Non-Employee Director Retirement Plan, filed as
Exhibit 10.18 of the Registrant's Annual Report on Form 10-K (Reg. No.
001-05725) for the year ended October 31,1994, and incorporated herein
by reference.
+10.23 Amendment to Quanex Corporation Non-Employee Director Retirement Plan
dated May 25, 1995, filed as Exhibit 10.3 of the Registrant's
Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the fiscal
quarter ended January 31, 2000 and incorporated herein by reference.
+10.24 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 (Reg. No. 001-05725) for the year ended October 31, 1996, and
incorporated herein by reference.
+10.25 Amendment to Quanex Corporation 1996 Employee Stock Option and
Restricted Stock Plan, dated December 1997, filed as Exhibit 10.26 of
the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for
the fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.26 Amendment to Quanex Corporation 1996 Employee Stock Option and
Restricted Stock Plan, dated December 9, 1999, filed as Exhibit 10.27
of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725)
for the fiscal year ended October 31, 1999 and incorporated herein by
reference.
+10.27 Amendment to Quanex Corporation 1996 Employee Stock Option and
Restricted Stock Plan, effective February 23, 2000, filed as Exhibit
10.2 of the Registrant's Quarterly Report on Form 10-Q (Reg. No.
001-05725) for the fiscal quarter ended January 31, 2000 and
incorporated herein by reference.
*+10.28 Amendment to Quanex Corporation 1996 Employee Stock Option and
Restricted Stock Plan, effective July 1, 2000.
+10.29 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.
+10.30 Amendment to Quanex Corporation Deferred Compensation Trust, dated
December 9, 1999, filed as Exhibit 10.29 of the Registrant's Annual
Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended
October 31, 1999 and incorporated herein by reference.
+10.31 Quanex Corporation 1997 Non-Employee Director Stock Option Plan filed
as Exhibit 10.21 of the Registrant's Annual Report on Form 10-K (Reg.
No. 001-05725) for the year ended October 31, 1997 and incorporated
herein by reference.
71
+10.32 Amendment to Quanex Corporation 1997 Non-Employee Director Stock
Option Plan, dated December 9, 1999, filed as Exhibit 10.31 of the
Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the
fiscal year ended October 31, 1999 and incorporated herein by
reference.
*10.33 Amendment to Quanex Corporation 1997 Key Employee Stock Plan,
effective July 1, 2000.
10.34 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 (Reg. No. 001-05725), dated August 9,
1996, and incorporated herein by reference.
10.35 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 (Reg. No.
001-05725), dated May 5, 1997, and incorporated herein by reference.
10.36 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 (Reg. No.
001-05725), dated December 3, 1997, and incorporated herein by
reference.
10.37 Acquisition Agreement and Plan of Merger, dated October 23, 2000,
between Quanex Corporation ("Company"), Quanex Five, Inc., a Delaware
corporation and wholly owned subsidiary of the Company, and Temroc
Metals, Inc., a Minnesota corporation, filed as Exhibit 2.1 to the
Company's Report on Form 8-K (Reg. No. 001-05725), dated November 30,
2000, and incorporated herein by reference.
10.38 First Amendment to Agreement and Plan of Merger dated November 15,
2000 between Quanex Corporation ("Company"), Quanex Five, Inc., a
Delaware corporation and wholly owned subsidiary of the Company, and
Temroc Metals, Inc., a Minnesota corporation, filed as Exhibit 3.1 to
the Company's Report on Form 8-K (Reg. No. 001-05725), dated November
30, 2000 and incorporated herein by reference.
10.39 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 (Reg. No.
001-05725) for the year ended October 31, 1998 and incorporated herein
by reference.
10.40 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 (Reg. No.
001-05725) for the year ended October 31, 1998 and incorporated herein
by reference.
10.41 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 (Reg. No.
001-05725) for the year ended October 31, 1998 and incorporated herein
by reference.
10.42 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
(Reg. No. 001-05725) for the year ended October 31, 1998 and
incorporated herein by reference.
10.43 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 (Reg. No. 001-05725)
for the year ended October 31, 1998 and incorporated herein by
reference.
10.44 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 (Reg. No.
001-05725) for the year ended October 31, 1998 and incorporated herein
by reference.
*21 Subsidiaries of the Registrant.
72
*23 Consent of Deloitte & Touche LLP.
*27 Financial Data Schedule
- ----------
+ Management Compensation or Incentive Plan
* Filed herewith