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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5725
QUANEX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 38-1872178
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 WEST LOOP SOUTH, SUITE 1500 77027
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (713) 961-4600
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.50 par value New York Stock Exchange, Inc.
Rights to Purchase Series A Junior
Participating Preferred Stock New York Stock Exchange, Inc.
6.88% Convertible Subordinated Debentures New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates as of December 31, 1998, computed by reference to the closing
price for the Common Stock on the New York Stock Exchange, Inc. on that date,
was $315,706,390. Such calculation assumes only the registrant's officers and
directors were affiliates of the registrant.
At December 31, 1998, there were outstanding 14,248,847 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, 1998, for its Annual Meeting of
Stockholders to be held on February 24, 1999, are incorporated herein by
reference in Items 10, 11, 12, and 13 of Part III of this Annual Report.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
General................................................... 2
Manufacturing Processes, Markets and Product Sales by
Business Segment.......................................... 3
Raw Materials and Supplies................................ 5
Backlog................................................... 5
Competition............................................... 6
Sales and Distribution.................................... 6
Seasonal Nature of Business............................... 6
Service Marks, Trademarks, Trade Names and Patents........ 6
Research and Development.................................. 6
Environmental Matters..................................... 7
Employees................................................. 7
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
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PART II
Item 5. Market for Registrant's Common Equity and Related Security
Holder Matters.............................................. 9
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 7A. Quantitative/Qualitative Disclosure......................... 19
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Disagreements on Accounting and Financial Disclosure........ 47
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PART III
Item 10. Directors and Executive Officers of the Registrant.......... 47
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 47
Item 13. Certain Relationships and Related Transactions.............. 47
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 48
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PART I
ITEM 1. BUSINESS
GENERAL
The Company was organized in 1927 as a Michigan corporation under the name of
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 otherwise requires.
Quanex Corporation is a technological leader in the production of value-added
engineered steel bars, aluminum flat-rolled products, engineered and formed
metal products. The Company believes that its use of state-of-the-art
manufacturing technology, low cost production and engineering processes to meet
specific customer applications provides the Company with competitive advantages
over many of its competitors. The Company has also sought to reduce the impact
of cyclical economic downturns on its operations through diversification of the
markets served. The markets served by the Company include the transportation
industry, the industrial machinery and capital equipment industries, the home
building and remodeling industries and the defense and other commercial
industries.
Since the mid-1980s Quanex has refocused its strategy from being a
manufacturer principally of steel products with a heavy dependence on energy
markets to a diversified, value-added specialized metals products company
serving a broader range of markets. The Company's future growth strategy is
focused on the continued penetration of higher margin markets, continued
expansion of its aluminum and steel manufacturing operations, rapid expansion of
formed value-added products, and niche acquisitions.
In December 1997, the Company completed the sale of its tubing operations
("Tubing Operations"), comprised of Michigan Seamless Tube Company, Gulf States
Tube Division, and the Tube Group Administrative Office. For business segment
purposes, the Tubing Operations were previously classified as "Steel Tubes". Two
small divisions, Heat Treat Division and NitroSteel Division, which were
previously included with the Steel Tubes segment, were retained by the Company
and are now included in the "Engineered Steel Bar" segment.
In October 1998, the Company completed the purchase of Decatur Aluminum Corp.,
an aluminum sheet manufacturer in Decatur, Alabama, for approximately $19
million. The facility, renamed Nichols Aluminum-Alabama, Inc. ("Nichols Aluminum
Alabama"), includes cold rolling and finishing operations and a wide-width paint
line which allows the facility to produce painted sheet, its highest value-added
product. The acquisition significantly expands the aluminum mill sheet products
segment's overall cold rolling capacity so as to effectively utilize most of the
400 million pounds of current casting capacity.
The Company has also invested significantly in technologically advanced
continuous manufacturing processes to meet demanding quality specifications and
to achieve cost efficiencies. In its MACSTEEL operations, rotary centrifugal
continuous casters are used with an in-line manufacturing process to produce
bearing grade and aircraft quality, seam-free, specialized engineered carbon and
alloy steel bars that enable Quanex to participate in higher margin markets.
Since 1992, the Company has invested over $150 million to enhance the steel
refining processes, to improve rolling and finishing capacity and to expand
manufacturing capacity at its MACSTEEL operations to 620,000 tons per year.
Phases I through III have already been completed. In Phase IV of these
expansions, the Company is investing an additional $16 million at the MACSTEEL
plants in Jackson, Michigan and Ft. Smith, Arkansas, to install two additional
cold finishing lines. This project is expected to double the capacity of MACPLUS
cold finished bars, MACSTEEL's premium value-added product, to 180,000 tons
annually when completed in 1999. In October 1998, the Company announced its
Phase V program, which will increase engineered steel bar capacity by
approximately 13% to 700,000 tons annually. The estimated completion date is
year-end 2000.
In December 1998 the Aluminum Mill Sheet Products segment completed
construction of two rotary furnaces and upgraded its dross recovery equipment at
its casting plant. The $12 million expansion now allows the Company's Nichols
Aluminum Division to use lower cost scrap resulting in a reduction of raw
material costs as well as improving the molten metal yield from scrap and
increasing efficiency.
In September 1998, the Company reorganized and consolidated its Piper Impact
facilities. The Company recorded a pretax restructuring charge of $58.5 million
in the fourth quarter. This amount included $53 million for the write down of
goodwill and long lived assets associated with Piper Impact's business and $5.5
million for expenses and assets related to the closing of its Park City, Utah
plant.
The Company's businesses are managed on a decentralized basis. Each operating
group has administrative, operating and marketing functions. Financial reporting
systems measure each business unit'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
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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 now grouped into three business segments,
consisting of (i) engineered steel bars, (ii) aluminum mill sheet products, and
(iii) engineered products. General corporate expenses are classified as other
operations.
Information with respect to major markets for the Company's products,
expressed as a percentage of consolidated net sales, is shown under the heading
"Sales by Major Markets" as set forth below. For financial information regarding
each of Quanex's business segments, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein and Note 13 to the
Consolidated Financial Statements. Although Quanex has attempted to estimate its
sales by product and market categories, many products have multiple end uses for
several industries and sales are not recorded on the basis of product or market
categories. A portion of sales is made to distributors who sell to different
industries. Net sales by principal market are based upon the total dollar volume
of customer invoices. For the year ended October 31, 1998, one customer, Autoliv
Inc., accounted for more than 10% of company sales.
Quanex operates 14 manufacturing facilities in nine states in the United
States and one plant in Zwolle, The Netherlands. These facilities feature
efficient plant design and flexibility in 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.
SALES BY MAJOR MARKET
Sales ($ Millions)
Fiscal Year Ended October 31,
Market ----------------------------------------------
Markets Description QUANEX PRODUCTS 1998 1997 1996 1995 1994
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Transportation Auto/Truck Steel bars, impact-extruded $352.9 $322.3 $207.2 $170.9 $131.4
components 44.2% 43.2% 33.4% 28.3% 30.2%
Other Transportation Steel bars, treated tubes and $ 31.8 $ 32.8 $ 22.0 $ 23.1 $ 16.6
(including ship/railroad, bars 4.0% 4.4% 3.6% 3.8% 3.8%
recreational vehicles and
military transportation)
Total Transportation $384.7 $355.1 $229.2 $194.0 $148.0
48.2% 47.6% 37.0% 32.1% 34.0%
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Aluminum Residential and Commercial Aluminum sheet, fabricated $334.8 $327.5 $313.1 $331.6 $200.9
Building Building Materials, Other aluminum products, aluminum 42.0% 43.9% 50.5% 54.9% 46.1%
Products coil, coated aluminum coil
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Industrial General Industrial Machinery Specialty forgings, impact- $ 29.9 $ 24.9 $ 47.4 $ 59.9 $ 72.0
Machinery and (including mining, extruded products, steel bars 3.8% 3.3% 7.6% 9.9% 16.5%
Capital Equipment agriculture and construction)
Capital Equipment (including Steel bars, treated bars and $ 10.4 $ 17.5 $ 22.0 $ 13.1 $ 10.5
material handling, machine tubes, partition products, 1.3% 2.4% 3.6% 2.2% 2.4%
tools, and office/household) impact-extruded products
Total Industrial Machinery $ 40.3 $ 42.4 $ 69.4 $ 73.0 $ 82.5
and Capital Equipment 5.1% 5.7% 11.2% 12.1% 18.9%
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Other $ 37.7 $ 21.1 $ 8.4 $ 5.4 $ 4.5
4.7% 2.8% 1.3% .9% 1.0%
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Total Sales $797.5 $746.1 $620.1 $604.0 $435.9
100.0% 100.0% 100.0% 100.0% 100.0%
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Engineered Steel Bars
The Company's Engineered Steel Bars segment consists of engineered steel bar
operations, steel bar and tube heat treating services, and steel bar and tube
corrosion and wear resistant finishing services.
The Company's engineered steel bar operations are conducted through its
MACSTEEL division, consisting of two plants located in Ft. Smith, Arkansas and
Jackson, Michigan. These plants manufacture hot finished, precision engineered,
carbon and alloy steel bars. The Company believes that MACSTEEL has the only two
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plants in North America using continuous rotary centrifugal casting technology.
This casting process produces seam-free bars, without surface defects and
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
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 Jackson and 50 tons at Ft. Smith.
MACSTEEL produces various grades of specialized engineered steel bars by
melting steel scrap and casting it in a rotary centrifugal continuous caster.
MACSTEEL's molten steel is secondarily refined by argon stirring, ladle
injection and vacuum arc degassing prior to casting. This enables MACSTEEL to
produce higher quality, "cleaner" steels. Precision engineered products are
produced through a continuous in-line process by which scrap steel is converted
into hot rolled steel bars without interruption.
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
under two man-hours of labor per ton compared to 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, 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. Piper Impact uses
MACSTEEL engineered steel bars for the manufacture of components for safety
critical steel air bag inflators at its 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 which
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 and "cut-to-length". Metallurgical testing
services are also provided. This plant serves customers in the energy,
automotive, ordnance, mining and fluid power 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 produced to specific customer applications and sold into fluid
power markets.
Aluminum Mill Sheet Products
The Company's Aluminum Mill Sheet Products segment consists of continuous
casting, cold rolling, finishing and painting operations conducted through its
Nichols Aluminum Division ("Nichols").
Nichols Aluminum manufactures mill finished and coated aluminum sheet for the
home improvement, residential and light commercial construction, transportation,
appliances, and service center markets and is comprised of four plants: a
thin-slab casting and hot rolling mill ("NAC") located in Davenport, Iowa, and
three cold rolling and finishing plants located in Davenport, Iowa ("NAD"),
Lincolnshire, Illinois ("NAL") and Decatur, Alabama ("NAA").
NAC's mini-mill in Davenport, Iowa uses the single in-line casting process to
produce up to 400 million pounds of reroll aluminum sheet annually. The
mini-mill converts scrap to aluminum sheet through melting, continuous casting
and in-line hot rolling. NAC also has a dross recovery system, the ability to
convert lower grades of scrap, and shredding capabilities to broaden the
diversity and sources of its scrap raw material. Delacquering equipment improves
the quality of the raw material before it reaches the melting furnaces by
burning off impurities within the scrap. The scrap is blended using computer
programs to achieve the desired alloy composition and the best economics. After
melting, the molten metal flows into a Hazelett thin-slab caster, which casts up
to a 52-inch wide aluminum slab. The slab then is fed directly to a hot mill
with three, in-line, rolling stands to reduce the slab from a thickness of
approximately .75 inches to coiled aluminum reroll sheet with a target thickness
of .045 inches. This hot rolling mill process substantially reduces subsequent
cold rolling requirements.
The Company believes the combination of capacity increases and technological
enhancements directed at producing quality hot rolled aluminum sheet with cost
savings derived from reduced raw material costs, optimized scrap utilization,
reduced unit energy cost, reduced cold rolling requirements and decreased labor
costs results in a significant manufacturing advantage.
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Further processing of the reroll aluminum sheet occurs at the NAD, NAL and NAA
plants, where the specific product requirements of customers can be met through
cold rolling to various gauges, annealing for additional mechanical properties
and formability, tension leveling and slitting to specific widths. Products at
the NAD and NAA plants can also be custom coated, an important feature for the
building products applications of certain customers.
Engineered Products
The Company's Engineered Products segment consists of impact extrusion
operations for both steel and aluminum conducted through the Piper Impact
facilities and metal fabrication operations at the Fabricated Products Division.
The impact extrusion operations consist of Piper Impact with both steel and
aluminum impact extrusion facilities in New Albany, Mississippi and an aluminum
impact extrusion facility in Zwolle, The Netherlands, acquired in October 1997
("Piper Impact Europe"). The Fabricated Products Division consists of the AMSCO
plant in Rice Lake, Wisconsin and two Homeshield Fabricated Products ("HFP")
plants in Chatsworth, Illinois.
Piper Impact and Piper Impact Europe are technological leaders in the
manufacture of custom designed, impact extruded aluminum and steel parts for the
transportation, electronics, defense, and other commercial markets. These
operations make use of the impact extrusion technology to produce highly
engineered near net shaped components from aluminum and steel bar slugs
involving complex design and machining requirements. The pressure resulting from
the impact of the extrusion presses causes metal to flow into the desired shape.
This cost efficient, cold-forming of the metal results in a high quality, work
hardened product with a superior finish. Heat treated and precision machined
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., in the form of air bag components for the automotive industry.
During 1997 the Company completed the construction and installation of
equipment at its second manufacturing facility in New Albany, Mississippi for
the production of highly engineered impact extruded steel air bag products.
Piper Impact's steel products plant was part of a two-year $42 million capital
project to provide capacity for new customer programs primarily for the
automotive air bag systems market. This includes passenger and side-impact air
bags, "smart" bags with adjustable inflation speed and those with alternative
inflation technologies. The Company believes that these projects will provide
Piper Impact with the technology and additional capacity for advanced
applications, improved customer service, and cost effective manufacturing
processes thereby improving competitiveness and long term growth opportunities
in other markets.
The Fabricated Products Division manufactures aluminum window and patio door
screens, window frames, and a broad line of custom designed, roll formed
products and stamped shapes for manufacturers of insulated glass, premium wood
windows and vinyl windows for the home improvement, residential and commercial
construction markets. AMSCO combines strong product design and development with
reliable, just-in-time delivery. HFP coats and fabricates aluminum coil in many
colors, sizes and finishes into rain carrying systems, soffit, exterior housing
trim and painted coil sheet and roofing products. Additionally, HFP manufactures
custom roll-formed products for industries such as the agricultural equipment
and industrial hand tools.
RAW MATERIALS AND SUPPLIES
MACSTEEL plants purchase steel scrap, pig iron, beach iron and hot briquetted
iron, their principal raw materials, on the open market. Transportation of these
raw materials to its plants can be adversely affected by extreme weather
conditions. Prices for scrap also vary in relation to the general business
cycle, typically declining in periods of slow economic growth.
Nichols Aluminum's principal raw material is aluminum scrap, which it
purchases on the open market. However, it also purchases and sells in limited
quantities aluminum ingot futures contracts on the London Metal Exchange ("LME")
to hedge against fluctuations in the price of aluminum scrap required to
manufacture products for fixed price sales contracts.
Piper Impact's raw material consists of aluminum bars and slugs which it
purchases on the open market and steel bars which it purchases from MACSTEEL.
Piper Impact Europe purchases its raw material consisting of aluminum slugs and
steel sheet on the open market in Europe and North America. Fabricated Products
Division purchases the majority of its raw material requirements consisting of
aluminum sheet from Nichols Aluminum.
BACKLOG
At October 31, 1998, Quanex's backlog of orders to be shipped in the next twelve
months was $183.8 million. This compares to $225.5 million at October 31, 1997.
Because many of the markets in which Quanex operates have short lead times,
backlog figures are not reliable indicators of annual sales volume or operating
results.
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COMPETITION
All of the Company's products are sold under highly competitive conditions. The
Company competes with a number of companies, some of which have financial and
other resources greater than those of the Company. Competitive factors include
product quality, price, delivery and ability to manufacture products to customer
specifications. The amounts of engineered steel bars, aluminum mill sheet
products and engineered products produced by the Company represent a small
percentage of annual domestic production.
The Company's engineered steel bar plants compete with two large integrated
steel producers, two large non-integrated steel producers and two smaller steel
companies. Although many of these producers are larger and have greater
resources than the Company, the Company believes that the technology used at the
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 products, primarily on the basis of the breadth of product lines, the
quality and responsiveness of its services and its prices.
The Company's engineered products businesses compete with many small metal
fabricators and impact extruders primarily on the basis of the custom
engineering, the quality and the responsiveness of its services and its prices.
SALES AND DISTRIBUTION
The Company has a nationwide system of sales offices. MACSTEEL sells hot rolled
engineered steel bars primarily to original equipment manufacturers ("OEMs")
through its sales organization and manufacturers' representatives.
The Company's aluminum mill sheet products are sold directly to OEMs and
through metal service centers. The Company's engineered products are sold
primarily to OEMs, except for the residential building products which are sold
through distributors.
SEASONAL NATURE OF BUSINESS
With the exception of impact extrusions, the business of which is not seasonal,
the Company's aluminum mill sheet and engineered products businesses are
seasonal because its primary markets are in the Northeast and Midwest regions of
the United States where winter weather reduces home building and home
improvement activity. Historically, in these businesses, lowest sales have
occurred during the Company's first fiscal quarter. Because a high percentage of
their manufacturing overhead and operating expenses is due to labor and costs
that are generally fixed throughout the year, profits for the operations in
these businesses tend to be lower in quarters with lower sales.
The other businesses in which the Company competes are 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 quarters. Due to the combined
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
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.
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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 now 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 the locations Quanex has owned or operated at
any time. The Company is currently participating in environmental assessments
and remediation of 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 supposedly 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, 1998, for Quanex's current plants,
former operating locations, and disposal facilities were approximately $23
million. Of that, approximately 80% relates to cleanup of historical soil and
groundwater contamination and other corrective measures at a plant operated by
the Company's Piper Impact subsidiary in New Albany, Mississippi. Depending upon
such factors as 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.
Amendments to the Federal Clean Air Act were adopted in 1990, and
environmental agencies continue to develop implementing regulations. 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's Board
of Directors approved capital expenditures totaling approximately $20 million to
be spent 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. These upgrades were substantially
complete as of October 31, 1998. Based upon its analysis and experience to date,
Quanex does not believe that its compliance with Clean Air Act requirements will
have a material effect on its operations or financial condition.
Quanex incurred approximately $23 million and $14 million during fiscal 1998
and 1997, respectively, in expenses and capital expenditures in order to comply
with existing or proposed environmental regulations. The 1998 and 1997 amounts
include spending toward a significant upgrade to pollution control systems at
MACSTEEL. The Company estimates spending of approximately $8 million at various
of its facilities during fiscal 1999. Quanex will continue to have expenditures
in connection with environmental matters beyond 1999, but it is not possible at
this time to reasonably estimate the amount of these expenditures. Future
expenditures relating to environmental matters will necessarily depend upon the
application to Quanex and its facilities of future regulations and government
decisions.
EMPLOYEES
At October 31, 1998, the Company employed 3,405 persons. Of the total employed,
27% were covered by collective bargaining agreements. On November 22, 1997, the
International Brotherhood of Teamsters ratified a five-year agreement covering
250 employees at two Davenport, Iowa, plants of Nichols Aluminum. The United
Steel Workers ratified a four-year agreement, expiring in January 2002, covering
90 employees at the Nichols Aluminum Alabama plant. During 1999 two labor
contracts will expire affecting two Quanex facilities. The International
Association of Machinists' contract, covering 100 employees at the Nichols
Aluminum, Lincolnshire plant will expire on January 12, 1999. A new five-year
agreement has been negotiated and approved by a two to one vote of the
membership on December 20, 1998. The United Steel Workers' contract at the
MacSteel Michigan plant covering 190 employees will expire on February 28, 1999.
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
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Owned: ENGINEERED STEEL BARS
Fort Smith, Arkansas MACSTEEL 415,723
Jackson, Michigan MACSTEEL 245,150
Huntington, Indiana Heat Treating 82,000
Leased (expires 2009):
Kenosha, Wisconsin NitroSteel 35,000
Owned: ALUMINUM MILL SHEET PRODUCTS
Lincolnshire, Illinois Nichols Aluminum 142,000
Davenport, Iowa Nichols Aluminum 236,000
Davenport, Iowa Nichols Aluminum Casting 245,000
Leased (4 leases expiring 2003, 2004, 2005 and 2018):
Decatur, Alabama Nichols Aluminum Alabama 410,000
Owned: ENGINEERED PRODUCTS
Rice Lake, Wisconsin AMSCO 290,800
Chatsworth, Illinois Homeshield Fabricated Products (two plants) 212,000
New Albany, Mississippi Piper Impact (two plants) 683,000
Park City, Utah(1) Piper Impact 130,000
Zwolle, The Netherlands Piper Impact Europe 110,000
Leased (expires 1999): EXECUTIVE OFFICES
Houston, Texas Quanex Corporation 21,000
(1)As previously announced, a plan has been approved to close this facility and
move its production to the New Albany, Mississippi facility in early 1999.
ITEM 3. LEGAL PROCEEDINGS
On or about July 13, 1998, the United States Department of Justice ("DOJ")
notified the Company that the federal government was prepared to bring against
the Company a court action alleging violations of the Clean Water Act at the
Company's former facility in Rosenberg, Texas. Among other things, the
government contended that the plant had discharged water, which contained
pollutants at levels greater than applicable effluent limits, had not
appropriately monitored its discharges, and had not adequately notified the
federal Environmental Protection Agency of exceedances. DOJ's demand letter
extended to the Company and to Vision Metals, the current owner and operator of
the Rosenberg plant, the opportunity to resolve this matter short of litigation
and offered to settle the Company's alleged violations for a civil penalty of
$1.1 million. The Company tendered this matter to Vision Metals for defense and
indemnification pursuant to the Purchase Agreement by which Vision Metals
acquired the Rosenberg facility and assumed certain environmental liabilities.
Having accepted the Company's tender without reservation, Vision Metals at its
expense is contesting certain of the government's allegations and attempting to
negotiate resolution of the government's Clean Water Act claims against the
Company.
Other than the above matter 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: 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
January..................................................... .16 .15 .15 .14 .14
April....................................................... .16 .15 .15 .15 .14
July........................................................ 16 .15 .15 .15 .14
October..................................................... .16 .16 .15 .15 .14
--- --- --- --- ---
Total............................................. .64 .61 .60 .59 .56
Quarterly Common Stock Sales Price
(HIGH & LOW) QUARTER ENDED: 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
January..................................................... 30 7/16 29 1/8 21 1/8 24 5/8 21 1/4
27 1/16 24 1/4 18 20 16 1/8
April....................................................... 33 13/16 27 7/8 22 3/8 23 7/8 22 3/8
28 1/2 23 3/8 19 5/8 21 19 1/8
July........................................................ 32 3/16 34 1/8 23 7/8 26 5/8 23
27 1/4 25 1/8 19 3/8 22 1/8 18 1/8
October..................................................... 27 7/8 36 1/2 28 3/4 26 27 1/4
15 5/8 26 1/4 19 5/8 18 5/8 20 3/4
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 earnings after October 31, 1989, adjusted
for other factors as set forth in the credit agreement. As of October 31, 1998,
the amount of dividends and other distributions the Company was permitted to
declare and pay under its credit facilities was approximately $40 million.
There were 5,632 holders of Quanex common stock on record as of December 31,
1998.
ITEM 6. SELECTED FINANCIAL DATA
GLOSSARY OF TERMS
The exact definitions of commonly used financial terms and ratios vary somewhat
among different companies and investment analysts. The following list gives the
definition of certain financial terms that are used in this report:
Capital expenditures: Additions to property, plant and equipment.
Book value per common share: Stockholders' equity less the stated value of
preferred stock divided by the number of common shares outstanding.
Asset turnover: Net sales divided by average total assets.
Current ratio: Current assets divided by current liabilities.
Return on investment: The sum of net income and the after-tax effect of interest
expense less capitalized interest divided by the sum of the averages for
long-term debt and stockholders' equity.
Return on common stockholders' equity: Net income attributable to common
stockholders divided by average common stockholders' equity.
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FINANCIAL SUMMARY 1993-1998
($ thousands, except per share data)
(FOR DEFINITION OF ITEMS, SEE PAGE 9) FISCAL YEARS ENDED OCTOBER 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
REVENUES AND EARNINGS
Net sales(1).................................................... 797,490 746,093 620,069 603,985 435,983
Cost of sales including depreciation............................ 683,954 644,041 526,886 521,521 376,077
- --------------------------------------------------------------------------------------------------------------------------
Gross profit.................................................... 113,536 102,052 93,183 82,464 59,906
Piper Impact Restructuring Charge............................... 58,500(2)
Other depreciation and amortization............................. 5,059 3,669 1,791 1,258 1,266
Selling, general and administrative expenses.................... 47,713 43,375 44,959 33,746 31,893
- --------------------------------------------------------------------------------------------------------------------------
Operating income................................................ 2,264 55,008 46,433 47,460 26,747
Percent of net sales............................................ 0.3 7.4 7.5 7.9 6.1
Other income (expense)-net...................................... 2,278 1,637 4,544 1,721 2,765
Interest expense-net............................................ 10,506 14,002 11,360 8,870 10,178
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, extraordinary items, cumulative
effect of accounting change, and income from discontinued
operations.................................................... (5,964) 42,643 39,617 40,311 19,334
Income taxes (credit)........................................... (2,087) 14,925 16,639 16,931 8,120
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations........................ (3,877) 27,718 22,978 23,380 11,214
Income from discontinued operations............................. 0 5,176 9,912 10,480 7,638
Gain on sale of discontinued operations......................... 13,046 36,290
Extraordinary items and cumulative effect of accounting changes, net
of taxes(3)................................................... -- -- (2,522)(3) (2,021)(3) --
- --------------------------------------------------------------------------------------------------------------------------
Net income...................................................... 9,169 69,184 30,368 31,839 18,852
Percent of net sales............................................ 1.1(6) 9.3(5) 4.9 5.3 4.3
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic Earnings per share:
Income (loss) from continuing operations...................... (0.27) 2.01 1.70 1.44 0.40
Income from discontinued operations........................... -- 0.37 0.73 0.78 0.57
Gain on sale of discontinued operations....................... 0.92 2.63 -- -- --
Extraordinary items and cumulative effect of accounting change... -- -- (0.19) (0.15) --
Net earnings (loss)........................................... 0.65 5.01 2.24 2.07 0.97
Cash dividends declared......................................... 0.64 0.61 0.60 0.59 0.56
Book value...................................................... 19.19 19.13 14.50 12.81 11.04
Average shares outstanding (000)................................ 14,149 13,807 13,524 13,443 13,342
Market closing price range
High.......................................................... 33 1/2 36 1/2 28 5/8 26 27
Low........................................................... 16 23 3/8 18 3/8 18 3/8 16 1/4
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION -- YEAR END
Working capital................................................. 62,979 52,818 88,238 53,629 100,007
Property, plant and equipment -- net............................ 395,054 379,071 319,165 233,982 239,642
Other assets.................................................... 69,422 119,738 117,142 55,989 54,736
Total assets.................................................... 674,288 685,705 638,948 466,458 491,329
Noncurrent deferred income taxes................................ 33,412 48,111 40,454 45,740 39,298
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt.................................................. 188,302 201,858 253,513 111,894 107,442
Stockholders' equity............................................ 272,044 268,823 197,009 172,814 233,883
Total capitalization............................................ 460,346 470,681 450,522 284,708 341,325
Long-term debt percent of capitalization........................ 40.9 42.9 56.3 39.3 31.5
- --------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Asset turnover.................................................. 1.2 1.1 1.0 1.3 0.9
Current ratio................................................... 1.4 TO 1 1.4 to 1 1.8 to 1 1.4 to 1 2.0 to 1
Return on average investment -- percent......................... 3.4(6) 16.7(5) 9.8 11.1 6.9
Return on average common equity -- percent...................... 3.4(6) 29.7(5) 16.4 17.4 9.0
- --------------------------------------------------------------------------------------------------------------------------
Working capital provided by operations(4)....................... 82,830 73,321 60,378 57,767 39,326
Depreciation and amortization................................... 42,400 37,865 36,499 29,062 25,520
Capital expenditures............................................ 60,936 69,146 34,737 21,629 42,297
Backlog for shipment in next 12 months.......................... 183,847 225,498 123,382 94,464 109,626
- --------------------------------------------------------------------------------------------------------------------------
Number of stockholders.......................................... 5,720 5,488 3,425 3,659 3,454
Average number of employees..................................... 3,261 2,994 1,950 1,653 1,530
Sales per employee.............................................. 245 249 318 365 285
- --------------------------------------------------------------------------------------------------------------------------
(FOR DEFINITION OF ITEMS, SEE PAGE 9) FISCAL YEARS ENDED OCTOBER 31, 1993
REVENUES AND EARNINGS
Net sales(1).................................................... 371,266
Cost of sales including depreciation............................ 329,220
- ---------------------------------------------------------------------------------------
Gross profit.................................................... 42,046
Piper Impact Restructuring Charge...............................
Other depreciation and amortization............................. 1,596
Selling, general and administrative expenses.................... 30,605
- ------------------------------------------------------------------------------------------------
Operating income................................................ 9,845
Percent of net sales............................................ 2.7
Other income (expense)-net...................................... 4,508
Interest expense-net............................................ 11,962
- ---------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, extraordinary items, cumulative
effect of accounting change, and income from discontinued
operations.................................................... 2,391
Income taxes (credit)........................................... 1,004
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations........................ 1,387
Income from discontinued operations............................. 7,041
Gain on sale of discontinued operations.........................
Extraordinary items and cumulative effect of accounting changes, net
of taxes(3)................................................... --
- --------------------------------------------------------------------------------------------------------------------------
Net income...................................................... 8,428
Percent of net sales............................................ 2.3
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic Earnings per share:
Income (loss) from continuing operations...................... (0.33)
Income from discontinued operations........................... 0.52
Gain on sale of discontinued operations....................... --
Extraordinary items and cumulative effect of accounting change... --
Net earnings (loss)........................................... 0.19
Cash dividends declared......................................... 0.56
Book value...................................................... 10.48
Average shares outstanding (000)................................ 13,477
Market closing price range
High.......................................................... 20 3/4
Low........................................................... 14 1/4
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION -- YEAR END
Working capital................................................. 121,959
Property, plant and equipment -- net............................ 218,851
Other assets.................................................... 61,313
Total assets.................................................... 463,362
Noncurrent deferred income taxes................................ 32,535
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt.................................................. 128,476
Stockholders' equity............................................ 225,776
Total capitalization............................................ 354,252
Long-term debt percent of capitalization........................ 36.3
- --------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Asset turnover.................................................. 0.8
Current ratio................................................... 3.0 to 1
Return on average investment -- percent......................... 4.3
Return on average common equity -- percent...................... 1.7
- --------------------------------------------------------------------------------------------------------------------------
Working capital provided by operations(4)....................... 30,482
Depreciation and amortization................................... 26,184
Capital expenditures............................................ 34,281
Backlog for shipment in next 12 months.......................... 73,207
- --------------------------------------------------------------------------------------------------------------------------
Number of stockholders.......................................... 3,540
Average number of employees..................................... 1,549
Sales per employee.............................................. 240
- --------------------------------------------------------------------------------------------------------------------------
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 1997-1993,
respectively of $187,123, $275,641, $287,210, $263,331 and $244,879.
(2) During the fourth quarter of 1998, Piper Impact recorded a $58.5 million
non-recurring restructuring charge as the result of impairment as described
by Statement of Financial Accounting Standards No. 121. See Footnote 4 to
the financial statements for further information.
(3) 1996 and 1995-early extinguishment of debt.
(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 restructuring charge ($58.5 million) and
gain on sale of discontinued operations ($13 million).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The discussion and analysis of the Company's financial condition and results of
operations should be read in conjunction with the Selected Financial Data and
the Consolidated Financial Statements of the Company and the accompanying notes.
PRIVATE SECURITIES LITIGATION REFORM ACT
Certain forward-looking information contained herein is being provided in
accordance with the provisions of the Private Securities Litigation Reform Act.
Such information is subject to certain assumptions and beliefs based on current
information known to the Company and is subject to factors that could result in
actual results differing materially from those anticipated in the
forward-looking statements contained in this report. Such factors include
domestic and international economic activity, prevailing prices of steel and
aluminum scrap and other raw material costs, interest rates, the continuation of
countervailing import duties on certain of the Company's competitors,
construction delays, market conditions for the Company's customers, any material
changes in purchases by the Company's principal customers, environmental
regulations and changes in estimates of costs for known environmental
remediation projects and situations, world-wide political stability and economic
growth, the Company's successful implementation of its internal operating plans
and the Year 2000 readiness efforts, 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,
------------------------------------------------
-----1998-------------1997-------------1996-----
DOLLAR % of Dollar % of Dollar % of
AMOUNT Sales Amount Sales Amount Sales
------ ----- ------ ----- ------ -----
Net Sales................................................. $797.5 100% $746.1 100% $620.1 100%
Cost of Sales........................................... 647.2 81 610.4 82 492.6 79
Selling, general and admin.............................. 47.7 6 43.4 6 45.0 7
Depreciation and amortization........................... 41.8 5 37.3 5 36.1 7
Restructuring Charge.................................... 58.5 7 -- -- -- --
------ --- ------ --- ------ ---
Operating Income.......................................... 2.3 1% 55.0 7% 46.4 7%
Interest Expense.......................................... (14.9) (2) (17.5) (2) (11.9) (2)
Capitalized Interest...................................... 4.4 1 3.5 0 .6 0
Other, net................................................ 2.2 0 1.6 0 4.5 1
Income tax benefit (expense).............................. 2.1 0 (14.9) (1) (16.6) (2)
------ --- ------ --- ------ ---
Income (loss) from continuing operations.................. $ (3.9) 0% $ 27.7 4% $ 23.0 4%
====== ====== ======
For the sixth consecutive year, the Company's continuing operations achieved
higher sales from the previous fiscal year. These continued increases are a
result of the Company's growth strategies through internal investments as well
as acquisitions. The Company's internal growth investments, principally at the
MACSTEEL Division and at Piper Impact, Inc. ("Piper Impact") were focused toward
capacity expansions, new product offerings, quality improvements, and enhanced
customer service capabilities. The Company also completed a number of strategic
acquisitions and divestitures to improve operations and align its businesses for
growth.
Acquisitions / Divestitures Since October 31, 1996
In April 1997, the Company completed the sale of its LaSalle Steel Company
("LaSalle") subsidiary. LaSalle's results of operations have been classified as
discontinued operations and prior periods have been restated. For business
segment reporting purposes, LaSalle's data was previously classified as "Cold
Finished Steel Bars".
In October 1997, the Company, through its Dutch subsidiary, Piper Impact
Europe B.V. ("Piper Impact Europe"), purchased the net assets of Advanced Metal
Forming C.V., a Dutch limited partnership, for approximately $30 million. The
Company's balance sheet as of October 31, 1997 includes Piper Impact Europe. The
Company's income statement for the twelve months ended October 31, 1997 does not
include results for Piper Impact Europe.
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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 Tubing Operations' results of
operations have been classified as discontinued operations and prior periods
have been restated. For business segment reporting purposes, these businesses
were previously classified as "Steel Tubes". Two small divisions, Heat Treat
Division and NitroSteel Division, which were previously included with this
segment, were retained by the Company and are now included in the Engineered
Steel Bars segment.
In October 1998, the Company acquired the stock of Decatur Aluminum Corp., a
Decatur, Alabama based aluminum sheet manufacturer for approximately $19
million. The newly acquired company has been renamed Nichols Aluminum-Alabama,
Inc. ("Nichols Aluminum Alabama") in alignment with Quanex's other aluminum mill
sheet businesses in its Nichols Aluminum division. Nichols Aluminum Alabama's
operations include cold rolling aluminum sheet to specific gauge, annealing,
leveling, custom painting and slitting to width. Nichols Aluminum Alabama
employs approximately 110 people.
Business Segments
The Company adopted Statement of Financial Accounting Standards No. 131, "SFAS
131" for the fiscal year ended 1998. SFAS 131 requires that the Company disclose
certain information about its operating segments where operating segments are
defined as "components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance". Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
Pursuant to SFAS 131, the Company has three reportable segments: engineered
steel bars, aluminum mill sheet products, and engineered products. The Company's
previously reported "Aluminum Products Group" has been split into two segments:
"Aluminum Mill Sheet Products" and "Engineered Products". The engineered steel
bar segment consists of engineered steel bars manufacturing, steel bar and tube
heat treating services and steel bar and tube wear and corrosion resistant
finishing services. The aluminum mill sheet segment manufactures mill finished
and coated aluminum sheet. The engineered products segment manufactures
impact-extruded aluminum and steel parts, aluminum window and patio door
screens, window frames and other roll formed products and stamped shapes.
The following table sets forth selected operating data for the Company's three
business segments:
Years Ended October 31,
--------------------------------
1998 1997 1996
--------------------------------
(In thousands)
Engineered Steel Bars:(1)
Net sales................................................. $327,296 $319,468 $292,167
Operating income.......................................... 58,908 50,762 39,090
Depreciation and amortization............................. 13,097 13,940 18,263
Identifiable assets....................................... $219,727 $192,937 $171,351
Aluminum Mill Sheet Products:(2)
Net sales................................................. $266,355 $261,041 $248,517
Operating income.......................................... 7,788 1,753 7,721
Depreciation and amortization............................. 10,670 10,154 10,077
Identifiable assets....................................... $198,596 $163,637 $182,743
Engineered Products:(3, 4)
Net sales................................................. $230,012 $206,831 $125,096
Operating income (loss)................................... (52,606) 15,444 14,506
Depreciation and amortization............................. 17,928 13,055 7,606
Identifiable assets....................................... $220,161 $281,943 $231,861
(1) Includes NitroSteel and Heat Treat divisions previously reported under the
Steel Tubes segment. (See Note 3 to financial statements)
(2) 1998 results include three weeks of Nichols Aluminum Alabama's operations
acquired October 9, 1998. (See Note 2 to financial statements)
(3) 1996 results include three months of Piper Impact's operations. Also, 1998
data includes the results of Piper Impact Europe. Identifiable assets as of
October 31, 1998 and 1997 include assets of Piper Impact Europe, acquired
October 29, 1997. (See Note 2 to financial statements)
(4) During 1998, Piper Impact recorded a $58.5 million non-recurring
restructuring charge as the result of impairment as described by Statement
of Financial Accounting No. 121. This restructuring charge is included in
operating income. (See Note 4 to financial statements)
The engineered steel bar business posted another record year, driven by strong
demand in the transportation markets. The business achieved best-ever levels in
sales and operating income. In December 1998, steel scrap prices reached their
lowest levels in years, but this has been offset by some softening in the
marketplace for steel bar products as customers work to manage their
inventories. In fiscal 1999, MACSTEEL plans to finish its Phase IV expansion
project which will double its production capacity for MACPLUS, its most premium
product. Work
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has begun on Phase V, which will increase capacity at MACSTEEL's engineered bar
mills and the MACSTEEL Heat Treating Division and will improve operational
efficiency at MACSTEEL NitroSteel.
The aluminum mill sheet business ended the year on a high note. Spreads have
increased from their depressed levels in the first half of the year and aluminum
scrap prices are relatively stable. The backlog for the first quarter is
stronger than normal, helped in part by the acquisition of Nichols Aluminum
Alabama. The business also has finished construction of its rotary furnace
project at its mini-mill in Davenport, Iowa, which will allow the casting plant
to use less costly, lower grade scrap in its production process. The furnaces
are expected to become fully operational in early fiscal 1999.
The engineered products business had a tough year. The automotive air bag
market underwent major and rapid changes during fiscal 1998. While Piper Impact
Europe made a solid contribution in its first full year with the Company, slack
demand in Asia and the General Motors strike adversely affected sales for Piper
Impact's products in North American markets. To improve its competitiveness and
its cost structure, Piper Impact is consolidating its operations in New Albany,
Mississippi by closing down a finishing plant in Park City, Utah. Marketing
efforts remain focused on building sales in diversified applications using Piper
Impact's unique product design capabilities and impact-extrusion manufacturing
process. The fabricated products businesses, AMSCO and Homeshield Fabricated
Products had slightly better results for fiscal 1998 as these businesses further
improved their operations. Efforts remain focused on using existing capacity for
new products and for developing end-markets using the Company's unique
value-added roll forming and polylaminate technology.
Outlook
The Company currently expects that overall business levels for fiscal 1999
should be similar to those experienced during 1998. However, domestic and global
market factors will impact the Company and any slowdown in the U.S. economy
could affect demand and pricing for many of the Company's products. Since the
non-recurring restructuring charge at Piper Impact included the write-off of
goodwill and some long lived assets, it will result in lower depreciation and
amortization for fiscal 1999. The acquisition of Nichols Aluminum Alabama is
expected to impact earnings in fiscal 1999. Improved financial results will be
dependent upon, among other things, whether the continued strength of the
economy can be sustained, improvements in the markets which the Company serves,
and whether the improvements in the price spreads of aluminum mill sheet
products can be sustained.
1998 COMPARED TO 1997
Net Sales -- Net sales for fiscal 1998 were $797.5 million, representing an
increase of $51.4 million when compared to fiscal 1997. This increase reflects
higher net sales in all three business segments as well as an increase of $14.4
million resulting from sales to discontinued operations which were previously
reflected as intersegment sales and eliminated in 1997. These sales are now
third-party sales and are not eliminated in 1998. Piper Impact Europe, which was
acquired in October 1997, contributed a full year of sales in fiscal 1998.
Net sales for fiscal 1998 from the Company's engineered steel bar business
were $327.3 million, representing an increase of $7.8 million, or 2%, when
compared to fiscal 1997. This increase was primarily attributable to a better
mix of product sales with a higher percentage of MACPLUS and bearing steels.
Net sales from the Company's aluminum mill sheets products business for fiscal
1998 were $266.4 million, representing an increase of $5.3 million, or 2%, when
compared to fiscal 1997. This increase was primarily attributable to strong
demand, which yielded a 5% increase in volume.
Net sales from the engineered products group increased $23.2 million to $230.0
million. The majority of the increase resulted from the addition of Piper Impact
Europe offset by a decrease in net sales at Piper Impact.
Restructuring Charge -- During the year ended October 31, 1998, the Company
recorded a restructuring charge of $58.5 million related to its subsidiary,
Piper Impact.
Components of this special charge include $51.2 million for goodwill
impairment; $6.7 million for impairment of property, plant and equipment; and
$600 thousand for severance benefits to be paid to employees of the Park City,
Utah plant. Piper Impact experienced significant changes in market conditions
and the relationship with its major customer in fiscal 1998, which led to
substantial declines in sales and operating cash flow. Management began an
evaluation of the operations of Piper Impact in August 1998. As a result of this
evaluation, in September 1998, management approved a plan to close the Park
City, Utah facility and move its production to the New Albany, Mississippi
facility.
Due to the significance of the changes discussed above and the decision to
close one of the acquired production facilities, management performed an
evaluation of the recoverability of all of the assets of Piper Impact, excluding
the new steel plant, as described in Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". Management concluded from the results of this
evaluation that a significant impairment of intangible as well as long-lived
assets had occurred. An impairment charge was required because estimated fair
value was less than the carrying value of the assets.
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Considerable management judgment is necessary to estimate fair value.
Accordingly, actual results could vary significantly from management's
estimates.
The one-time restructuring charge resulted in an after-tax impact on net
income of $38 million or $2.68 per share.
Operating Income -- Consolidated operating income for fiscal 1998 was $2.3
million. Included in operating income was the one-time $58.5 million
restructuring charge discussed above. Operating income excluding this
restructuring charge was $60.8 million, representing an increase of $5.8
million, or 10%, when compared to fiscal 1997. Primary contributing factors to
this increase were: 1) Increased sales and operating income from the engineered
steel bar and aluminum mill sheet business and 2) the inclusion of a full year
of Piper Impact Europe in the engineered products business. These improvements
were partly offset by lower operating income from Piper Impact of the engineered
products business.
Operating income from the Company's engineered steel bar business for fiscal
1998 was $58.9 million, representing an increase of $8.1 million, or 16%, when
compared to fiscal 1997. This increase was principally due to increased sales
from strong demand in the transportation markets as well as lower material
prices. These results represented a record year for this business.
Operating income from the Company's aluminum mill sheet products business for
fiscal 1998 was $7.8 million, representing an increase of $6.0 million, or 344%,
when compared to fiscal 1997. This increase was principally due to increased
volume and net sales accompanied by lower scrap prices. During the fourth
quarter of 1998, this business experienced a turnaround with strong demand and
favorable material costs.
The Company's engineered products business experienced an operating loss of
$52.6 million for fiscal 1998. Included in this loss was the non-recurring
restructuring charge of $58.5 million described above. Operating income for 1998
excluding this restructuring charge was $5.9 million, a decrease of $9.6 million
or 62% from 1997. This decline is largely a result of operating losses
experienced at Piper Impact. While Piper Impact Europe made a solid contribution
in its first full year with the Company, slack demand in Asia and the General
Motors strike adversely affected sales for Piper Impact products in North
American markets. The fabricated products lines within this business showed
modest improvement over fiscal 1997.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses increased in fiscal 1998 by $4.3 million, or 10%,
compared to fiscal 1997. This increase is largely a result of the inclusion of a
full year of Piper Impact Europe, which was not included in 1997.
Depreciation and Amortization -- Depreciation and amortization increased by
$4.5 million in fiscal 1998 compared to fiscal 1997. This increased depreciation
resulted from the inclusion of Piper Impact Europe in 1998 and the increased
depreciation at Piper Impact for the steel products plant partially offset by
lower depreciation at the engineered steel bar business.
Interest Expense and Capitalized Interest -- Interest expense decreased by
$2.6 million compared to fiscal 1997 as a result of reducing bank borrowings
with proceeds received from the sale of LaSalle and the Tubing operations.
Capitalized interest increased by $859 thousand in 1998 compared to 1997
primarily due to Phase III and IV of the MACSTEEL expansion projects.
Other -- "Other, net" consists largely of investment income and remained
relatively constant.
Income From Continuing Operations -- The Company had a loss from continuing
operations of $3.9 million in 1998. Included in this loss was the after-tax
non-recurring restructuring charge of $38.0 million. Income from continuing
operations excluding the restructuring charge was $34.1 million, an improvement
of $6.4 million, or 23%, compared to fiscal 1997. The improvement was
attributable to improved results in the Company's engineered steel bars and
aluminum mill sheet businesses, and the inclusion of a full year of Piper Impact
Europe and lower interest expense. These improvements were partially offset by
lower operating results at Piper Impact. The Company's effective income tax rate
was 35% for fiscal 1998 and 1997.
Income from Discontinued Operations -- Income from discontinued operations,
net of income taxes, for fiscal 1997, was $5.2 million which consisted of the
Tubing Operations and LaSalle Steel. There was no income from discontinued
operations in fiscal 1998. (See Note 3 to the financial statements)
Net Income -- Fiscal 1998 net income was $9.2 million, compared to $69.2
million for fiscal 1997. Included in net income for fiscal 1998 is an after-tax
non-recurring restructuring charge of $38.0 million and an after-tax gain of
$13.0 million on the sale of discontinued operations. Included in net income for
1997 was an after-tax gain of $36.3 million on the sale of discontinued
operations.
1997 COMPARED TO 1996
Net Sales -- Net sales for fiscal 1997 were $746.1 million, representing an
increase of $126.0 million when compared to fiscal 1996. This increase resulted
principally from a full year of Piper Impact sales in 1997 compared to three
months in 1996 and higher volumes in the engineered steel bar business.
Net sales for fiscal 1997 from the Company's engineered steel bar business
were $319.5 million, representing an increase of $27.3 million, or 9%, when
compared to fiscal 1996. This increase was attributable to record volume.
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An 11% increase in volume resulted from improved market share following the
Company's capacity expansion program.
Net sales from the Company's aluminum mill sheet products business for fiscal
1997 were $261.0 million, representing an increase of $12.5 million, or 5%, when
compared to fiscal 1996. This increase was mostly attributable to increased
volume.
Net sales from the Company's engineered products business for fiscal 1997 was
$206.8 million, representing an increase of $81.7 million or 65%. This increase
was mostly attributable to a full year of Piper Impact in 1997 compared to three
months in 1996.
Operating Income -- Consolidated operating income for fiscal 1997 was $55.0
million, representing an increase of $8.6 million, or 18%, when compared to
fiscal 1996. This increase resulted from improved sales and operating income
from the engineered steel bar business, partly offset by lower operating income
from the aluminum mill sheet products business.
Operating income from the Company's engineered steel bar business for fiscal
1997 was $50.8 million, representing an increase of $11.7 million, or 30%, when
compared to fiscal 1996. This increase was principally due to increased sales
following the Company's capacity expansion program but 1996 operating income was
also affected by higher accruals to the allowance for doubtful accounts. These
higher accruals were necessary as the engineered steel bar business increased
sales during the past several years.
Operating income from the Company's aluminum mill sheet products business for
fiscal 1997 was $1.8 million, representing a decrease of $6.0 million, or 77%,
when compared to fiscal 1996. This decrease was principally due to volatility in
the aluminum scrap markets, resulting in higher average raw material costs and
lower price spreads.
Operating income from the Company's engineered products business for fiscal
1997 was $15.4 million, representing an increase of $938 thousand, or 6%, when
compared to fiscal 1996. The results for 1997 included a full year of Piper
Impact in 1997 compared to three months in 1996. Fourth quarter results of 1997
were affected by start-up costs, including higher labor and training expenses
and the temporary use of less efficient production processes at Piper Impact's
new plant in New Albany, Mississippi.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses decreased in fiscal 1997 by $1.6 million, or 4%,
compared to fiscal 1996. This decrease was principally due to higher accruals to
the allowance for doubtful accounts in the prior year affecting the engineered
steel bar and the aluminum mill sheet products businesses. These higher accruals
were needed because the Company experienced $5.7 million in bad debts during the
year ended October 31, 1996, and to recognize risks associated with higher sales
volume achieved during the past several years. Fiscal 1997 selling, general and
administrative expenses were also affected by a full year of Piper Impact
compared to three months in fiscal 1996.
Depreciation and Amortization -- Depreciation and amortization increased by
$1.2 million in fiscal 1997 compared to fiscal 1996. Increased depreciation
resulting from a full year of Piper Impact was partly offset by lower
depreciation at MACSTEEL.
Interest Expense and Capitalized Interest -- Interest expense increased by
$5.6 million compared to fiscal 1996 primarily due to increased long-term debt
related to the Piper Impact acquisition in the fourth quarter of fiscal 1996.
Capitalized interest increased by $3.0 million in 1997 compared to 1996
primarily due to Phase III of the MACSTEEL expansion project and the
construction of the new Piper Impact plant in New Albany, Mississippi.
Other -- Included in "Other, net" for fiscal 1996, was a $2.3 million pretax
gain which represents the final recovery of a business interruption claim
related to a fire at the Company's Lincolnshire, Illinois facility that occurred
in 1993. In addition, "Other, net" included investment income of $2.0 million
for fiscal 1997 compared to $1.6 million for fiscal 1996.
Income From Continuing Operations -- Income from continuing operations
improved by $4.7 million, or 21%, compared to fiscal 1996. The improvements were
principally attributable to improved results at the Company's MACSTEEL division.
The Company's effective income tax rate was 35% for fiscal 1997 compared to 42%
in 1996.
Income From Discontinued Operations -- Income from discontinued operations,
net of income taxes, for fiscal 1997, was $5.2 million, compared to $9.9 million
for 1996. Fiscal 1996 included a full year of LaSalle which was sold during the
second quarter of fiscal 1997.
Net Income -- Fiscal 1997 net income was $69.2 million, compared to $30.4
million for fiscal 1996. Included in net income for fiscal 1997 is an after-tax
gain of $36.3 million on the sale of LaSalle Steel Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash on hand, cash flow from
operations, and borrowings under an unsecured $250 million Revolving Credit and
Term Loan Agreement ("Bank Agreement"). The Bank Agreement currently consists of
a revolving line of credit ("Revolver"). In July 1997, the term loan provisions
of the Bank Agreement expired. The Bank Agreement expires July 23, 2003 and
provides for up to $25 million for standby letters of credit, limited to the
undrawn amount available under the Revolver. All borrowings under the
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Revolver bear interest, at the option of the Company, at either (i) the prime
rate or the federal funds rate plus one percent, whichever is higher, or (ii) a
Eurodollar based rate. In the fourth quarter of fiscal 1996, the Company entered
into interest rate swap agreements, which effectively converted $100 million of
its variable rate debt under the Bank Agreement to fixed rate debt. Under these
agreements, payments are made based on a fixed rate ($50 million at 7.025%, and
$50 million at 6.755%) and payments are received on a LIBOR based variable rate
(5.22203% at October 31, 1998). Differentials to be paid or received under the
agreements are recognized as interest expense. Payments under the swap
agreements are tied to the interest periods for the borrowings under the Bank
Agreement. The swap agreements mature July 29, 2003. The Bank Agreement contains
customary affirmative and negative covenants and requirements to maintain a
minimum consolidated tangible net worth, as defined. The Bank Agreement limits
the payment of dividends and certain restricted investments. At October 31,
1998, retained earnings of approximately $40 million were available for
dividends. Under the Bank Agreement, at October 31, 1998, there was $80 million
outstanding under the Revolver.
In December 1995, the Company acquired all of its outstanding 10.77% Senior
Notes for a purchase price equal to 107.5% of the principal amount plus accrued
interest. The acquisition and related expenses resulted in an after-tax
extraordinary charge of approximately $2.5 million in the first quarter of 1996.
The acquisition was funded with cash and additional borrowings.
On June 30, 1995, the Company exercised its right under the terms of its
Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for
an aggregate of $84,920,000 of its 6.88% Convertible Subordinated Debentures due
June 30, 2007("Debentures"). During September 1998, the Company accepted an
unsolicited block offer to buy back $1.5 million principal amount of its
Convertible Subordinated Debentures; therefore, the outstanding balance as of
October 1998 is $83,420,000. Interest is payable semi-annually on June 30 and
December 31 of each year. The Debentures are subject to mandatory annual sinking
fund payments sufficient to redeem 25% of the Debentures issued on each of June
30, 2005 and June 30, 2006, to retire a total of 50% of the Debentures before
maturity. The Debentures are subordinate to all senior indebtedness of the
Company and are convertible, at the option of the holder, into shares of the
Company's common stock at a conversion price of $31.50 per share.
On August 9, 1996, the Company completed the acquisition of substantially all
of the assets of Piper Impact. Piper Impact's assets, net of various
liabilities, were acquired for approximately $130 million in cash, cash
equivalents, and notes. This acquisition was financed with existing cash and
bank borrowings. Subsequent to the acquisition, the Company's Board of Directors
approved additional capital expenditures at Piper Impact totaling approximately
$42 million. These projects were completed in fiscal year 1998.
On April 18, 1997, the Company completed the sale of LaSalle for approximately
$65 million in cash. The proceeds were used to pay down the Company's Revolver.
On October 29, 1997, the Company acquired, through its Dutch subsidiary, Piper
Impact Europe B.V.("Piper Impact Europe"), substantially all of the assets of
Advance Metal Forming C.V., a Dutch limited partnership, for approximately $30
million. The acquisition was financed with existing cash and bank borrowings of
35 million Dutch Guilders. Piper Impact Europe's primary source of funds is a
stand-alone secured credit facility ("Credit Facility") providing up to 50
million Dutch Guilders ("NLG"). At October 31, 1998 and 1997, 1 NLG was equal to
.535 and .514 dollars. The Credit Facility consists of a Roll-Over Term Loan, a
Medium Term Loan and an Overdraft Facility. The Roll-Over Term Loan provides NLG
15 million for loan periods of 1, 2, 3, 6, or 12 months with repayment of
outstanding borrowings on October 27, 2002. Interest is payable on the repayment
date at the Amsterdam Interbank Offering Rate (AIBOR) plus 90 basis points. In
the case of a loan period of twelve months, interest is payable six months after
the beginning of the loan period and on the repayment date. The Medium Term Loan
provides NLG 15 million at 6.375% payable quarterly in arrears from March 1,
1998, with quarterly repayments of principal in equal amounts of NLG 500
thousand commencing January 1, 1999 through April 1, 2006. The Overdraft
Facility provides an aggregate amount of NLG 20 million to cover overdrafts or
up to NLG 15 million of loans for a period of one year, subject to annual
renewal. Overdrafts bear interest at the Bank's published rate for overdraft
facilities plus 1% per annum. Loans under the Overdraft Facility bear interest
at AIBOR plus 45 to 55 basis points. The terms of Overdraft Facility loans are
selected by Piper Impact Europe to be a period of 1, 2, 3, 6, or 12 months.
Interest on overdrafts are paid quarterly in arrears. The borrowings outstanding
under this Credit Facility as of October 31, 1998 totaled approximately $22
million.
On December 3, 1997, the Company completed the sale of its Tubing Operations
for approximately $30 million in cash. The proceeds were used to improve the
Company's debt structure and for investment in the Company's value-added
businesses.
On October 9, 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 named Nichols Aluminum-Alabama,
Inc. ("Nichols Aluminum Alabama"). The acquisition was financed using existing
cash available under the Revolver. Certain Industrial Development bonds were
assumed as part of the Nichols Aluminum Alabama acquisition. These bonds mature
August 1, 2004 with interest payable monthly. The bonds bear interest at a
weekly interest rate, which is the rate determined by the remarketing agent
under then prevailing
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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 October 1998 (the only
month the Company owned these bonds) ranged from 3.35% to 3.55%. The outstanding
principal amount of the bonds on October 31, 1998 was $4,755,000.
At October 31, 1998, the Company had commitments of $23 million for the
purchase or construction of capital assets, primarily relating to the Company's
continued expansions at MACSTEEL and Piper Impact. The Company plans to fund
these capital expenditures through cash flow from operations and, if necessary,
additional borrowings.
The Company believes that it has sufficient funds and adequate financial
sources available to meet its anticipated liquidity needs. The Company also
believes that cash flow from operations, cash balances and available borrowings
will be sufficient for the foreseeable future to finance anticipated working
capital requirements, capital expenditures, debt service requirements,
environmental expenditures and dividends.
Operating Activities
Cash provided by operating activities during fiscal 1998 was $64.1 million. This
represents a decrease of $15.4 million, or 19%, compared to fiscal 1997. This
decrease primarily resulted from increased inventory levels.
Investment Activities
Net cash used by investment activities in fiscal 1998 was $39.8 million compared
to $49.6 million in fiscal 1997. Fiscal 1998 cash from investing activities
included the acquisition of Decatur Aluminum Corp. and proceeds from the sale of
the Tubing Operations. Fiscal 1997 cash from investing activities included the
acquisition of Advanced Metal Forming, C.V. and proceeds from the sale of
LaSalle Steel Company. Capital expenditures decreased from $68.9 million in 1997
to $58.5 million in 1998. The Company estimates that fiscal 1999 capital
expenditures will approximate $60 to $70 million.
Financing Activities
Net cash used by financing activities for fiscal 1998 was $24.9 million,
principally consisting of net reductions in long-term debt of $18.6 million and
$9.1 million in common dividends, partly offset by proceeds from exercise of
stock options.
The Company uses futures and option contracts to hedge a portion of its
exposure to price fluctuations of aluminum. The exposure is related to the
Company's backlog of aluminum sales orders with committed prices as well as
future aluminum sales for which a sales price increase would lag a raw material
cost increase. Firm price commitments associated with these futures and options
contracts do not extend beyond December 1999. Hedging gains and losses are
included in "Cost of sales" in the income statement concurrently with the hedged
sales. Unrealized gains and losses related to open contracts are not reflected
in the consolidated statements of income.
EFFECTS OF INFLATION
Inflation has not had a significant effect on earnings and other financial
statement items.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for the Company's year ending October 31, 1999. SFAS No. 130
establishes standards for the reporting and displaying of comprehensive income
and its components. The Company continues to analyze SFAS No. 130 to determine
what additional disclosures will be required.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits", which is effective for the
Company's year ending October 31, 1999. This statement defines new disclosure
requirements for pension and other postretirement benefits in an effort to
facilitate financial analysis by adding useful information and deleting
disclosures that the FASB considers no longer useful. The Company continues to
analyze SFAS No. 132 to determine what additional disclosures will be required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the Company's year
ending October 31, 2000. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company will be
analyzing SFAS No. 133 to determine what, if any, impact or additional
disclosure requirements this pronouncement will have.
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YEAR 2000
The Company, like other businesses, is facing the Year 2000 issue. Many computer
systems and equipment with embedded chips or processors use only two digits to
represent the calendar year. This could result in computational or operational
errors as dates are compared across the century boundary causing possible
disruptions in business operations. The Year 2000 issue can arise at any point
in the Company's supply, manufacturing, processing, distribution, and financial
chains.
State of Readiness
The Company began addressing the Year 2000 issue in 1997, with an initial
assessment of Year 2000 readiness efforts at each of its operating units. Based
on the responses from the operating units, a standardized Year 2000 Plan format
was developed. By July 1998, each operating unit had completed a Year 2000 Plan
that included the following components:
1) Inventory of all systems (including hardware, software, and equipment with
embedded chips or processors),
2) Assessment of all systems for Year 2000 compliance,
3) Development of a project schedule for replacement or remediation of
non-compliant systems,
4) Development of a project schedule for testing compliant systems, and
5) Development of a list of significant vendors/suppliers for surveying their
Year 2000 readiness efforts.
The Year 2000 issue is being addressed within the Company by its individual
business units, and progress is reported periodically to management. The Company
has committed resources to conduct risk assessment and to take corrective
action, where required, with a target date of becoming Year 2000 ready for the
most critical systems by July 1999.
MACSTEEL, the most profitable and significant business segment of the Company,
has already replaced and/or remediated its most critical business systems to
become Year 2000 ready with testing scheduled for March 1999. The operating
units of the other two business segments are in the process of upgrading or
replacing their Enterprise Resource Planning ("ERP") systems with versions that
are certified to be Year 2000 ready by the manufacturers of such products. The
implementation of these ERP systems is anticipated to be complete by July 1999.
With respect to the plant systems, including automation and embedded chips
used in manufacturing operations, all business units are in the process of
completing their inventory and assessment audits. The Company is relying on
vendor certification and testing. Assessment and testing, with corrective action
as required, is expected to be completed by the third quarter of 1999.
With respect to the external parties, including suppliers and customers, the
Company's business units are in the process of surveying the Year 2000 readiness
efforts of critical external parties. Risk assessment is expected to be
completed by March 1999 and monitoring risk in this area will continue into the
third quarter of 1999, as many external parties will not have completed their
Year 2000 readiness efforts.
In addition, the Company is developing contingency plans intended to mitigate
possible disruption in business operations that may result from the Year 2000
issue. Contingency plans may include stockpiling necessary materials and
inventories, securing alternate sources of supply, adjusting facility shutdown
and start-up schedules, development of manual procedures to execute transactions
and complete processes and other appropriate measures. Once developed,
contingency plans will be continually refined as additional information becomes
available.
Cost
The Year 2000 activities and associated costs are being managed within each
business unit. The Company's total cost relating to the Year 2000 activities is
not expected to exceed $1 million.
Risks
Quanex is a diversified and decentralized company comprised of three business
segments. Each of these segments has multiple operating units, resulting in
thirteen separate Year 2000 Plans. Quanex has not required standardized systems
throughout the Company. This diversification has allowed the Company to spread
the risk of the Year 2000 issue, since no one system is responsible for the
entire financial and operational needs of the Company. While the diversification
reduces the risk of a material Year 2000 issue affecting the entire Company,
this same diversification increases the possibility that the Year 2000 issue
will occur at one or more units since many more
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systems exist than in a centralized environment. Management is addressing this
issue by requiring regular periodic reporting from each business unit and
monitoring the progress with follow-up review by independent consultants.
However, if implementation of the ERP systems at two major business units and
replacement/remediation of other critical non-compliant systems is not completed
in a timely manner, the affected units will implement contingency plans to
minimize disruptions in business operations that may result from the Year 2000
issue.
The Company relies on third party suppliers for raw materials, water,
utilities, transportation and other key services. Interruption of supplier
operations due to Year 2000 issues could affect the Company's operations. While
each business unit will evaluate the status of its major suppliers' Year 2000
readiness efforts and develop contingency plans to manage the risk, it can not
eliminate the potential for disruption due to third party failures.
The Company is also dependent upon its customers for sales and cash flow. Year
2000 interruptions in the operations of its major customers could result in
reduced sales, increased inventory or receivable levels and cash flow
reductions. The Company is in the process of surveying its major customers' Year
2000 readiness efforts to assess risk and develop plans with an intent to
minimize the impact on its operations.
The Company believes that it is taking all reasonable steps to ensure Year
2000 readiness. Its ability to meet the projected goals, including the costs of
addressing the Year 2000 issue and the dates upon which compliance will be
attained, depends on the Year 2000 readiness of its key suppliers and customers,
the completion of its final remediation and testing efforts and the successful
development and implementation of contingency plans. Although these and other
unanticipated Year 2000 issues could have an adverse effect on the results of
operations or financial condition of the Company, it is not possible to estimate
the extent of impact at this time, since the contingency plans are still under
development.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR
2000 INFORMATION AND READINESS DISCLOSURE ACT.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") introduced a
new currency, the Euro, on January 1, 1999. The new currency is in response to
the EMU's policy of economic convergence to harmonize trade policy, eliminate
business costs associated with currency exchange and to promote the free flow of
capital, goods and services among the participating countries.
On January 1, 1999, the participating countries adopted the Euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash (banking) transactions. The existing local currencies, or legacy
currencies, will remain legal tender through January 1, 2002. Beginning on
January 1, 2002, Euro-denominated bills and coins will be issued for cash
transactions. For a period of six months from this date, both legacy currencies
and the Euro will be legal tender. On or before July 1, 2002, the participating
countries will withdraw all legacy currency and use exclusively the Euro.
At the current time, the Company does not believe that the conversion to the
Euro will have a material impact on its business or its financial statements.
ITEM 7A. QUANTITATIVE/QUALITATIVE DISCLOSURE
The following discussion of the Company and its subsidiaries' exposure to
various market risks contains "forward looking statements" that involve risks
and uncertainties. These projected results have been prepared utilizing certain
assumptions considered reasonable in light of information currently available to
the Company. Nevertheless, because of the inherent unpredictability of interest
rates, foreign currency rates and metal commodity prices as well as other
factors, actual results could differ materially from those projected in such
forward looking information. For a description of the Company's significant
accounting policies associated with these activities, see Notes 1 and 16 to the
Consolidated Financial Statements.
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, 1998, the Company had fixed-rate debt totaling $101 million.
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 10 and 16 to
the Company's Consolidated Financial Statements). The conversion feature of the
Company's Subordinated Debentures makes it impractical to estimate the effect of
a hypothetical 10% change in interest rates. This is due to the high correlation
between the market value of these instruments and the market value of the
Company's common stock. In general, any changes in fair value would impact
earnings and cash flows only if the Company were to reacquire all or a portion
of these instruments in the open market prior to their maturity.
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The Company and certain of its subsidiaries' floating-rate obligations total
$99 million at October 31, 1998 (see Note 10 to the Company's Consolidated
Financial Statements). The exposure of these obligations to increases in
short-term interest rates is limited by interest rate swap agreements entered
into by the Company. These swap agreements effectively fix the interest rate on
all of the Company's variable rate debt, thus limiting the potential impact that
increasing interest rates would have on earnings. Under these swap agreements,
payments are made based on a fixed rate ($50 million at 7.025%, and $50 million
at 6.755%) and received on a LIBOR based variable rate (5.22203% at October 31,
1998). At October 31, 1998, the unrealized losses related to the interest rate
swap agreements are $8.5 million. If the floating rates were to change by 10%
from October 31, 1998 levels, the fair market value of these swaps would change
by approximately $1.7 million. However, it should be noted that any change in
value of these contracts, real or hypothetical, would be significantly offset by
an inverse change in the value of the underlying hedged item.
Foreign Currency Exchange Rate Risk
The Company is subject to significant exposure from fluctuations in US
Dollar/Dutch Guilder exchange rates. As further described in Note 16 of the
Consolidated Financial Statements, the Company utilizes foreign currency forward
contracts to limit transactional exposure to changes in currency exchange rates.
At October 31, 1998, the Company had 11 separate contracts maturing in monthly
increments to purchase an aggregate notional amount of $4.675 million in foreign
currency. These forward contracts do not extend beyond September 30, 1999.
Unrealized pretax gains on these forward contracts totaled approximately $137
thousand at October 31, 1998. A hypothetical 10% change in applicable October
31, 1998 forward rates would increase or decrease the pretax gain by
approximately $463 thousand related to these positions. However, it should be
noted that any change in value of these contracts, real or hypothetical, would
be significantly offset by an inverse change in the value of the underlying
hedged item.
In addition, the Company utilizes a range forward zero-cost agreement to
protect its initial equity investment in its Netherlands subsidiary, Piper
Impact Europe. This agreement, which was entered into with a major financial
institution, has a notional value of 30 million guilders. By establishing
minimum and maximum exchange rates, this agreement limits the potential
devaluation of the Company's initial investment in its subsidiary while also
limiting any potential appreciation. If, at the expiration date of the
agreement, the Dutch guilder/US dollar exchange rate is within the range of 1.80
to 2.05, this agreement will expire at no cost to either party. At October 31,
1998, there was no financial statement impact as the exchange rate fell within
the range. A hypothetical 10% increase in the October 31, 1998 exchange rate
would result in a positive adjustment to stockholders' equity of approximately
$10 thousand. In contrast, a hypothetical 10% decrease would result in a
negative adjustment to stockholder's equity of approximately $1.2 million.
However, it should be noted that any change in the value of this agreement, real
or hypothetical, would be significantly offset by an inverse change in the value
of the underlying hedged position.
Commodity Price Risk
In the normal course of business, the Company enters into long-term firm price
sales contracts with one of its customers. 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, 1998, the Company had open futures contracts at fair values of $3.3 million
and unrealized losses of $369,000 on such contracts. These contracts covered a
notional volume of 5,511,557 pounds of aluminum. A hypothetical 10% change from
the October 31, 1998 average LME ingot price of $.60 per pound would increase or
decrease the unrealized pretax losses related to these contracts by
approximately $330,000. However, it should be noted that any change in the value
of these contracts, real or hypothetical, would be significantly offset by an
inverse change in the cost of purchased aluminum scrap.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Quanex Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Quanex
Corporation and subsidiaries as of October 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 1998. Our audits also
included the financial statement schedule listed in the index on page 48. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Quanex Corporation and subsidiaries
as of October 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Houston, Texas
Date: November 23, 1998
RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Quanex Corporation and
subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles and include amounts that are based on
management's best judgments and estimates.
Quanex's system of internal controls is designed to provide reasonable
assurance, at justifiable cost, as to the reliability of financial records and
reporting and the protection of assets. The system of controls provides for
appropriate division of responsibility and the application of policies and
procedures that are consistent with high standards of accounting and
administration. Internal controls are monitored through recurring internal audit
programs and are updated as our businesses and business conditions change.
The Audit Committee, composed solely of outside directors, determines that
management is fulfilling its financial responsibilities by meeting periodically
with management, Deloitte & Touche LLP, and Quanex's internal auditors, to
review internal accounting control and financial reporting matters. The internal
and independent auditors have free and complete access to the Audit Committee.
We believe that Quanex's system of internal controls, combined with the
activities of the internal and independent auditors and the Audit Committee,
provides reasonable assurance of the integrity of our financial reporting.
/s/ VERNON E. OECHSLE /s/ WAYNE M. ROSE
Vernon E. Oechsle Wayne M. Rose
President and Vice President and
Chief Executive Officer Chief Financial Officer
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Quanex Corporation
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 1997
- ---------------------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and equivalents...................................... $ 26,279 $ 26,851
Accounts and notes receivable, less allowance for doubtful
accounts of $11,752,000 in 1998 and $10,338,000 in
1997................................................... 85,166 80,089
Inventories............................................... 85,397 73,035
Deferred income taxes..................................... 11,560 5,601
Prepaid expenses.......................................... 1,410 1,320
-------- --------
Total current assets.............................. 209,812 186,896
Property, plant and equipment, net.......................... 395,054 379,071
Net assets of discontinued operations....................... -- 13,554
Goodwill, net............................................... 52,281 91,496
Other assets................................................ 17,141 14,688
-------- --------
$674,288 $685,705
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 75,160 $ 71,317
Accrued expense........................................... 56,125 43,208
Current maturities of long-term debt...................... 12,248 11,050
Income taxes payable...................................... 3,300 8,503
-------- --------
Total current liabilities......................... 146,833 134,078
Long-term debt.............................................. 188,302 201,858
Deferred pension credits.................................... 7,832 6,627
Deferred postretirement welfare benefits.................... 7,092 6,835
Deferred income taxes....................................... 33,412 48,111
Other liabilities........................................... 18,773 19,373
-------- --------
Total liabilities................................. 402,244 416,882
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized; issued & outstanding -- none in 1998 and
1997................................................... -- --
Common stock, $.50 par value, 50,000,000 shares
authorized; 14,179,834 shares in 1998 and 14,050,411
shares in 1997 issued and outstanding.................. 7,090 7,025
Additional paid-in capital................................ 108,624 105,146
Retained earnings......................................... 156,278 156,528
Cumulative foreign currency translation adjustment........ 1,132 422
Adjustment for minimum pension liability.................. (1,080) (298)
-------- --------
Total stockholders' equity........................ 272,044 268,823
-------- --------
$674,288 $685,705
======== ========
See notes to consolidated financial statements.
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Quanex Corporation
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net sales................................................... $797,490 $746,093 $620,069
Costs and expenses:
Cost of sales............................................. 647,179 610,412 492,594
Selling, general and administrative....................... 47,713 43,375 44,959
Depreciation and amortization............................. 41,834 37,298 36,083
Restructuring charge...................................... 58,500 -- --
-------- -------- --------
Operating income............................................ 2,264 55,008 46,433
Other income (expense):
Interest expense.......................................... (14,904) (17,541) (11,929)
Capitalized interest...................................... 4,398 3,539 569
Other, net................................................ 2,278 1,637 4,544
-------- -------- --------
Income (loss) from continuing operations before income taxes
and extraordinary charge.................................. (5,964) 42,643 39,617
Income tax benefit (expense)................................ 2,087 (14,925) (16,639)
-------- -------- --------
Income (loss) from continuing operations and before
extraordinary charge...................................... (3,877) 27,718 22,978
Income from discontinued operations, net of income taxes.... -- 5,176 9,912
Gain on sale of discontinued operations, net of income
taxes..................................................... 13,046 36,290 --
-------- -------- --------
Income before extraordinary charge.......................... 9,169 69,184 32,890
Extraordinary charge -- early extinguishment of debt, net of
income taxes.............................................. -- -- (2,522)
-------- -------- --------
Net income attributable to common stockholders.............. $ 9,169 $ 69,184 $ 30,368
======== ======== ========
Earnings per common share:
Basic:
Continuing operations.................................. $ (0.27) $ 2.01 $ 1.70
Discontinued operations................................ -- 0.37 0.73
Gain on sale of discontinued operations................ .92 2.63 --
Extraordinary charge................................... -- -- (0.19)
-------- -------- --------
Total basic net earnings.......................... $ 0.65 $ 5.01 $ 2.24
======== ======== ========
Diluted:
Continuing operations.................................. $ (0.27) $ 1.90 $ 1.62
Discontinued operations................................ -- 0.31 0.61
Gain on sale of discontinued operations................ .92 2.17 --
Extraordinary charge................................... -- -- (0.15)
-------- -------- --------
Total diluted net earnings........................ $ 0.65 $ 4.38 $ 2.08
======== ======== ========
Weighted average number of shares outstanding
Basic.................................................. 14,149 13,807 13,524
Diluted................................................ 14,149 16,725 16,354
See notes to consolidated financial statements.
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Quanex Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
Total
Common Stock Additional Stock-
Years Ended October 31, 1998, -------------------- Paid-in Retained holders'
1997, and 1996 Shares Amount Capital Earnings Other Equity
- ------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1995...................... 13,485,312 $6,743 $ 92,406 $ 74,426 $(761) $172,814
Net income..................................... -- -- -- 30,368 30,368
Common dividends ($.60 per share).............. -- -- -- (8,115) -- (8,115)
Adjustment for minimum pension liability....... -- -- -- -- (31) (31)
Unearned compensation.......................... -- -- -- -- 132 132
Other.......................................... 105,088 52 1,845 (56) -- 1,841
---------- ------ -------- -------- ----- --------
Balance at October 31, 1996...................... 13,590,400 6,795 94,251 96,623 (660) 197,009
Net income..................................... -- -- -- 69,184 69,184
Common dividends ($.61 per share).............. -- -- -- (8,422) -- (8,422)
Adjustment for minimum pension liability....... -- -- -- -- 177 177
Unearned compensation.......................... -- -- -- -- 185 185
Foreign currency translation adjustment........ 422 422
Other.......................................... 460,011 230 10,895 (857) -- 10,268
---------- ------ -------- -------- ----- --------
Balance at October 31, 1997...................... 14,050,411 $7,025 $105,146 $156,528 $ 124 $268,823
Net income..................................... 9,169 9,169
Common dividends ($.64 per share).............. (9,059) (9,059)
Adjustment for minimum pension liability....... (782) (782)
Foreign currency translation adjustment........ 710 710
Other.......................................... 129,423 65 3,478 (360) -- 3,183
---------- ------ -------- -------- ----- --------
Balance at October 31, 1998...................... 14,179,834 $7,090 $108,624 $156,278 $ 52 $272,044
========== ====== ======== ======== ===== ========
See notes to consolidated financial statements.
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Quanex Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED OCTOBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES:
Net Income................................................ $ 9,169 $ 69,184 $ 30,368
Adjustments to reconcile net income to cash provided by
operating activities:
Income from discontinued operations (net of taxes)... -- (5,176) (9,912)
Gain on sale of discontinued operations (net of
taxes).............................................. (13,046) (36,290) --
Restructuring charge (net of deferred taxes of
$20,475)............................................ 38,025 -- --
Depreciation and amortization........................ 42,400 37,865 36,654
Deferred income taxes................................ 6,059 7,545 2,533
Deferred pension costs............................... (34) (183) 318
Deferred postretirement welfare benefits............. 257 376 417
-------- --------- --------
82,830 73,321 60,378
Changes in assets and liabilities net of effects from
acquisitions and dispositions:
Decrease in accounts and notes receivable............ 3,664 2,957 7,798
Decrease (increase) in inventory..................... (10,994) 8,898 (17,568)
Increase (decrease) in accounts payable.............. (2,262) 112 (4,848)
Increase (decrease) in accrued expenses.............. (346) 2,919 2,907
Other, net........................................... (8,822) (8,868) 1,011
-------- --------- --------
Cash provided by continuing operations............ 64,070 79,339 49,678
Cash provided by discontinued operations.......... -- 89 16,073
-------- --------- --------
Cash provided by operating activities............. 64,070 79,428 65,751
INVESTMENT ACTIVITIES:
Acquisition of Decatur Aluminum Corp., net of cash and
equivalents acquired................................... (9,573) -- --
Acquisition of Advanced Metal Forming, C.V., net of cash
and equivalents acquired............................... -- (33,584) --
Acquisition of Piper Impact, Inc., net of cash and
equivalents acquired................................... -- (5,575) (123,264)
Net proceeds from sale of LaSalle Steel Company........... 1,366 63,900 --
Net proceeds from sale of the Tubing Operations........... 30,068 -- --
Capital expenditures, net of retirements.................. (58,513) (68,916) (34,699)
Capital expenditures of discontinued operations........... -- (3,868) (11,089)
Other, net................................................ (3,168) (1,550) (5,120)
-------- --------- --------
Cash (used) by investment activities.............. (39,820) (49,593) (174,172)
-------- --------- --------
Cash provided (used) by operating and investment
activities...................................... 24,250 29,835 (108,421)
FINANCING ACTIVITIES:
Bank borrowings (repayments), net......................... (17,124) (41,828) 160,000
Purchase of subordinated debentures....................... (1,500) -- --
Notes payable borrowings (repayments)..................... -- -- (10,000)
Purchase of Senior Notes.................................. -- -- (44,667)
Common dividends paid..................................... (9,059) (8,422) (8,115)
Issuance of common stock, net............................. 3,183 10,453 1,973
Other, net................................................ (429) 429 0
-------- --------- --------
Cash provided (used) by financing activities...... (24,929) (39,368) 99,191
-------- --------- --------
Effect of exchange rate changes on cash and equivalents..... 107 422 --
-------- --------- --------
Decrease in cash and equivalents............................ (572) (9,111) (9,230)
Cash and equivalents at beginning of period................. 26,851 35,962 45,192
-------- --------- --------
Cash and equivalents at end of period....................... $ 26,279 $ 26,851 $ 35,962
======== ========= ========
See notes to consolidated financial statements.
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Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Quanex Corporation
and its subsidiaries (the "Company"), all of which are wholly owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
SCOPE OF OPERATIONS
The Company operates primarily in three industry segments: manufacturing of
engineered steel bars, aluminum mill sheet products and engineered products. The
Company's products include engineered steel bars, coiled aluminum sheet (mill
finish and coated), aluminum and steel fabricated products and impact
extrusions. The Company's manufacturing operations are conducted primarily in
the United States.
REVENUES
The Company recognizes revenues when products are shipped and the title and risk
of ownership pass to the customer.
STATEMENTS OF CASH FLOWS
The Company generally considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. Similar
investments with original maturities beyond three months are considered
short-term investments. For fiscal years 1998, 1997 and 1996 cash paid for
income taxes was $20,860,000, $13,906,000, and $19,551,000, respectively. These
amounts are before refunds of $172,000, $471,000, and $204,000, respectively.
Cash paid for interest for fiscal 1998, 1997 and 1996 was $14,404,000,
$17,964,000, and $12,084,000, 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 7.
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 the
acquisitions of Piper Impact, Inc. in 1996, Piper Impact Europe B.V. in 1997 and
Nichols Aluminum-Alabama, Inc. in 1998 (See Note 2). At October 31, 1998 and
1997, accumulated amortization was $9,255,000, and $10,398,000, respectively.
During the fourth quarter of 1998, the balance of goodwill associated with Piper
Impact was written off in accordance with Statement of Financial Accounting
Standard No. 121. (See Note 4)
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of".
The statement established accounting standards related to the impairment of
long-lived assets, such as property, plant, equipment and intangibles. The
Company adopted SFAS No. 121 in fiscal 1997. The
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Company evaluates any possible impairment of long-lived assets using estimates
of undiscounted future cash flows. (See Note 4 -- regarding the impact of this
statement.)
HEDGING
The Company enters into various derivative instruments to protect itself from
fluctuating prices and rates. The Company uses futures contracts to hedge a
portion of its exposure to price fluctuations of aluminum. Hedging gains and
losses are recognized concurrently with related sales transactions. The Company
enters into interest rate swap agreements which effectively exchange variable
interest rate debt for fixed interest rate debt. The agreements are used to
reduce the exposure to possible increases in interest rates. The Company enters
into these swap agreements with major financial institutions. The Company uses
foreign currency swap agreements to protect the value of its investment in Piper
Impact Europe as well as to protect itself from currency fluctuations on certain
sales and purchases. The impact of the foreign currency instruments which
protect the investment in Piper Impact Europe are recorded as a foreign currency
translation adjustment in the equity section of the financial statements when
exchange rates go outside of the limits. The gains and losses on the forward
contracts related to the sales and purchases are deferred off-balance sheet and
included as a component of the related transaction when recorded. (See Note 16)
EARNINGS PER SHARE DATA
In February 1997, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 128 -- "Earnings per Share" ("SFAS 128")
which specifies the computation, presentation and disclosure requirements for
Earnings Per Share ("EPS"). SFAS 128 replaces the presentation of primary and
fully diluted EPS pursuant to Accounting Principles Board Opinion No.
15 -- "Earnings per Share" ("APB 15") with the presentation of basic and diluted
EPS. Basic EPS 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 EPS 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. The Company adopted SFAS
128 in fiscal 1998 and restated all prior-period EPS disclosure.
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.
RECLASSIFICATION
Certain amounts for prior periods have been reclassified in the accompanying
consolidated financial statements to conform to 1998 presentations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for the Company's year ending October 31, 1999. SFAS No. 130
establishes standards for the reporting and displaying of comprehensive income
and its components. The Company continues to analyze SFAS No. 130 to determine
the additional disclosures required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for the Company's year
ending October 31, 1999. This statement establishes standards for the reporting
of information about operating segments. The Company has adopted this
pronouncement as of October 31, 1998 and restated prior periods' segment
information.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits", which is effective for the
Company's year ending October 31, 1999. This statement
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defines new disclosure requirements for pension and other postretirement
benefits in an effort to facilitate financial analysis by adding useful
information and deleting disclosures that the FASB considers no longer useful.
The Company continues to analyze SFAS No. 132 to determine what additional
disclosures will be required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the Company's year
ending October 31, 2000. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company will be
analyzing SFAS No. 133 to determine what, if any, impact or additional
disclosure requirements this pronouncement will have.
2. ACQUISITIONS
On August 9, 1996, the Company acquired the assets, net of various liabilities,
of Piper Impact, Inc. ("Piper Impact"). Piper Impact is a manufacturer of
custom-designed, impact-extruded aluminum and steel parts for the
transportation, defense and other commercial markets, with production facilities
in New Albany, Mississippi and Park City, Utah.
Piper Impact's net assets were acquired for approximately $130 million in
cash, cash equivalents, and notes. To finance the acquisition, the Company
entered into an unsecured revolving credit/term loan facility which provides for
the borrowing of up to $250 million. (See Note 10) The acquisition was accounted
for using the purchase method of accounting. The purchase price was allocated to
the assets and liabilities of Piper Impact based on estimated fair values.
Goodwill associated with the Piper Impact acquisition approximated $56 million,
which was being amortized on a straight-line basis over twenty-five years.
During 1998, in accordance with SFAS No. 121, the Company determined that the
goodwill of Piper Impact was impaired and recorded a restructuring charge. (See
Note 4).
Liabilities assumed included an estimated $20 million related to costs for
further investigation and specified environmental remediation. These cost
estimates include charges for additional studies, remediation, renovations to
affected facilities and equipment, and other compliance expenditures. The
estimated range of costs is $15 million to $25 million of which the accrual
represents management's best estimate of total costs expected to be incurred.
Actual expenditures could differ from current estimates as additional studies
are completed, requiring revisions to the remediation and restoration plan.
The unaudited pro-forma consolidated results of operations of the Company are
shown below as if the acquisition had occurred at the beginning of the fiscal
period indicated. These results are not necessarily indicative of the results
which would actually have occurred if the purchase had taken place at the
beginning of the period, nor are they necessarily indicative of future results.
Pro Forma
----------------
October 31, 1996
----------------
(In thousands,
except per share
amounts)
(Unaudited)
Net sales................................................... $708,492
Income before extraordinary charge.......................... 27,751
Net income attributable to common shareholders
Before extraordinary charge............................... 27,751
Earnings per share before extraordinary charge:
Basic..................................................... $ 2.05
Diluted................................................... $ 1.92
On October 29, 1997, the Company, through its Dutch subsidiary, Piper Impact
Europe B.V. ("Piper Impact Europe"), acquired the net assets of Advanced Metal
Forming C.V., a Dutch limited partnership, for approximately $30 million. The
Company's balance sheet as of October 31, 1997 includes Piper Impact Europe.
Goodwill associated with Piper Impact Europe is approximately NLG 26 million or
$14 million as of October 31, 1998. The income statement for the twelve months
ended October 31, 1997 does not include Piper Impact Europe.
Piper Impact Europe produces aluminum impact extrusions and precision steel
stampings for the automotive and electronics industries in Europe and North
America. Piper Impact Europe employs approximately 300 people, and its
manufacturing facilities are located near Zwolle in The Netherlands.
On October 9, 1998, the Company, acquired the stock of Decatur Aluminum Corp.,
a Decatur, Alabama based coiled aluminum sheet manufacturer for approximately
$19 million. Included in the purchase price was debt totaling $5 million and
other specified liabilities for $5 million assumed by the Company. The newly
acquired company has been renamed Nichols Aluminum-Alabama, Inc. ("Nichols
Aluminum Alabama"), in alignment
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with Quanex's other aluminum mill sheet businesses in its Nichols Aluminum
division. Based on preliminary purchase accounting, goodwill associated with
Nichols Aluminum Alabama is approximately $10 million as of October 31, 1998.
Nichols Aluminum Alabama's operations include cold rolling aluminum sheet to
specific gauge, annealing, leveling, custom painting and slitting to width.
Nichols Aluminum Alabama employs approximately 110 people.
3. DISCONTINUED OPERATIONS
In April 1997, the Company completed the sale of its LaSalle Steel Company
("LaSalle") subsidiary. The Company recorded an after tax gain on the sale of
$36,290,000 in the second quarter of fiscal 1997. During 1998, an additional
after tax gain of $668,000 was recorded as a result of post-closing adjustments.
LaSalle's results of operations have been classified as discontinued operations
and prior periods have been restated. For business segment reporting purposes,
LaSalle's data was previously reported as the segment "Cold Finished Steel
Bars".
In December 1997, the Company completed the sale of its tubing operations,
comprised of Michigan Seamless Tube, Gulf States Tube, and the Tube Group
Administrative Office ("Tubing Operations"). The sale was effective November 1,
1997. The Company recorded an after tax gain on the sale of $12,378,000 during
fiscal 1998. Included in the gain is an accrual for the Company's best estimate
of potential environmental clean-up costs at one of the discontinued operating
facilities. Results of these operations have been classified as discontinued and
prior periods have been restated. For business segment reporting purposes,
Tubing Operations were previously classified as "Steel Tubes".
Net sales and income from discontinued operations are as follows:
Years Ended October 31,
-----------------------
1997 1996
-----------------------
(In thousands)
Net sales................................................... $187,123 $275,641
Operating income............................................ 7,962 17,090
Income tax expense.......................................... (2,786) (7,178)
Income from discontinued operations......................... $ 5,176 $ 9,912
October 31, 1997
----------------
(In thousands)
Net Assets of Discontinued Operations Current assets........ $ 24,388
Property, plant and equipment, net.......................... 17,357
Other assets................................................ 2,784
Current liabilities......................................... (11,241)
Deferred pension credits.................................... (4,373)
Deferred postretirement welfare benefits.................... (22,406)
Deferred income taxes....................................... 6,718
Adjustment for minimum pension liability.................... 327
--------
Net assets of discontinued operations..................... $ 13,554
========
4. PIPER IMPACT IMPAIRMENT DISCLOSURE
During the year ended October 31, 1998, the Company recorded a restructuring
charge of $58.5 million related to its subsidiary, Piper Impact.
Components of this special charge include $51.2 million for goodwill
impairment; $6.7 million for impairment of property, plant and equipment; and
$600 thousand for severance benefits to be paid to employees of the Park City,
Utah plant. Piper Impact experienced significant changes in market conditions
and the relationship with its major customer in fiscal 1998, which led to
substantial declines in sales and operating cash flow. Management began an
evaluation of the operations of Piper Impact in August 1998. As a result of this
evaluation, in September 1998, management approved a plan to close the Park
City, Utah facility and move its production to the New Albany, Mississippi
facility.
Due to the significance of the changes discussed above and the decision to
close one of the acquired production facilities, management performed an
evaluation of the recoverability of all of the assets of Piper Impact, excluding
the new steel plant, as described in Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". Management concluded from the results of this
evaluation that a significant impairment of intangible as well as long-lived
assets had occurred. An impairment charge was required because estimated fair
value was less than the carrying value of the assets.
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Considerable management judgment is necessary to estimate fair value.
Accordingly, actual results could vary significantly from management's
estimates.
The one-time restructuring charge resulted in an after-tax impact on net
income of $38 million or $2.68 per share.
5. EARNINGS PER SHARE
The computational components of basic and diluted earnings per share are as
follows (Shares and dollars in thousands except per share amounts):
For the Year Ended October 31, 1998
-----------------------------------
Numerator Denominator Per Share
(Income) (Shares) Amount
-----------------------------------
BASIC EPS
Income from continuing operations......................... $(3,877) 14,149 $(0.27)
Income from discontinued operations....................... -- --
Gain on sale of discontinued operations................... 13,046 $ .92
------- ------
Total basic net income............................ $ 9,169 $ 0.65
======= ======
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equivalents arising from stock
options(1)............................................. -- --
Effect of conversion of subordinated debentures(1)........ -- --
------- ------ ------
DILUTED EPS
Income from continuing operations......................... $(3,877) 14,149 $(0.27)
======
Income from discontinued operations....................... -- --
Gain on sale of discontinued operations................... 13,046 $ .92
------- ------
Total diluted net income.......................... $ 9,169 $ 0.65
======= ======
For the Year Ended October 31, 1997
-----------------------------------
Numerator Denominator Per Share
(Income) (Shares) Amount
-----------------------------------
BASIC EPS
Income from continuing operations......................... $27,718 13,807 $2.01
Income from discontinued operations....................... 5,176 .37
Gain on sale of discontinued operations................... 36,290 2.63
------- -----
Total basic net income............................ $69,184 $5.01
======= =====
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equivalents arising from stock
options................................................ 222
Effect of conversion of subordinated debentures........... $ 3,997 2,696
------- ------
DILUTED EPS
Income from continuing operations......................... $31,715 16,725 $1.90
======
Income from discontinued operations....................... 5,176 .31
Gain on sale of discontinued operations................... 36,290 2.17
------- -----
Total diluted net income.......................... $73,181 $4.38
======= =====
(1) The effect of both common stock equivalents arising from stock options and
the conversion of subordinated debentures was anti-dilutive.
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For the Year Ended October 31, 1996
-----------------------------------
Numerator Denominator Per Share
(Income) (Shares) Amount
-----------------------------------
BASIC EPS
Income from continuing operations......................... $22,978 13,524 $1.70
Income from discontinued operations....................... 9,912 .73
Extraordinary item (Net).................................. (2,522) (.19)
------- -----
Total basic net income............................ $30,368 $2.24
======= =====
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equivalents arising from stock
options................................................ 134
Effect of conversion of subordinated debentures........... $ 3,567 2,696
------- ------
DILUTED EPS
Income from continuing operations......................... $26,545 16,354 $1.62
======
Income from discontinued operations....................... 9,912 .61
Gain on sale of discontinued operations................... (2,522) (.15)
------- -----
Total diluted net income.......................... $33,935 $2.08
======= =====
6. INCOME TAXES
Income taxes are provided on taxable income at the statutory rates applicable to
such income. Deferred taxes have not been provided on the Company's foreign
subsidiary's cumulative undistributed earnings of $931,000, since such amounts
are expected to be reinvested indefinitely. If these earnings were remitted to
the Company, there would be little or no additional federal income tax because
of the availability of foreign tax credits.
Income tax expense (benefit) consists of the following:
Years Ended October 31,
------------------------------
1998 1997 1996
------------------------------
(In thousands)
Current:
Federal................................................... $ 9,312 $ 846 $12,914
State..................................................... 4,190 2,829 2,865
Foreign................................................... 507 -- --
-------- ------- -------
14,009 3,675 15,779
Deferred:................................................... (16,096) 11,250 860
-------- ------- -------
Income taxes from continuing operations..................... (2,087) 14,925 16,639
Income taxes from discontinued operations................... -- 2,786 7,178
Income taxes from sale of discontinued operations........... 3,441 13,178 --
Reduction of taxes from extinguishment of debt.............. -- -- (1,826)
-------- ------- -------
Totals............................................ $ 1,354 $30,889 $21,991
======== ======= =======
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.
31
33
- --------------------------------------------------------------------------------
Significant components of the Company's net deferred tax liability are as
follows:
October 31,
-------------------
1998 1997
-------------------
(In thousands)
Deferred tax liability:
Property, plant and equipment............................. $ 44,723 $43,092
Inventory................................................. (1,161) 412
Other..................................................... 16,926 12,735
-------- -------
60,488 56,239
-------- -------
Deferred tax assets:
Intangibles............................................... 19,678 --
Postretirement benefit obligation......................... 3,149 2,969
Other employee benefit obligations........................ 9,314 8,143
Other accrued liabilities................................. 6,495 2,617
-------- -------
38,636 13,729
-------- -------
Net deferred tax liability.................................. $ 21,852 $42,510
======== =======
Deferred income tax liability - non-current................. $ 33,412 $48,111
Deferred tax assets - current............................... (11,560) (5,601)
-------- -------
Net deferred tax liability................................ $ 21,852 $42,510
======== =======
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,
---------------------------
1998 1997 1996
---------------------------
(In thousands)
Income tax expense (benefit) at statutory tax rate.......... $(2,087) $14,925 $13,866
Increase (decrease) in taxes resulting from:
State income taxes, net of federal effect................. (250) 1,655 2,148
Goodwill.................................................. 345 334 334
Other items, net.......................................... (95) (1,989) 291
------- ------- -------
$(2,087) $14,925 $16,639
======= ======= =======
The Company reached a settlement with the Internal Revenue Service with respect
to its tax audit of fiscal years 1992 through 1994. During 1997, the Company
made a payment of $2,016,000 of tax and related interest. Adequate provisions
had been made in prior years and the settlement did not have a material effect
on earnings for fiscal 1997.
7. INVENTORIES
Inventories consist of the following:
October 31,
-----------------
1998 1997
-----------------
(In thousands)
Raw materials............................................... $25,167 $19,432
Finished goods and work in process.......................... 52,485 47,739
------- -------
77,652 67,171
Other..................................................... 7,745 5,864
------- -------
Total............................................. $85,397 $73,035
======= =======
32
34
- --------------------------------------------------------------------------------
The values of inventories in the consolidated balance sheets are based on the
following accounting methods:
LIFO........................................................ $57,594 $51,517
FIFO........................................................ 27,803 21,518
------- -------
Total............................................. $85,397 $73,035
======= =======
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $12,300,000 and $16,000,000 at October
31, 1998 and 1997, respectively.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
October 31,
---------------------
1998 1997
---------------------
(In thousands)
Land and land improvements.................................. $ 18,376 $ 18,901
Buildings................................................... 100,009 80,981
Machinery and equipment..................................... 545,677 461,817
Construction in progress.................................... 38,893 81,155
--------- ---------
702,955 642,854
Less accumulated depreciation and amortization.............. (307,901) (263,783)
--------- ---------
$ 395,054 $ 379,071
========= =========
The Company had commitments for the purchase or construction of capital assets
amounting to approximately $23 million at October 31, 1998.
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
October 31,
-----------------
1998 1997
-----------------
(In thousands)
Accrued contribution to pension funds....................... $ 1,196 $ 1,033
Interest.................................................... 2,544 2,516
Payroll, payroll taxes and employee benefits................ 24,497 21,995
State and local taxes....................................... 1,942 1,985
Other....................................................... 25,946 15,679
------- -------
$56,125 $43,208
======= =======
10. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
October 31,
-------------------
1998 1997
-------------------
(In thousands)
Revolving credit agreements................................. $ 83,212 $100,185
Convertible subordinated debentures......................... 83,420 84,920
Term loan................................................... 8,031 7,709
Bank borrowings due within one year......................... 11,120 10,278
Industrial Revenue and Economic Development Bonds,
unsecured, payable in annual installments through the year
2005, bearing interest ranging from 6.50% to 8.375%....... 3,275 3,275
State of Alabama Industrial Development Bonds............... 4,755 0
Other....................................................... 6,737 6,541
-------- --------
$200,550 $212,908
Less maturities due within one year included in current
liabilities............................................... 12,248 11,050
-------- --------
$188,302 $201,858
======== ========
33
35
- --------------------------------------------------------------------------------
On July 23, 1996, the Company replaced its $75 million Revolving Credit and
Letter of Credit Agreement with an unsecured $250 million Revolving Credit and
Term Loan Agreement ("Bank Agreement"). The Bank Agreement consists of a
revolving line of credit ("Revolver"). 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, 1998 and 1997, the Company had $80 and $100 million,
respectively, outstanding under the Revolver. The weighted average interest
rates on borrowings under the Revolver were 6.2%, 6.6% and 6.3% in 1998, 1997
and 1996, respectively. As of October 31, 1998, the Company was in compliance
with all Bank Agreement covenants. Under the Company's most restrictive loan
covenants, retained earnings of approximately $40 million at October 31, 1998
were available for dividends.
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 September, 1998, the Company accepted an unsolicited block offer to buy
back $1.5 million principal amount of its Convertible Subordinated Debentures;
therefore, the outstanding balance as of October 31, 1998 is $83,420,000.
At October 31, 1994, the Company had $125 million outstanding in Senior Notes.
The Senior Notes paid interest at 10.77% per annum. In December 1994, the
Company acquired $59.5 million principal amount of the Senior Notes for a
purchase price equal to 105% of the principal amount plus accrued interest. The
Company recorded an extraordinary charge of $2.0 million ($3.5 million before
tax) in the first quarter of 1995 related to the call premium and write-off of
deferred debt issuance costs for the Senior Notes that were repurchased. In
August 1995, the Company made a required annual repayment of $20.8 million
principal amount. In December 1995, the Company acquired the remaining $44.7
million principal amount of the Senior Notes for a purchase price equal to
107.5% of the principal amount plus accrued interest. The second acquisition and
related expenses resulted in an after-tax extraordinary charge of approximately
$2.5 million ($4.3 million before tax) in the first quarter of 1996.
On October 28, 1997, Piper Impact Europe B.V. ("Piper Impact Europe") executed
a stand-alone secured credit facility ("Credit Facility") providing up to 50
million Dutch Guilders ("NLG"). At October 31, 1998, and 1997, 1 NLG was equal
to .535 and .514 U.S. dollars, respectively. The Credit Facility consists of a
Roll-Over Term Loan, a Medium Term Loan and an Overdraft Facility. The Roll-Over
Term Loan provides NLG 15 million for loan periods of 1, 2, 3, 6, or 12 months
with repayment of outstanding borrowings on October 27, 2002. Interest is
payable on the repayment date at the Amsterdam Interbank Offering Rate (AIBOR)
plus 90 basis points. In the case of a loan period of twelve months, interest is
payable six months after the beginning of the loan period and on the repayment
date. The Medium Term Loan provides NLG 15 million at 6.375% payable quarterly
in arrears from March 1, 1998, with quarterly repayments of principal in equal
amounts of NLG 500 thousand commencing January 1, 1999 through April 1, 2006.
The Overdraft Facility provides an aggregate amount of NLG 20 million to cover
overdrafts or up to NLG 15 million of loans for a period of one year, subject to
annual renewal. Overdrafts bear interest at the Bank's published rate for
overdraft facilities plus 1% per annum. Loans under the Overdraft Facility bear
interest at AIBOR plus 45 to 55 basis points. The terms of Overdraft Facility
loans are selected by Piper Impact Europe to be a period of 1, 2, 3, 6, or 12
months. Interest on overdrafts is paid quarterly in arrears.
Interest on loans under the Overdraft Facility is payable on the repayment
date, however, in the case of a loan period of twelve months, interest is
payable six months after the beginning of the loan period and on the repayment
date. At October 31, 1998, and 1997, Piper Impact Europe had NLG 41.8 and 35.3
million, respectively outstanding under the Credit Facility. As of October 31,
1998, Piper Impact Europe was in compliance with all Credit Facility covenants.
The State of Alabama Industrial Development bonds were assumed as part of the
Nichols Aluminum Alabama acquisition. (See Note 2). These bonds mature August 1,
2004 with interest payable monthly. The bonds bear interest at the weekly
interest rate as determined by the remarketing agent under then prevailing
market conditions to be the minimum interest rate, which, if borne by the Bonds
on the effective date of such rate, would enable the remarketing agent to sell
the Bonds on such business day at a price (without regard to accrued interest)
equal to the principal amount of the bonds. The interest rate, however, may not
exceed 13% per annum. The weekly interest rate during October 1998 (the only
month the Company owned these bonds) ranged from 3.35% to 3.55%. These bonds are
secured by a Letter of Credit.
34
36
- --------------------------------------------------------------------------------
Aggregate maturities of long-term debt at October 31, 1998, are as follows (in
thousands):
1999........................................................ $ 12,248
2000........................................................ 52
2001........................................................ 48
2002........................................................ 3,257
2003........................................................ 80,049
Thereafter.................................................. 104,896
--------
$200,550
========
11. PENSION PLANS AND RETIREMENT 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, an employee's coverage for retirement benefit is determined
by the plant or location of his/her employment.
The single employer defined benefit 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 single employer defined benefit plans' funded status was as follows:
Assets exceed Accumulated benefit
accumulated obligation
benefit obligation exceeds assets
------------------- --------------------
October 31,
------------------------------------------
1998 1997 1998 1997
------------------------------------------
(In thousands)
Assets available for benefits............................... $-- $ 12,807 $ 17,692 $ 3,606
--- -------- -------- -------
Projected benefit obligation
Vested.................................................... -- (10,602) (20,637) (4,446)
Nonvested................................................. -- (170) (768) (752)
--- -------- -------- -------
Accumulated benefit obligation......................... -- (10,772) (21,405) (5,198)
Effect of future salary increases......................... -- (5,990) (6,260) --
--- -------- -------- -------
Total projected benefit obligation................ -- (16,762) (27,665) (5,198)
--- -------- -------- -------
Assets less than projected benefit obligation............... $-- $ (3,955) $ (9,973) $(1,592)
=== ======== ======== =======
Consisting of:
Amounts to be offset against future pension costs:
Assets in excess of obligation at adoption............. $-- $ 772 $ 713 $ 52
Obligation (increase) decrease due to plan
amendments............................................ -- 238 (591) (816)
Actuarial gains (losses)............................... -- 1,103 (3,683) (541)
Minimum liability adjustment........................... -- -- 2,545 1,305
Amounts recognized in consolidated balance sheets:
Deferred pension credit................................ -- (5,371) (7,832) (1,256)
Accrued contribution to pension funds.................. -- (697) (1,125) (336)
--- -------- -------- -------
$-- $ (3,955) $ (9,973) $(1,592)
=== ======== ======== =======
In accordance with the provisions of Statement of Financial Accounting Standards
No. 87, the Company recorded additional minimum pension liabilities as of
October 31, 1998 and 1997, representing the excess of the accumulated benefit
obligations over the fair value of plan assets and accrued pension liabilities.
The Company recorded additional pension liabilities of $2,545,000, and
$1,305,000; intangible assets of $774,000, and $816,000; and stockholders'
equity reductions, net of income taxes, of $1,080,000, and $298,000, as of
October 31, 1998 and 1997, respectively.
The projected unit credit method was used to determine the actuarial present
value of the accumulated benefit obligation and the projected benefit
obligation. For 1998, the discount rate was 6.75%. For 1997 and 1996 the
discount rate was 7.5%. The expected long term rate of return on assets was 10%
for the three year period ending October 31, 1998. The assumed rate of increase
in future compensation levels was 4.0% in 1998 and 4.5% in 1997 and 1996. The
plans invest primarily in marketable equity and debt securities.
35
37
- --------------------------------------------------------------------------------
Net pension costs for the single employer defined benefit plans were as
follows:
Years Ended October 31,
---------------------------
1998 1997 1996
---------------------------
(In thousands)
Benefits earned during the year............................. $ 1,832 $ 1,371 $ 1,270
Interest cost on projected benefit obligation............... 1,685 1,511 1,293
Actual return on plan assets................................ (433) (2,561) (1,400)
Net amortization and deferral............................... (1,316) 1,250 335
------- ------- -------
$ 1,768 $ 1,571 $ 1,498
======= ======= =======
One of the Company's subsidiaries, Piper Impact Europe, participates in two
multi-employer plans. The plans provide defined benefits to substantially all of
Piper Impact Europe's employees. Amounts charged to pension cost and contributed
to the plans in 1998 totaled NLG 1,551,000 or approximately $800,000. There were
no pension costs in 1997 or 1996 for these plans as Piper Impact Europe was
acquired on October 29, 1997. (See Note 2)
The Company has various defined contribution plans in effect for certain
eligible employees. The Company makes contributions to the plans subject to
certain limitations outlined in the plans. Contributions to these plans were
approximately $2,978,000, $2,919,000, and $2,476,000 during fiscal 1998, 1997,
and 1996, respectively.
The Company has a Supplemental Benefit Plan covering certain key officers of
the Company. Earned vested benefits under the Supplemental Benefit Plan were
approximately $4,147,000, $3,724,000, and $2,959,000 at October 31, 1998, 1997
and 1996, respectively. These benefits are funded with life insurance policies
purchased by the Company.
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain healthcare and life insurance benefits for certain
eligible retired employees employed prior to January 1, 1993. Certain employees
may become eligible for those benefits if they reach normal retirement age while
working for the Company. The Company continues to fund benefit costs on a
pay-as-you-go basis; and, for fiscal year 1998, the Company made benefit
payments totaling $410,000, compared to $247,000 and $171,000 in fiscal 1997 and
1996, respectively.
The following table sets forth the funded status of the Company's projected
postretirement benefits other than pensions, reconciled with amounts recognized
in the Company's consolidated balance sheets at:
October 31,
-----------------
1998 1997
-----------------
(In thousands)
Accumulated postretirement benefit obligation:
Retirees.................................................. $(4,696) $(4,233)
Fully eligible active plan participants................... (357) (161)
Other active plan participants............................ (2,931) (2,217)
------- -------
(7,984) (6,611)
Plan assets at fair value................................... -- --
------- -------
Accumulated postretirement benefit obligation in excess of
plan assets............................................... (7,984) (6,611)
Unrecognized prior service cost............................. -- --
Unrecognized net loss (gain) from past experience different
from that assumed and from changes in assumption.......... 892 (224)
------- -------
Accrued postretirement benefit cost......................... $(7,092) $(6,835)
======= =======
October 31,
------------------
1998 1997 1996
------------------
(In thousands)
Net periodic postretirement benefit cost:
Service cost -- benefits attributed to service during the
period................................................. $163 $148 $145
Interest cost on accumulated postretirement benefit
obligation............................................. 523 472 438
Net amortization and deferral............................. (10) 3 5
---- ---- ----
Net periodic postretirement benefit cost.................. $676 $623 $588
==== ==== ====
36
38
- --------------------------------------------------------------------------------
The assumed healthcare cost trend rate was 8% in 1998, decreasing uniformly to
4.75% in the year 2003 and remaining level thereafter. The assumed discount rate
used to measure the accumulated postretirement benefit obligation was 6.75% and
7.5% at October 31, 1998 and 1997, respectively.
If the healthcare cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of October 31, 1998 would be
increased by 2.08%. The effect of this change on the sum of the service cost and
interest cost would be an increase of 1.61%.
13. INDUSTRY SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131, "SFAS
131" for fiscal year ended 1998. SFAS 131 requires that the Company disclose
certain information about its operating segments where operating segments are
defined as "components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance". Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
Pursuant to SFAS 131, the Company has three reportable segments: engineered
steel bars, aluminum mill sheet products, and engineered products. The Company's
previously reported "Aluminum Products Group" has been split into two segments:
"Aluminum Mill Sheet Products" and "Engineered Products". Prior years'
presentation has been restated to conform to the new segment reporting. The
engineered steel bar segment consists of engineered steel bars manufacturing,
steel bar and tube heat treating services and steel bar and tube wear and
corrosion resistant finishing services. The aluminum mill sheet segment
manufactures mill finished and coated aluminum sheet. The engineered products
segment manufactures impact-extruded aluminum and steel parts, aluminum window
and patio door screens, window frames and other roll formed products and stamped
shapes.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Quanex Corporation evaluates
performance based on operating income.
The Company accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices.
The Company's reportable segments are strategic business divisions that offer
different products and services. These groups are managed separately because
each business requires different expertise and marketing strategies.
For the year-ended October 31, 1998, 13% of the Company's consolidated net
sales were made to one customer. These sales are included in the engineered
products segment.
Year ended Engineered Aluminum Mill Engineered Corporate
October 31, 1998 Steel Bars(4) Sheet Products(1) Products(5) & Other(2) Consolidated(5)
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies................. $324,312 $243,168 $230,010 -- $797,490
Intersegment(3)........................... 2,984 23,187 $ 2 $(26,173) --
-------- -------- -------- -------- --------
Total............................. $327,296 $266,355 $230,012 (26,173) $797,490
Operating Income (loss)..................... $ 58,908 $ 7,788 $(52,606) $(11,826) $ 2,264
Depreciation and amortization:
Operating................................. $ 13,097 $ 10,670 $ 17,928 $ 139 $ 41,834
Other..................................... -- -- -- 566 566
-------- -------- -------- -------- --------
Total............................. $ 13,097 $ 10,670 $ 17,928 $ 705 $ 42,400
======== ======== ======== ======== ========
Capital expenditures(6)..................... $ 31,116 $ 13,109 $ 16,442 $ 269 $ 60,936
Identifiable assets......................... $219,727 $198,596 $220,161 $ 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) Includes NitroSteel and Heat Treating divisions previously reported under
the Steel Tubes segment. See Note 3.
(5) Operating income includes mostly non-cash non-recurring restructuring charge
of $58,500. See Note 4.
(6) Includes capitalized interest.
37
39
- --------------------------------------------------------------------------------
For the year ended October 31, 1997, 13% of the Company's consolidated net sales
were made to one customer. These sales are included in the engineered products
segment.
Year ended Engineered Aluminum Mill Engineered Corporate
October 31, 1997 Steel Bars(4) Sheet Products Products(1) & Other(2) Consolidated
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies............ $301,436 $237,836 $206,821 -- $746,093
Intersegment(3)...................... 18,032 23,205 10 $(41,247) --
-------- -------- -------- -------- --------
Total........................ $319,468 $261,041 $206,831 $(41,247) $746,093
======== ======== ======== ======== ========
Operating Income (loss)................ $ 50,762 $ 1,753 $ 15,444 $(12,951) $ 55,008
Depreciation and amortization:
Operating............................ $ 13,940 $ 10,154 $ 13,055 $ 149 $ 37,298
Other................................ -- -- -- 567 567
-------- -------- -------- -------- --------
Total........................ $ 13,940 $ 10,154 $ 13,055 $ 716 $ 37,865
======== ======== ======== ======== ========
Capital expenditures(5)................ $ 35,220 $ 5,751 $ 27,830 $ 345 $ 69,146
Identifiable assets.................... $192,937 $163,637 $281,943 $ 47,188 $685,705
(1) Identifiable assets include Advanced Metal Forming C.V., acquired on October
29, 1997.
(2) Included in "Corporate and Other" are intersegment eliminations, corporate
expenses and net assets of discontinued operations.
(3) Intersegment sales are conducted on an arm's-length basis.
(4) Includes NitroSteel and Heat Treating divisions previously reported under
the Steel Tubes segment. See Note 3.
(5) Includes capitalized interest.
Year ended Engineered Aluminum Mill Engineered Corporate
October 31, 1996 Steel Bars(4) Sheet Products Products(1) & Other(2) Consolidated
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
To unaffiliated companies............ $275,202 $219,781 $125,086 -- $620,069
Intersegment(3)...................... 16,965 28,736 10 $(45,711) --
-------- -------- -------- -------- --------
Total........................ $292,167 $248,517 $125,096 $(45,711) $620,069
======== ======== ======== ======== ========
Operating Income (loss)................ $ 39,090 $ 7,721 $ 14,506 $(14,884) $ 46,433
Depreciation and amortization:
Operating............................ $ 18,263 $ 10,077 $ 7,606 $ 137 $ 36,083
Other................................ -- -- -- 571 571
-------- -------- -------- -------- --------
Total........................ $ 18,263 $ 10,077 $ 7,606 $ 708 $ 36,654
======== ======== ======== ======== ========
Capital expenditures(5)................ $ 19,573 $ 5,317 $ 9,714 $ 133 $ 34,737
Identifiable assets.................... $171,351 $182,743 $231,861 $ 52,993 $638,948
(1) Includes three months of operations and identifiable assets of Piper Impact.
(2) Included in "Corporate and Other" are intersegment eliminations, corporate
expenses and net assets of discontinued operations.
(3) Intersegment sales are conducted on an arm's-length basis.
(4) Includes NitroSteel and Heat Treating divisions previously reported under
the Steel Tubes segment. See Note 3.
(5) Includes capitalized interest.
38
40
- --------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
Year Ended October 31,
--------------------------------
1998 1997 1996
--------------------------------
NET SALES(1)
United States............................................... $752,589 $727,246 $603,179
Mexico...................................................... 15,121 16,028 13,035
European countries.......................................... 28,501 2,625 3,271
Other foreign countries..................................... 1,279 194 584
-------- -------- --------
Total............................................. $797,490 $746,093 $620,069
======== ======== ========
(1) Net Sales are attributed to countries based on location of customer.
Year Ended October 31,
--------------------------------
1998 1997 1996
--------------------------------
NET SALES(2)
United States............................................... $763,775 $746,093 $620,069
The Netherlands............................................. 33,715 -- --
-------- -------- --------
Total............................................. $797,490 $746,093 $620,069
======== ======== ========
(2) Net Sales are attributed to countries based on location of operations.
Year Ended October 31,
--------------------------------
1998 1997 1996
--------------------------------
OPERATING INCOME (LOSS)(4)
United States............................................... $ (144)(3) $55,008 $ 46,433
The Netherlands............................................. 2,408 -- --
-------- ------- --------
Total............................................. $ 2,264 $55,008 $ 46,433
======== ======= ========
(3) Including the restructuring charge of $58.5 million. (See Note 4).
(4) Operating income (loss) is attributed to countries based on location of
operations.
Year Ended October 31,
----------------------
1998 1997
----------------------
IDENTIFIABLE ASSETS(5)
United States............................................... $627,969 $645,300
The Netherlands............................................. 46,319 40,405
-------- --------
Total............................................. $674,288 $685,705
======== ========
(5) Identifiable assets are attributed to countries based on location of
operations.
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. 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 $60. 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 $60. 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
39
41
- --------------------------------------------------------------------------------
Company's common stock for $60. 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 in 1999.
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. RESTRICTED STOCK AND STOCK OPTION PLANS
KEY EMPLOYEE PLANS:
The Company has restricted stock and stock option plans which provide for the
granting of common shares or stock options to key employees. Under the Company's
restricted stock plan, common stock may be awarded to key employees. The
recipient is entitled to all of the rights of a shareholder, except that during
the forfeiture period the shares are nontransferable. The award vests during an
eight year period based on the price of the Company's stock. Upon issuance of
stock under the plan, unearned compensation equal to the market value at the
date of grant is charged to stockholders' equity and subsequently amortized to
expense over the restricted period. There were no restricted shares granted in
1996, 1997 or 1998. No compensation expense was charged in 1998 related to the
restricted stock. The amount charged to compensation expense in 1997 and 1996
was $185,000 and $132,000, respectively relating to restricted stocks granted in
1994.
Under the Company's option plans, options are granted at prices determined by
the Board of Directors which may not be less than the fair market value of the
shares at the time the options are granted. Unless otherwise provided by the
Board at the time of grant, options become exercisable in 33 1/3% increments
maturing cumulatively on each of the first through third anniversaries of the
date of grant and must be exercised no later than ten years from the date of
grant. There were 493,176, 722,322, and 624,035, shares available for granting
of options at October 31, 1998, 1997, and 1996, respectively. Stock option
transactions for the three years ended October 31, 1998, were as follows:
Shares Average
Shares Under Price
Exercisable Option Per Share
-----------------------------------
Balance at October 31, 1995................................. 567,243 1,061,033 $20
=======
Granted................................................... 269,650 28
Exercised................................................. (69,503) 12
Cancelled................................................. (3,534) 22
---------
Balance at October 31, 1996................................. 726,609 1,257,646 22
=======
Granted................................................... 165,700 29
Exercised................................................. (323,218) 18
Cancelled................................................. (13,987) 25
---------
Balance at October 31, 1997................................. 650,053 1,086,141 24
=======
Granted................................................... 264,550 21
Exercised................................................. (95,416) 21
Cancelled................................................. (35,404) 26
---------
Balance at October 31, 1998................................. 770,075 1,219,871 $23
======= =========
On October 1, 1992, Carl E. Pfeiffer retired as the Chief Executive Officer of
the Company. In connection with such retirement, the Company replaced options to
purchase 60,000 shares of Common Stock at a weighted average exercise price of
$15.85 held by Mr. Pfeiffer, under the Company's employee stock option plans
with new options having the same exercise prices and expiration dates. Such
options are substantially similar to the options previously held by him with the
exception that vesting is not contingent upon his continued employment with the
Company and the options expire on various dates between October 25, 1999, and
October 13, 2001, instead of one year after retirement. During the year ended
October 31, 1997, options for the entire 60,000 shares were exercised at an
average price of $15.85 per share.
40
42
- --------------------------------------------------------------------------------
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, 1998 or 1997. There were 20,000 shares
available for granting of options at October 31, 1996. Stock option transactions
for the three years ended October 31, 1998, were as follows:
Shares Average
Shares Under Price
Exercisable Option Per Share
---------------------------------
Balance at October 31, 1995................................. 16,666 20,000 $17
======
Granted................................................... 20,000 20
Exercised................................................. -- --
Cancelled................................................. -- --
-------
Balance at October 31, 1996................................. 20,000 40,000 18
======
Granted................................................... -- --
Exercised................................................. (15,000) 18
Cancelled................................................. -- --
-------
Balance at October 31, 1997................................. 11,666 25,000 18
======
Granted................................................... -- --
Exercised................................................. (5,000) 14
Cancelled................................................. -- --
-------
Balance at October 31, 1998................................. 13,332 20,000 $20
====== =======
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 12,000,
30,000, and 51,000 shares
41
43
- --------------------------------------------------------------------------------
available for granting of options at October 31, 1998, 1997 and 1996,
respectively. Stock option transactions for the three years ended October 31,
1998, were as follows:
Shares Average
Shares Under Price
Exercisable Option Per Share
---------------------------------
Balance at October 31, 1995................................. 87,000 108,000 $20
=======
Granted................................................... 21,000 29
Exercised................................................. (6,000) 19
Cancelled................................................. -- --
-------
Balance at October 31, 1996................................. 102,000 123,000 22
=======
Granted................................................... 21,000 28
Exercised................................................. (30,000) 18
Cancelled................................................. -- --
-------
Balance at October 31, 1997................................. 93,000 114,000 24
=======
Granted................................................... 18,000 17
Exercised................................................. (3,000) 19
Cancelled................................................. -- --
-------
Balance at October 31, 1998................................. 111,000 129,000 $23
======= =======
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. 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. 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. There were 400,000 shares available for granting
of options at October 31, 1998. There were no transactions under this plan as of
October 31, 1998.
STOCK BASED COMPENSATION
Effective November 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." In accordance with SFAS No. 123, the Company will
continue to apply the existing rules contained in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and disclose 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,
---------------------------
1998 1997 1996
---------------------------
(In thousands)
Net income attributable to common stockholders.............. $ 9,169 $69,184 $30,368
SFAS No. 123 adjustment..................................... (1,495) (995) (1,431)
------- ------- -------
Pro forma net attributable to common stockholders........... $ 7,674 $68,189 $28,937
======= ======= =======
Earnings per Common share:
Basic as reported......................................... $ 0.65 $ 5.01 $ 2.24
Basic pro forma........................................... $ 0.54 $ 4.94 $ 2.14
Diluted as reported....................................... $ 0.65 $ 4.38 $ 2.08
Diluted pro forma......................................... $ 0.54 $ 4.32 $ 1.99
42
44
- --------------------------------------------------------------------------------
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 for 1998 and 1997.
1998 1997 1996
---------------------------
Risk-free interest rate..................................... 4.49% 5.39% 5.44%
Dividend yield.............................................. 3.00% 2.23% 2.23%
Volatility factor........................................... 31.57% 29.83% 29.83%
Weighted average expected life.............................. 5 YEARS 5 years 5 years
16. FINANCIAL INSTRUMENTS
The Company uses futures contracts to hedge a portion of its exposure to price
fluctuations of aluminum. The exposure is related to the Company's backlog of
aluminum sales orders with committed prices as well as future aluminum sales for
which a sales price increase would lag a raw material cost increase. Firm price
commitments associated with these futures contracts do not extend beyond
December, 1999. Hedging gains and losses are included in "Cost of sales" in the
income statement concurrently with the hedged sales. Unrealized gains and losses
related to open contracts are not reflected in the consolidated statements of
income. At October 31, 1998, the Company had open futures contracts at fair
values of $3.3 million and unrealized losses of $369 thousand on such contracts.
At October 31, 1998, these contracts covered a notional volume of 5,511,557
pounds of aluminum.
In the fourth quarter of fiscal 1996, the Company entered into interest rate
swap agreements, which effectively converted $100 million of its variable rate
debt under the Bank Agreement, to fixed rate. Under these agreements, payments
are made based on a fixed rate ($50 million at 7.025%, and $50 million at
6.755%) and received on a LIBOR based variable rate (5.22203% at October 31,
1998). Differentials to be paid or received under the agreements are recognized
as interest expense. The agreements mature in 2003. The unrealized losses
related to the interest rate swaps are $8.5 million on October 31, 1998 and $4.1
million on October 31, 1997 on the total notional amount of $100 million for
fiscal 1998 and fiscal 1997.
The Company utilizes foreign currency forward contracts to hedge identifiable
foreign currency commitments associated with transactions in the regular course
of the Company's foreign operations. These forward contracts establish the
exchange rates at which the Company will purchase a contracted amount of foreign
currency for a specified amount of US dollars. At October 31, 1998, the Company
had 11 separate contracts maturing in monthly increments to purchase an
aggregate notional amount of $4.675 million in foreign currency. These forward
contracts do not extend beyond September 30, 1999. Unrealized pretax gains on
these forward contracts totaled approximately $137 thousand at October 31, 1998.
In December 1997, the Company entered into a zero-cost range forward (foreign
currency swap) agreement on a notional value of 30 million Guilders with a major
financial institution to hedge its initial equity investment in its Netherlands
subsidiary, Piper Impact Europe. This agreement limits the Company's exposure to
large fluctuations in the US Dollar/Dutch Guilder exchange rate. Under the terms
of the agreement, Quanex has the option to let the agreement expire at no cost
if the exchange rate remains within an established range on the expiration date
of October 25, 2000. At October 31, 1998, there was no effect on the financial
statements from this agreement as the exchange rate remained within this range.
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 $190.6 million and $215.6 million, as of October 31, 1998 and 1997,
respectively, as compared to carrying values at October 31, 1998 and 1997 of
$200.6 million and $212.9 million, respectively.
The fair value of long-term debt was based on the quoted market price, recent
transactions, or based on rates available to the Company for instruments with
similar terms and maturities. The fair value of interest rate swaps was
estimated by discounting expected cash flows using quoted market interest rates.
The fair value of the aluminum and foreign currency instruments was determined
by obtaining the LME price per pound and the foreign currency translation rates
as of October 31, 1998 and valuing the outstanding notional volumes under the
agreements.
43
45
- --------------------------------------------------------------------------------
17. CONTINGENCIES
Quanex is subject to loss contingencies arising from federal, state, and local
environmental laws. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. The Company accrues its best
estimates of its remediation obligations and adjusts such accruals as further
information and circumstances develop. Those estimates may change substantially
depending on information about the nature and extent of contamination,
appropriate remediation technologies, and regulatory approvals. Costs of future
expenditures for environmental remediation are not discounted to their present
value. When environmental laws might be deemed to impose joint and several
liability for the costs of responding to contamination, the Company accrues its
allocable share of liability taking into account the number of companies
participating, their ability to pay their shares, the volumes and nature of the
wastes involved, the nature of anticipated response actions, and the nature of
the Company's alleged connections. It is management's opinion that the Company
has established appropriate reserves for environmental remediation obligations
at various of its plant sites and disposal facilities. Those amounts are not
expected to have a material adverse effect on the Company's financial condition.
Total remediation reserves, at October 31, 1998, were approximately $23 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.
44
46
Quanex Corporation
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following sets forth the selected quarterly information for the years ended
October 31, 1998 and 1997. The information presented has been restated to
reflect LaSalle and the Tubing Operations as discontinued operations. (See Note
3 to the Consolidated Financial Statements)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands except per share amounts)
1998:
Net sales................................................... $180,982 $203,428 $204,854 $208,226
Gross profit................................................ 17,219 27,395 30,876 38,046
Income from continuing operations........................... 2,293 7,756 10,285 (24,211)
Income from discontinued operations......................... -- -- -- --
Gain on sale of discontinued operations..................... 13,606 -- -- (560)
Net income.................................................. 15,899 7,756 10,285 (24,771)
Earnings per share:
Basic:
Income from continuing operations...................... 0.16 0.55 0.73 (1.71)
Income from discontinued operations.................... -- -- -- --
Gain on sale of discontinued operations................ 0.97 -- -- (0.04)
-------- -------- -------- --------
Net earnings (loss).................................... 1.13 0.55 0.73 (1.75)
Diluted..................................................... $ 1.11 $ 0.51 $ 0.66 $ (1.75)
1997:
Net sales................................................... $167,955 $185,999 $196,589 $195,550
Gross profit................................................ 20,611 26,136 28,678 26,627
Income from continuing operations........................... 3,372 7,339 8,607 8,400
Income from discontinued operations......................... 954 1,751 813 1,658
Gain on sale of discontinued operations..................... -- 36,290 -- --
Net income.................................................. 4,326 45,380 9,420 10,058
Earnings per share:
Basic:
Income from continuing operations...................... 0.25 0.53 0.62 0.60
Income from discontinued operations.................... 0.07 0.13 0.06 0.12
Gain on sale of discontinued operations................ -- 2.65 -- --
-------- -------- -------- --------
Net earnings (loss).................................... 0.32 3.31 0.68 0.72
Diluted..................................................... $ 0.31 $ 2.78 $ 0.62 $ 0.65
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, 1998....................... $10,338 $ 1,088 $ (202) $528 $11,752
Year ended October 31, 1997....................... $ 7,703 $ 2,674 $ (39) $ -- $10,338
Year ended October 31, 1996....................... $ 2,933 $10,449 $(5,679) $ -- $ 7,703
45
47
QUARTERLY FINANCIAL RESULTS
(from continuing operations)
1998 1997 1996
- ------------------------------------------------------------------------------------------
NET SALES (millions)
January..................................................... 180.98 167.96 121.85
April....................................................... 203.43 186.00 143.50
July........................................................ 204.85 196.58 160.29
October..................................................... 208.23 195.55 194.43
- ------------------------------------------------------------------------------------------
Total............................................. 797.49 746.09 620.07
GROSS PROFIT (millions)
January..................................................... 17.22 20.61 14.73
April....................................................... 27.39 26.14 17.95
July........................................................ 30.88 28.68 26.41
October..................................................... 38.05 26.62 34.09
- ------------------------------------------------------------------------------------------
Total............................................. 113.54 102.05 93.18
INCOME FROM CONTINUING OPERATIONS (millions)
January..................................................... 2.29 3.37 1.52
April....................................................... 7.76 7.34 5.26
July........................................................ 10.28 8.61 7.48
October..................................................... (24.21) 8.40 8.72
- ------------------------------------------------------------------------------------------
Total............................................. (3.88) 27.72 22.98
INCOME FROM CONTINUING OPERATIONS PER BASIC COMMON SHARE
January..................................................... .16 .25 .11
April....................................................... .55 .53 .39
July........................................................ .73 .62 .55
October..................................................... (1.71) .60 .64
- ------------------------------------------------------------------------------------------
Year.............................................. (.27) 2.01 1.70
QUARTERLY COMMON STOCK DIVIDENDS
January..................................................... .16 .15 .15
April....................................................... .16 .15 .15
July........................................................ .16 .15 .15
October..................................................... .16 .16 .15
- ------------------------------------------------------------------------------------------
Total............................................. .64 .61 .60
COMMON STOCK SALES PRICE (High & Low)
January..................................................... 30 7/16 29 1/8 21 1/8
27 1/16 24 1/4 18
April....................................................... 33 13/16 27 7/8 22 3/8
28 1/2 23 3/8 19 5/8
July........................................................ 32 3/16 34 1/8 23 7/8
27 1/4 25 1/8 19 3/8
October..................................................... 27 7/8 36 1/2 28 3/4
15 5/8 26 1/4 19 5/8
46
48
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, 1998.
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, 1998.
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, 1998.
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, 1998.
47
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
----
(a) 1. Financial Statements
Independent Auditors' Report................................ 21
Consolidated Balance Sheet.................................. 22
Consolidated Statements of Income........................... 23
Consolidated Statements of Stockholders' Equity............. 24
Consolidated Statements of Cash Flow........................ 25
Notes to Consolidated Financial Statements.................. 26
2. Financial Statement Schedule
Schedule II - Valuation and qualifying accounts............. 45
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................................................. 48
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3.1 -- Restated Certificate of Incorporation of the Registrant,
as on February 27, 1997, filed as Exhibit 4.1 of the
Registrant's Registration Statement on Form S-8,
Registration No. 333-22977, and incorporated herein by
reference.
3.2 -- Amended and Restated Bylaws of the Registrant, as amended
through December 12, 1996, filed as Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1996, and incorporated herein by
reference.
4.1 -- Form of Registrant's Common Stock certificate, filed as
Exhibit 4.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1987, and
incorporated herein by reference.
4.2 -- Amended and Restated Rights agreement between the
Registrant and Manufacturers Hanover Trust Company, as
Rights Agent, filed as Exhibit 1 to Amendment No. 1 to
the Registrant's Form 8-A dated April 28, 1989, and
incorporated herein by reference.
4.3 -- Amended and Restated Certificate of Designation,
Preferences and Rights of the Registrant's Series A
Junior Participating Preferred Stock, filed as Exhibit 1
to Amendment No. 1 to the Registrant's Form 8-A dated
April 28, 1989, and incorporated herein by reference.
4.4 -- Form of Indenture relating to the Registrant's 6.88%
Convertible Subordinated Debentures due 2007 between the
Registrant and Chemical Bank, as Trustee, filed as
Exhibit 19.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1992, and
incorporated herein by reference.
4.5 -- $250,000,000 Revolving Credit and Term Loan Agreement
dated as of July 23, 1996, among the Company, Comerica
Bank, as Agent, and Harris Trust and Savings Bank and
Wells Fargo Bank (Texas), NA as Co-Agents, filed as
Exhibit 4.1 of the Company's Report on Form 8-K, dated
August 9, 1996, and incorporated herein by reference.
10.1 -- Agreement of Lease between the Registrant and 3D Tower
Limited, dated March 5, 1985, filed as Exhibit 10.13 of
the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1985, and incorporated
herein by reference, as amended by the First Amendment to
Lease Agreement between the Registrant and VPM 1989-1,
Ltd. effective December 8, 1989 and the amendment filed
as Exhibit 10.23 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1995.
48
50
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
+10.2 -- Quanex Corporation 1988 Stock Option Plan, as amended,
and form of Stock Option 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 for the quarter ended January 31,
1995, and incorporated herein by reference.
+10.3 -- Quanex Corporation Deferred Compensation Plan, as amended
and restated filed as Exhibit 10.6 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1995, and incorporated herein by reference.
+10.4 -- Quanex Corporation 1978 Stock Option Plan, as amended,
filed as Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1988,
together with the amendment filed as Exhibit 10.16 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995, and incorporated herein
by reference.
+10.5 -- Quanex Corporation Executive Incentive Compensation Plan,
as amended, filed as Exhibit 10.8 to the Registrant's
Form 10-K for the year ended October 31, 1993, and
incorporated herein by reference.
+10.6 -- Quanex Corporation Supplemental Benefit Plan, effective
February 28, 1980 as restated November 1, 1988 and
amended on June 28, 1991, filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1991, and incorporated herein by
reference.
+10.7 -- Form of Severance Compensation Agreement and Escrow
Agreement, adopted on February 28, 1985, between the
Registrant and each executive officer of the Registrant,
filed as Exhibit 10.14 of the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1985, and
incorporated herein by reference.
+10.8 -- Quanex Corporation Stock Option Loan Plan for Key
Officers, filed as Exhibit 10.13 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1988, and incorporated herein by reference.
+10.9 -- 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 for the fiscal
year ended October 31, 1988, together with the amendment
filed as Exhibit 10.14 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31,
1995, and incorporated herein by reference.
+10.10 -- Quanex Corporation 1989 Non-Employee Director Stock
Option Plan, as amended, filed as Exhibit 4.4 of the
Registrant's Form S-8, Registration No. 33-35128,
together with the amendment filed as Exhibit 10.15 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995, and incorporated herein
by reference.
+10.11 -- Quanex Corporation Employee Stock Option and Restricted
Stock Plan, as amended, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1994, and incorporated herein by
reference.
+10.12 -- Retirement Agreement dated as of September 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1992, and
incorporated herein by reference.
+10.13 -- Stock Option Agreement dated as of October 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1992, and
incorporated herein by reference.
+10.14 -- Deferred Compensation Agreement dated as of July 31,
1992, between the Registrant and Carl E. Pfeiffer, filed
as Exhibit 10.22 to the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1992, and
incorporated herein by reference.
+10.15 -- Quanex Corporation Non-Employee Director Retirement Plan,
filed as Exhibit 10.18 of the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1994, and
incorporated herein by reference.
49
51
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
+10.16 -- Quanex Corporation 1996 Employee Stock Option Plan and
Restricted Stock Plan, filed as Exhibit 10.19 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1996, and incorporated herein by
reference.
+10.17 -- 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.
+10.18 -- Quanex Corporation 1997 Non-Employee Director Stock
Option Plan, and incorporated herein by reference.
10.19 -- Asset Purchase Agreement dated July 31, 1996, among the
Company, Piper Impact, Inc., a Delaware corporation,
Piper Impact, Inc., A Tennessee corporation, B. F.
Sammons and M. W. Robbins, filed as Exhibit 2.1 of the
Company's Report on Form 8-K, dated August 9, 1996, and
incorporated herein by reference.
10.20 -- Stock Purchase Agreement dated April 18, 1997, by and
among Niagara Corporation, Niagara Cold Drawn Corp., and
Quanex Corporation filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated May 5, 1997, and
incorporated herein by reference.
10.21 -- Purchase Agreement dated December 3, 1997, among Quanex
Corporation, Vision Metals Holdings, Inc., and Vision
Metals, Inc., filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated December 3, 1997, and
incorporated herein by reference.
*10.22 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Trailer Company dated
May 1, 1963.
*10.23 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Corporation dated May
1, 1964.
*10.24 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Corporation dated
October 1, 1965.
*10.25 -- Lease Agreement between The Industrial Development Board
of the City of Decatur (Alabama) and Fruehauf Corporation
dated December 1, 1978.
*10.26 -- Assignment and Assumption Agreement between Fruehauf
Trailer Corporation and Decatur Aluminum Corp.
(subsequently renamed Nichols Aluminum-Alabama, Inc.)
dated October 9, 1998.
*10.27 -- 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.
*21 -- Subsidiaries of the Registrant.
*23 -- Consent of Deloitte & Touche LLP.
*27 -- Financial Data Schedule
- ---------------
+ Management Compensation or Incentive Plan
* Filed herewith
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has not
filed with this Annual Report on Form 10-K certain instruments defining the
rights of holders of long-term debt of the Registrant and its subsidiaries
because the total amount of securities authorized under any of such instruments
does not exceed 10% of the total assets of the Registrant and its subsidiaries
on a consolidated basis. The Registrant agrees to furnish a copy of any such
agreements to the Securities and Exchange Commission upon request.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the quarter ended
October 31, 1998.
50
52
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
------------------------------------
Vernon E. Oechsle
Director, President and
Chief Executive Officer
(Principal Executive Officer)
January 12, 1999
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.
SIGNATURE TITLE DATE
--------- ----- ----
By: /s/ ROBERT C. SNYDER Director and Chairman January 12, 1999
-------------------------------------------------------
Robert C. Snyder
By: /s/ VERNON E. OECHSLE Director, President and Chief January 12, 1999
------------------------------------------------------- Executive Officer
Vernon E. Oechsle
By: /s/ CARL E. PFEIFFER Director January 12, 1999
-------------------------------------------------------
Carl E. Pfeiffer
By: /s/ GERALD B. HAECKEL Director January 12, 1999
-------------------------------------------------------
Gerald B. Haeckel
By: /s/ SUSAN F. DAVIS Director January 12, 1999
-------------------------------------------------------
Susan F. Davis
By: /s/ JOHN D. O'CONNELL Director January 12, 1999
-------------------------------------------------------
John D. O'Connell
By: /s/ DONALD G. BARGER, JR. Director January 12, 1999
-------------------------------------------------------
Donald G. Barger, Jr.
By: /s/ VINCENT R. SCORSONE Director January 12, 1999
-------------------------------------------------------
Vincent R. Scorsone
By: /s/ MICHAEL J. SEBASTIAN Director January 12, 1999
-------------------------------------------------------
Michael J. Sebastian
By: /s/ RUSSELL M. FLAUM Director January 12, 1999
-------------------------------------------------------
Russell M. Flaum
By: /s/ JAMES H. DAVIS Executive Vice President and Chief January 12, 1999
------------------------------------------------------- Operating Officer (Principal
James H. Davis Operating Officer)
By: /s/ WAYNE M. ROSE Vice President-Finance and January 12, 1999
------------------------------------------------------- Corporate Development Chief
Wayne M. Rose Financial Officer (Principal
Financial Officer)
By: /s/ VIREN M. PARIKH Controller (Principal Accounting January 12, 1999
------------------------------------------------------- Officer)
Viren M. Parikh
51
53
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3.1 -- Restated Certificate of Incorporation of the Registrant,
as on February 27, 1997, filed as Exhibit 4.1 of the
Registrant's Registration Statement on Form S-8,
Registration No. 333-22977, and incorporated herein by
reference.
3.2 -- Amended and Restated Bylaws of the Registrant, as amended
through December 12, 1996, filed as Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1996, and incorporated herein by
reference.
4.1 -- Form of Registrant's Common Stock certificate, filed as
Exhibit 4.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1987, and
incorporated herein by reference.
4.2 -- Amended and Restated Rights agreement between the
Registrant and Manufacturers Hanover Trust Company, as
Rights Agent, filed as Exhibit 1 to Amendment No. 1 to
the Registrant's Form 8-A dated April 28, 1989, and
incorporated herein by reference.
4.3 -- Amended and Restated Certificate of Designation,
Preferences and Rights of the Registrant's Series A
Junior Participating Preferred Stock, filed as Exhibit 1
to Amendment No. 1 to the Registrant's Form 8-A dated
April 28, 1989, and incorporated herein by reference.
4.4 -- Form of Indenture relating to the Registrant's 6.88%
Convertible Subordinated Debentures due 2007 between the
Registrant and Chemical Bank, as Trustee, filed as
Exhibit 19.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1992, and
incorporated herein by reference.
4.5 -- $250,000,000 Revolving Credit and Term Loan Agreement
dated as of July 23, 1996, among the Company, Comerica
Bank, as Agent, and Harris Trust and Savings Bank and
Wells Fargo Bank (Texas), NA as Co-Agents, filed as
Exhibit 4.1 of the Company's Report on Form 8-K, dated
August 9, 1996, and incorporated herein by reference.
10.1 -- Agreement of Lease between the Registrant and 3D Tower
Limited, dated March 5, 1985, filed as Exhibit 10.13 of
the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1985, and incorporated
herein by reference, as amended by the First Amendment to
Lease Agreement between the Registrant and VPM 1989-1,
Ltd. effective December 8, 1989 and the amendment filed
as Exhibit 10.23 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1995.
+10.2 -- Quanex Corporation 1988 Stock Option Plan, as amended,
and form of Stock Option 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 for the quarter ended January 31,
1995, and incorporated herein by reference.
+10.3 -- Quanex Corporation Deferred Compensation Plan, as amended
and restated filed as Exhibit 10.6 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1995, and incorporated herein by reference.
+10.4 -- Quanex Corporation 1978 Stock Option Plan, as amended,
filed as Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1988,
together with the amendment filed as Exhibit 10.16 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995, and incorporated herein
by reference.
+10.5 -- Quanex Corporation Executive Incentive Compensation Plan,
as amended, filed as Exhibit 10.8 to the Registrant's
Form 10-K for the year ended October 31, 1993, and
incorporated herein by reference.
+10.6 -- Quanex Corporation Supplemental Benefit Plan, effective
February 28, 1980 as restated November 1, 1988 and
amended on June 28, 1991, filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1991, and incorporated herein by
reference.
54
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
+10.7 -- Form of Severance Compensation Agreement and Escrow
Agreement, adopted on February 28, 1985, between the
Registrant and each executive officer of the Registrant,
filed as Exhibit 10.14 of the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1985, and
incorporated herein by reference.
+10.8 -- Quanex Corporation Stock Option Loan Plan for Key
Officers, filed as Exhibit 10.13 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1988, and incorporated herein by reference.
+10.9 -- 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 for the fiscal
year ended October 31, 1988, together with the amendment
filed as Exhibit 10.14 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31,
1995, and incorporated herein by reference.
+10.10 -- Quanex Corporation 1989 Non-Employee Director Stock
Option Plan, as amended, filed as Exhibit 4.4 of the
Registrant's Form S-8, Registration No. 33-35128,
together with the amendment filed as Exhibit 10.15 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995, and incorporated herein
by reference.
+10.11 -- Quanex Corporation Employee Stock Option and Restricted
Stock Plan, as amended, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1994, and incorporated herein by
reference.
+10.12 -- Retirement Agreement dated as of September 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1992, and
incorporated herein by reference.
+10.13 -- Stock Option Agreement dated as of October 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1992, and
incorporated herein by reference.
+10.14 -- Deferred Compensation Agreement dated as of July 31,
1992, between the Registrant and Carl E. Pfeiffer, filed
as Exhibit 10.22 to the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1992, and
incorporated herein by reference.
+10.15 -- Quanex Corporation Non-Employee Director Retirement Plan,
filed as Exhibit 10.18 of the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1994, and
incorporated herein by reference.
+10.16 -- Quanex Corporation 1996 Employee Stock Option Plan and
Restricted Stock Plan, filed as Exhibit 10.19 of the
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1996, and incorporated herein by
reference.
+10.17 -- 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.
+10.18 -- Quanex Corporation 1997 Non-Employee Director Stock
Option Plan, and incorporated herein by reference.
10.19 -- Asset Purchase Agreement dated July 31, 1996, among the
Company, Piper Impact, Inc., a Delaware corporation,
Piper Impact, Inc., A Tennessee corporation, B. F.
Sammons and M. W. Robbins, filed as Exhibit 2.1 of the
Company's Report on Form 8-K, dated August 9, 1996, and
incorporated herein by reference.
10.20 -- Stock Purchase Agreement dated April 18, 1997, by and
among Niagara Corporation, Niagara Cold Drawn Corp., and
Quanex Corporation filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated May 5, 1997, and
incorporated herein by reference.
55
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
10.21 -- Purchase Agreement dated December 3, 1997, among Quanex
Corporation, Vision Metals Holdings, Inc., and Vision
Metals, Inc., filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated December 3, 1997, and
incorporated herein by reference.
*10.22 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Trailer Company dated
May 1, 1963.
*10.23 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Corporation dated May
1, 1964.
*10.24 -- Lease Agreement between The Industrial Development Board
of the City of Decatur and Fruehauf Corporation dated
October 1, 1965.
*10.25 -- Lease Agreement between The Industrial Development Board
of the City of Decatur (Alabama) and Fruehauf Corporation
dated December 1, 1978.
*10.26 -- Assignment and Assumption Agreement between Fruehauf
Trailer Corporation and Decatur Aluminum Corp.
(subsequently renamed Nichols Aluminum-Alabama, Inc.)
dated October 9, 1998.
*10.27 -- 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.
*21 -- Subsidiaries of the Registrant.
*23 -- Consent of Deloitte & Touche LLP.
*27 -- Financial Data Schedule
- ---------------
+ Management Compensation or Incentive Plan
* Filed herewith