-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EaqohHtPjOacjsZb6/E5cGx0vZEc9HOHvFSlfeZger+SNXANjTpO/0zW4xubYMUy 2wLnGAInZ/rIAemIk/t1NQ== 0000950129-98-000203.txt : 19980121 0000950129-98-000203.hdr.sgml : 19980121 ACCESSION NUMBER: 0000950129-98-000203 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980120 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUANEX CORP CENTRAL INDEX KEY: 0000276889 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 381872178 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-05725 FILM NUMBER: 98509053 BUSINESS ADDRESS: STREET 1: 1900 W LOOP SOUTH STE 1500 STREET 2: ATTN THOMAS M BEWLEY CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7139614600 MAIL ADDRESS: STREET 1: 1900 WEST LOOP SOUTH STREET 2: SUITE 1500 CITY: HOUSTON STATE: TX ZIP: 77027 10-K/A 1 QUANEX CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 1 to Annual Report on Form 10-K on FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NUMBER 1-5725 QUANEX CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 38-1872178 State or other jurisdiction of incorporation or (I.R.S. Employer organization Identification No.) 1900 WEST LOOP SOUTH, SUITE 1500 77027 HOUSTON, TEXAS (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code (713) 961-4600 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $.50 Par Value New York Stock Exchange, Inc. Rights to Purchase Series A Junior Participating Preferred Stock New York Stock Exchange, Inc. 6.88% Convertible Subordinated Debentures New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's voting stock held by non-affiliates as of December 31, 1997, computed by reference to the closing price for the Common Stock on the New York Stock Exchange, Inc. on that date, was $396,630,084. Such calculation assumes only the registrant's officers and directors were affiliates of the registrant. At December 31, 1997, there were outstanding 14,102,403 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, 1997, for its Annual Meeting of Stockholders to be held on February 26, 1998, are incorporated herein by reference in Items 10, 11, 12, and 13 of Part III of this Annual Report. 2 EXPLANATORY NOTE This Form 10-K/A amends Item 8 of Quanex Corporation's Annual Report on Form 10-K for the year ended October 31, 1997. 3 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1997. Our audits also included the financial statement schedule listed in the index on page 41. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1997 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 December 11, 1997 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/ VERSON E. OECHSLE /s/ WAYNE M. ROSE Vernon E. Oechsle Wayne M. Rose President and Vice President and Chief Executive Officer Chief Financial Officer
18 4 Quanex Corporation CONSOLIDATED BALANCE SHEETS
October 31, 1997 1996 - ------------------------------------------------------------------------------------- (In thousands) ASSETS Current assets: Cash and equivalents...................................... $ 26,851 $ 35,962 Accounts and notes receivable, less allowance for doubtful accounts of $10,338,000 in 1997 and $7,703,000 in 1996................................................... 80,089 78,439 Inventories............................................... 73,035 78,828 Deferred income taxes..................................... 5,601 9,302 Prepaid expenses.......................................... 1,320 110 --------- --------- Total current assets.............................. 186,896 202,641 Property, plant and equipment, net.......................... 379,071 319,165 Net assets of discontinued operations....................... 13,554 18,830 Goodwill, net............................................... 91,496 84,343 Other assets................................................ 14,688 13,969 --------- --------- $ 685,705 $ 638,948 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable............................................. $ -- $ 5,575 Accounts payable.......................................... 71,317 67,037 Accrued expense........................................... 43,208 37,984 Current maturities of long-term debt...................... 11,050 -- Income taxes payable...................................... 8,503 3,807 --------- --------- Total current liabilities......................... 134,078 114,403 Long-term debt.............................................. 201,858 253,513 Deferred pension credits.................................... 6,627 7,110 Deferred postretirement welfare benefits.................... 6,835 6,459 Deferred income taxes....................................... 48,111 40,454 Other liabilities........................................... 19,373 20,000 --------- --------- Total liabilities................................. 416,882 441,939 Stockholders' equity: Preferred stock, no par value, 1,000,000 shares authorized; issued & outstanding -- none in 1997 and 1996................................................... -- -- Common stock, $.50 par value, 50,000,000 shares authorized in 1997 and 25,000,000 shares authorized in 1996; 14,050,411 shares in 1997 and 13,590,400 shares in 1996 issued and outstanding......................... 7,025 6,795 Additional paid-in capital................................ 105,146 94,251 Retained earnings......................................... 156,528 96,623 Cumulative foreign currency translation adjustment........ 422 -- Unearned compensation..................................... -- (185) Adjustment for minimum pension liability.................. (298) (475) --------- --------- Total stockholders' equity........................ 268,823 197,009 --------- --------- $ 685,705 $ 638,948 ========= =========
See notes to consolidated financial statements. 19 5 Quanex Corporation CONSOLIDATED STATEMENTS OF INCOME
Years Ended October 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Net sales................................................... $746,093 $620,069 $603,985 Costs and expenses: Cost of sales............................................. 609,989 492,594 493,994 Selling, general and administrative....................... 43,798 44,959 33,746 Depreciation and amortization............................. 37,298 36,083 28,785 -------- -------- -------- Operating income............................................ 55,008 46,433 47,460 Other income (expense): Interest expense.......................................... (17,541) (11,929) (10,742) Capitalized interest...................................... 3,539 569 1,872 Other, net................................................ 1,637 4,544 1,721 -------- -------- -------- Income from continuing operations before income taxes and extraordinary charge...................................... 42,643 39,617 40,311 Income tax expense.......................................... (14,925) (16,639) (16,931) -------- -------- -------- Income from continuing operations and before extraordinary charge.................................................... 27,718 22,978 23,380 Income from discontinued operations, net of income taxes.... 5,176 9,912 10,480 Gain on sale of discontinued operations, net of income taxes..................................................... 36,290 -- -- -------- -------- -------- Income before extraordinary charge.......................... 69,184 32,890 33,860 Extraordinary charge -- early extinguishment of debt, net of income taxes.............................................. -- (2,522) (2,021) -------- -------- -------- Net income.................................................. 69,184 30,368 31,839 Preferred dividends......................................... -- -- (3,957) -------- -------- -------- Net income attributable to common stockholders.............. $ 69,184 $ 30,368 $ 27,882 ======== ======== ======== Earnings per common share: Primary: Continuing operations.................................. $ 1.98 $ 1.68 $ 1.43 Discontinued operations................................ 0.37 0.73 0.77 Gain on sale of discontinued operations................ 2.58 -- -- Extraordinary charge................................... -- (0.19) (0.15) -------- -------- -------- Total primary net earnings........................ $ 4.93 $ 2.22 $ 2.05 ======== ======== ======== Fully diluted: Continuing operations.................................. $ 1.90 $ 1.60 $ 1.43 Discontinued operations................................ 0.31 0.60 0.77 Gain on sale of discontinued operations................ 2.17 -- -- Extraordinary charge................................... -- (0.15) (0.15) -------- -------- -------- Total assuming full dilution...................... $ 4.38 $ 2.05 $ 2.05 ======== ======== ======== Weighted average number of shares outstanding Primary................................................ 14,029 13,658 13,580 Assuming full dilution................................. 16,725 16,585 13,580
See notes to consolidated financial statements. 20 6 Quanex Corporation CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollar amounts in thousands)
Total Preferred Stock Common Stock Additional Stock- Years Ended October 31, 1997, ------------------- --------------------- Paid-in Retained holders' 1996, and 1995 Shares Amount Shares Amount Capital Earnings Other Equity - ------------------------------------------------------------------------------------------------------------------------- Balance at October 31, 1994... 345,000 $ 86,250 13,377,724 $6,688 $ 86,323 $ 55,081 $(459) $233,883 Net income.................. -- -- -- -- -- 31,839 -- 31,839 Common dividends ($.59 per share).................... -- -- -- -- -- (7,932) -- (7,932) Preferred dividends......... -- -- -- -- -- (4,451) -- (4,451) Conversion of preferred stock to subordinated debentures................ (339,681) (84,920) -- -- 3,350 -- -- (81,570) Conversion of preferred stock to common stock..... (5,319) (1,330) 42,211 21 1,309 -- -- -- Adjustment for minimum pension liability......... -- -- -- -- -- -- (355) (355) Unearned compensation....... -- -- -- -- -- -- 53 53 Other....................... -- -- 65,377 34 1,424 (111) -- 1,347 -------- -------- ---------- ------ -------- -------- ----- -------- 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 ======== ======== ========== ====== ======== ======== ===== ========
See notes to consolidated financial statements. 21 7 Quanex Corporation CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended October 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------- (In thousands) OPERATING ACTIVITIES: Net Income................................................ $ 69,184 $ 30,368 $ 31,839 Adjustments to reconcile net income to cash provided by operating activities: Income from discontinued operations.................. (5,176) (9,912) (10,480) Gain on sale of discontinued operations.............. (36,290) -- -- Depreciation and amortization........................ 37,865 36,654 29,410 Deferred income taxes................................ 7,545 2,533 6,668 Deferred pension costs............................... (183) 318 76 Deferred postretirement welfare benefits............. 376 417 254 -------- --------- -------- 73,321 60,378 57,767 Changes in assets and liabilities net of effects from acquisitions and dispositions: Decrease (increase) in accounts and notes receivable.......................................... 2,957 7,798 (19,630) Decrease (increase) in inventory..................... 8,898 (17,568) (3) Increase (decrease) in accounts payable.............. 112 (4,848) 12,863 Increase in accrued expenses......................... 2,919 2,907 3,926 Other, net........................................... (8,868) 900 (3,656) -------- --------- -------- Cash provided by continuing operations............ 79,339 49,567 51,267 Cash provided by discontinued operations.......... 89 16,073 15,885 -------- --------- -------- Cash provided by operating activities............. 79,428 65,640 67,152 INVESTMENT ACTIVITIES: 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........... 63,900 -- -- Capital expenditures, net of retirements.................. (68,916) (34,699) (21,615) Capital expenditures of discontinued operations........... (3,868) (11,089) (4,986) Decrease in short-term investments........................ -- -- 54,070 Other, net................................................ (1,550) (5,120) (1,878) -------- --------- -------- Cash provided (used) by investment activities..... (49,593) (174,172) 25,591 -------- --------- -------- Cash provided (used) by operating and investment activities...................................... 29,835 (108,532) 92,743 FINANCING ACTIVITIES: Bank borrowings (repayments), net......................... (41,828) 160,000 -- Notes payable borrowings (repayments)..................... -- (10,000) 10,000 Purchase of Senior Notes.................................. -- (44,667) (59,500) Repayments of long-term debt.............................. -- -- (20,958) Common dividends paid..................................... (8,422) (8,115) (7,932) Preferred dividends paid.................................. -- -- (4,451) Stock options exercised................................... 8,357 1,179 454 Other, net................................................ 2,525 905 846 -------- --------- -------- Cash provided (used) by financing activities...... (39,368) 99,302 (81,541) -------- --------- -------- Effect of exchange rate changes on cash and equivalents..... 422 -- -- -------- --------- -------- Increase (decrease) in cash and equivalents................. (9,111) (9,230) 11,202 Cash and equivalents at beginning of period................. 35,962 45,192 33,990 -------- --------- -------- Cash and equivalents at end of period....................... $ 26,851 $ 35,962 $ 45,192 ======== ========= ========
See notes to consolidated financial statements. 22 8 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 two industry segments: the manufacturing of engineered steel bars and aluminum products. The Company's products include engineered steel bars, aluminum sheet, aluminum 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 1997, 1996 and 1995 cash paid for income taxes was $13,906,000, $19,551,000, and $17,572,000, respectively. These amounts are before refunds of $471,000, $204,000, and $47,000, respectively. Cash paid for interest for fiscal 1997, 1996 and 1995 was $17,964,000, $12,084,000, and $10,324,000, respectively. Non-cash investing and financing activities in fiscal 1995 included the exchange of $84,920,000 of the Company's Cumulative Convertible Exchangeable Preferred Stock for the Company's 6.88% Convertible Subordinated Debentures due June 30, 2007, and the conversion of $1,330,000 of the Company's Cumulative Convertible Exchangeable Preferred Stock to the Company's common stock. (See Note 2 regarding acquisitions) 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 5. LONG-LIVED ASSETS 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 and Piper Impact Europe B.V. in 1997 (See Note 2). At October 31, 1997 and 1996, accumulated amortization was $10,398,000 and $7,297,000, respectively. The Company evaluates any possible impairment of goodwill using estimates of undiscounted future cash flows. 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
23 9 - -------------------------------------------------------------------------------- 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 establishes accounting standards related to the impairment of long-lived assets, such as property, plant, equipment and intangibles. The Company adopted statement No. 121 in fiscal 1997 and did not experience any material impact on its financial position or results of operations. HEDGING The Company uses futures and option contracts to hedge a portion of its exposure to price fluctuations of aluminum. Hedging gains and losses are recognized concurrently with the related sales transactions. The Company enters into interest rate agreements which effectively exchange variable interest rate debt for fixed interest rate debt. The agreements are used to reduce the exposure to increasing interest rates. The Company enters into these agreements with major financial institutions. The Company does not use derivative financial instruments for trading or speculative purposes. (See Note 15) EARNINGS PER SHARE DATA Primary earnings per share is computed by deducting preferred dividends from net income in order to determine net income attributable to common stockholders. This amount is then divided by the weighted average number of common shares outstanding and common stock equivalents. Fully diluted earnings per-share amounts assume conversion of the Company's 6.88% Convertible Subordinated Debentures, the elimination of the related interest and amortization of issuance costs, net of tax, and the issuance of common stock for all other potentially dilutive common stock equivalents outstanding. 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 is required to adopt SFAS 128 with its January 31, 1998 financial statements and restate all prior-period EPS disclosure. Under SFAS 128, the Company's pro forma basic and diluted EPS would have been:
1997 1996 1995 ----- ------ ------ Basic EPS: Continuing operations..................................... $2.01 $ 1.70 $ 1.44 Discontinued operations................................... 0.37 0.73 0.78 Gain on sale of discontinued operations................... 2.63 -- -- Extraordinary charge...................................... -- (0.19) (0.15) ----- ------ ------ Total Basic EPS................................... $5.01 $ 2.24 $ 2.07 Diluted EPS: Continuing operations..................................... $1.90 $ 1.60 $ 1.51 Discontinued operations................................... 0.31 0.60 0.64 Gain on sale of discontinued operations................... 2.17 -- -- Extraordinary charge...................................... -- (0.15) (0.12) ----- ------ ------ Total Diluted EPS................................. $4.38 $ 2.05 $ 2.03 ===== ====== ======
FOREIGN CURRENCY TRANSLATION Gains and losses resulting from translation of the Company's foreign subsidiary's operations are included as a separate component of stockholder's 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 24 10 - -------------------------------------------------------------------------------- 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 1997 presentations. 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, electronics and defense 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. 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 their estimated fair values. The goodwill associated with the Piper Impact acquisition approximated $56 million, which is being amortized on a straight-line basis over twenty-five years. 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 8) 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 periods 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 periods, nor are they necessarily indicative of future results.
Pro Forma -------------------- October 31, -------------------- 1996 1995 -------------------- (In thousands, except per share amounts) (Unaudited) Net sales................................................... $708,492 $710,357 Income before extraordinary charge.......................... 27,751 28,801 Preferred dividends......................................... -- 3,957 Net income attributable to common shareholders before extraordinary charge...................................... 27,751 24,844 Earnings per share before extraordinary charge: Primary................................................... $ 2.03 $ 1.83 Fully diluted............................................. $ 1.89 $ 1.83
25 11 - -------------------------------------------------------------------------------- On October 29, 1997, the Company, through its Dutch subsidiary, Piper Impact Europe B.V. ("Piper Europe"), acquired the net assets of Advanced Metal Forming C.V., a Dutch limited partnership, for approximately $30 million. The Company's balance sheet as of October 31, 1997 includes Piper Europe. The income statement for the twelve months ended October 31, 1997 does not include Piper Europe. Piper Europe produces aluminum impact extrusions and precision steel stampings for the automotive and electronics industries in Europe and North America. Piper Europe employs approximately 260 people, and its manufacturing facilities are located near Zwolle in The Netherlands. 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. 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 Company will record a gain on the sale of approximately $13,000,000 in the first quarter of fiscal 1998. 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". (See Note 17) Net sales and income from discontinued operations are as follows:
Years Ended October 31, -------------------------------- 1997 1996 1995 -------------------------------- (In thousands) Net sales................................................... $187,123 $275,641 $287,210 Operating income............................................ 7,962 17,090 18,069 Income tax expense.......................................... (2,786) (7,178) (7,589) Income from discontinued operations......................... $ 5,176 $ 9,912 $ 10,480
October 31, -------------------- 1997 1996 -------------------- (In thousands) Net Assets of Discontinued Operations Current assets.............................................. $ 24,388 $ 60,697 Property, plant and equipment, net.......................... 17,357 32,381 Other assets................................................ 2,784 5,010 Current liabilities......................................... (11,241) (38,663) Deferred pension credits.................................... (4,373) (10,183) Deferred postretirement welfare benefits.................... (22,406) (49,169) Deferred income taxes....................................... 6,718 16,421 Adjustment for minimum pension liability.................... 327 2,336 -------- -------- Net assets of discontinued operations..................... $ 13,554 $ 18,830 ======== ========
26 12 - -------------------------------------------------------------------------------- 4. INCOME TAXES Income tax expense (benefit) consists of the following:
Years Ended October 31, ----------------------------- 1997 1996 1995 ----------------------------- (In thousands) Current: Federal................................................... $ 846 $12,914 $11,147 State..................................................... 2,829 2,865 562 ------- ------- ------- 3,675 15,779 11,709 Deferred.................................................... 11,250 860 5,222 ------- ------- ------- Income taxes from continuing operations..................... 14,925 16,639 16,931 Income taxes from discontinued operations................... 2,786 7,178 7,589 Income taxes from sale of discontinued operations........... 13,178 -- -- Reduction of taxes from extinguishment of debt.............. -- (1,826) (1,463) ------- ------- ------- Totals................................................. $30,889 $21,991 $23,057 ======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax liability are as follows:
October 31, ------------------ 1997 1996 ------------------ (In thousands) Deferred tax liability: Property, plant and equipment............................. $43,092 $34,843 Inventory................................................. 412 (587) Other..................................................... 12,735 12,791 ------- ------- 56,239 47,047 ------- ------- Deferred tax assets: Postretirement benefit obligation......................... 2,969 2,762 Other employee benefit obligations........................ 8,143 7,041 Other accrued liabilities................................. 2,617 6,092 ------- ------- 13,729 15,895 ------- ------- Net deferred tax liability.................................. $42,510 $31,152 ======= ======= Deferred income tax liability -- non-current................ $48,111 $40,454 Deferred tax assets -- current.............................. (5,601) (9,302) ------- ------- Net deferred tax liability........................ $42,510 $31,152 ======= =======
Income tax expense 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, ----------------------------- 1997 1996 1995 ----------------------------- (In thousands) Income tax expense at statutory tax rate.................... $14,925 $13,866 $14,109 Increase (decrease) in taxes resulting from: State income taxes, net of federal effect................. 1,655 2,148 2,220 Goodwill.................................................. 334 334 334 Other items, net.......................................... (1,989) 291 268 ------- ------- ------- $14,925 $16,639 $16,931 ======= ======= =======
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. 27 13 - -------------------------------------------------------------------------------- 5. INVENTORIES Inventories consist of the following:
October 31, ------------------ 1997 1996 ------------------ (In thousands) Raw materials............................................... $19,432 $19,757 Finished goods and work in process.......................... 47,739 53,100 ------- ------- 67,171 72,857 Other....................................................... 5,864 5,971 ------- ------- Total............................................. $73,035 $78,828 ======= =======
The values of inventories in the consolidated balance sheets are based on the following accounting methods: LIFO........................................................ $51,517 $60,904 FIFO........................................................ 21,518 17,924 ------- ------- Total............................................. $73,035 $78,828 ======= =======
With respect to inventories valued using the LIFO method, replacement cost exceeded the LIFO value by approximately $16,000,000 and $13,000,000 at October 31, 1997 and 1996, respectively. 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
October 31, ----------------------- 1997 1996 ----------------------- (In thousands) Land and land improvements.................................. $ 18,901 $ 16,381 Buildings................................................... 80,981 75,466 Machinery and equipment..................................... 461,817 424,577 Construction in progress.................................... 81,155 34,890 --------- --------- 642,854 551,314 Less accumulated depreciation and amortization.............. (263,783) (232,149) --------- --------- $ 379,071 $ 319,165 ========= =========
The Company had commitments for the purchase or construction of capital assets amounting to approximately $23 million at October 31, 1997. 7. ACCRUED EXPENSES Accrued expenses consist of the following:
October 31, ------------------ 1997 1996 ------------------ (In thousands) Accrued contribution to pension funds....................... $ 1,033 $ 1,023 Interest.................................................... 2,516 2,925 Payroll, payroll taxes and employee benefits................ 21,995 20,682 State and local taxes....................................... 1,985 1,647 Other....................................................... 15,679 11,707 ------- ------- $43,208 $37,984 ======= =======
28 14 - -------------------------------------------------------------------------------- 8. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Long-term debt consists of the following:
October 31, -------------------- 1997 1996 -------------------- (In thousands) Revolving credit agreements................................. $100,185 $160,000 Convertible subordinated debentures......................... 84,920 84,920 Term loan................................................... 7,709 -- Bank borrowings due within one year......................... 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 Other....................................................... 6,541 5,318 -------- -------- $212,908 $253,513 Less maturities due within one year included in current liabilities............................................... 11,050 -- -------- -------- $201,858 $253,513 ======== ========
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, 2002, 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, 1997, the Company had $100 million outstanding under the Revolver. The weighted average interest rates on borrowings under the Revolver were 6.6% and 6.3% in 1997 and 1996, respectively. As of October 31, 1997, the Company was in compliance with all Bank Agreement covenants. Under the Company's most restrictive loan covenants, retained earnings of $42,954,000 at October 31, 1997 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. 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 Europe") executed a stand-alone secured credit facility ("Credit Facility") providing up to 50 million Dutch Guilders ("NLG"). At October 31, 1997, 1 NLG was equal to .514 U.S. dollars. The Credit Facility consists of a Roll-Over Term Loan, a Medium Term Loan and an Overdraft Facility. The Roll-Over Term Loan provides NLG 15 million for loan periods of 1, 2, 3, 6, or 12 months with repayment of outstanding borrowings on October 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 Europe to be a period of 1, 2, 3, 6, or 12 months. Interest on overdrafts are paid quarterly in arrears. 29 15 - -------------------------------------------------------------------------------- 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, 1997, Piper Europe had NLG 35.3 million outstanding under the Credit Facility. As of October 31, 1997, Piper Europe was in compliance with all Credit Facility covenants. Aggregate maturities of long-term debt at October 31, 1997, are as follows (in thousands): 1998................. $ 11,050 1999................. -- 2000................. -- 2001................. -- 2002................. 100,185 Thereafter........... 101,673 -------- $212,908 ========
9. PENSION PLANS AND RETIREMENT BENEFITS The Company has retirement plans covering substantially all employees. The plans provide for defined benefits. The plans pay benefits to employees at retirement using formulas based upon years of service and compensation rates near retirement. The Company's funding policy is generally to make the minimum annual contributions required by applicable regulations. The plans' funded status was as follows:
Assets exceed Accumulated benefit accumulated obligation benefit obligation exceeds assets -------------------- -------------------- October 31, -------------------------------------------- 1997 1996 1997 1996 -------------------------------------------- (In thousands) Assets available for benefits.............................. $ 12,807 $ 9,910 $ 3,606 $ 2,323 -------- -------- ------- ------- Projected benefit obligation Vested................................................... (10,602) (8,571) (4,446) (3,637) Nonvested................................................ (170) (283) (752) (834) -------- -------- ------- ------- Accumulated benefit obligation........................ (10,772) (8,854) (5,198) (4,471) Effect of future salary increases........................ (5,990) (5,378) -- -- -------- -------- ------- ------- Total projected benefit obligation............... (16,762) (14,232) (5,198) (4,471) -------- -------- ------- ------- Assets less than projected benefit obligation.............. $ (3,955) $ (4,322) $(1,592) $(2,148) ======== ======== ======= ======= Consisting of: Amounts to be offset against future pension costs: Assets in excess of obligation at adoption............ $ 772 $ 876 $ 52 $ 59 Obligation (increase) decrease due to plan amendments.......................................... 238 294 (816) (826) Actuarial gains (losses).............................. 1,103 492 (541) (836) Minimum liability adjustment.......................... -- -- 1,305 1,604 Amounts recognized in consolidated balance sheets: Deferred pension credit............................... (5,371) (5,250) (1,256) (1,860) Accrued contribution to pension funds................. (697) (734) (336) (289) -------- -------- ------- ------- $ (3,955) $ (4,322) $(1,592) $(2,148) ======== ======== ======= =======
In accordance with the provisions of Statement of Financial Accounting Standards No. 87, the Company recorded additional minimum pension liabilities as of October 31, 1997 and 1996, 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 $1,305,000 and $1,604,000; intangible assets of $816,000 and $827,000; and stockholders' equity reductions, net of income taxes, of $298,000 and $475,000, as of October 31, 1997 and 1996, 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 1997, 1996 and 1995 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, 1997. The assumed rate of increase in future compensation levels was 4.5% in 1997, 1996 and 1995. The plans invest primarily in marketable equity and debt securities. 30 16 - -------------------------------------------------------------------------------- Net pension costs for defined benefit plans were as follows:
Years Ended October 31, ----------------------------- 1997 1996 1995 ------- ------- ------- (In thousands) Benefits earned during the year............................. $ 1,371 $ 1,270 $ 1,109 Interest cost on projected benefit obligation............... 1,511 1,293 1,142 Actual return on plan assets................................ (2,561) (1,400) (1,319) Net amortization and deferral............................... 1,250 335 348 ------- ------- ------- $ 1,571 $ 1,498 $ 1,280 ======= ======= =======
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 $2,919,000, $2,476,000, and $2,299,000 during fiscal 1997, 1996, and 1995, 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 $3,724,000, $2,959,000, and $4,107,000 at October 31, 1997, 1996 and 1995, respectively. These benefits are funded with life insurance policies purchased by the Company. 10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides certain healthcare and life insurance benefits for eligible retired employees. 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 1997, the Company made benefit payments totaling $247,000, compared to $171,000 and $366,000 in fiscal 1996 and 1995, 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, ------------------ 1997 1996 ------------------ (In thousands) Accumulated postretirement benefit obligation: Retirees.................................................. $(4,233) $(3,870) Fully eligible active plan participants................... (161) (178) Other active plan participants............................ (2,217) (2,043) ------- ------- (6,611) (6,091) Plan assets at fair value................................... -- -- ------- ------- Accumulated postretirement benefit obligation in excess of plan assets............................... (6,611) (6,091) Unrecognized prior service cost............................. -- -- Unrecognized net loss from past experience different from that assumed and from changes in assumption............... (224) (368) ------- ------- Accrued postretirement benefit cost......................... $(6,835) $(6,459) ======= =======
Years Ended October 31, ----------------------- 1997 1996 1995 ----------------------- (In thousands) Net periodic postretirement benefit cost: Service cost -- benefits attributed to service during the period................................................. $148 $145 $124 Interest cost on accumulated postretirement Benefit obligation............................................. 472 438 442 Net amortization and deferral............................. 3 5 54 ---- ---- ---- Net periodic postretirement benefit cost.................. $623 $588 $620 ==== ==== ====
The assumed healthcare cost trend rate was 8.8% in 1997, decreasing uniformly to 5.5% in the year 2003 and remaining level thereafter. The assumed discount rate used to measure the accumulated postretirement benefit obligation was 7.5% at October 31, 1997 and October 31, 1996. 31 17 - -------------------------------------------------------------------------------- If the healthcare cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of October 31, 1997 would be increased by 3.5%. The effect of this change on the sum of the service cost and interest cost would be an increase of 2.8%. 11. INDUSTRY SEGMENT INFORMATION Quanex is principally a producer of specialized metals and metal products. The Company's operations primarily consist of two segments: engineered steel bars and aluminum products. For the year ended October 31, 1997, sales to Autoliv Inc. represented 13% of the Company's consolidated net sales. Sales to Autoliv are included in the aluminum products segment.
Corporate Year ended Engineered Aluminum and October 31, 1997 Steel Bars(4) Products(1) Other(2) Consolidated - -------------------------------------------------------------------------------------------------------------------- (In thousands) Net Sales: To unaffiliated companies........................ $301,436 $444,657 -- $746,093 Intersegment(3).................................. 18,032 -- $(18,032) -- ------- ------- ------- ------- Total.............................................. $319,468 $444,657 $(18,032) $746,093 ======= ======= ======= ======= Operating Income (loss)............................ $50,762 $17,415 $(13,169) $55,008 Depreciation and amortization: Operating........................................ $13,940 $23,227 $ 131 $37,298 Other............................................ -- -- 567 567 ------- ------- ------- ------- Total.............................................. $13,940 $23,227 $ 698 $37,865 ======= ======= ======= ======= Capital expenditures............................... $35,220 $33,581 $ 345 $69,146 Identifiable assets................................ $192,937 $443,799 $48,969 $685,705
(1) Identifiable assets includes 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 Nitro Steel and Heat Treat divisions previously reported under the Steel Tubes segment. See Note 3.
Corporate Year ended Engineered Aluminum and October 31, 1996 Steel Bars(4) Products(1) Other(2) Consolidated - -------------------------------------------------------------------------------------------------------------------- (In thousands) Net Sales: To unaffiliated companies........................ $275,202 $344,867 -- $620,069 Intersegment(3).................................. 16,965 -- $(16,965) -- ------- ------- ------- ------- Total.............................................. $292,167 $344,867 $(16,965) $620,069 ======= ======= ======= ======= Operating Income (loss)............................ $39,090 $22,070 $(14,727) $46,433 Depreciation and amortization: Operating........................................ $18,263 $17,712 $ 108 $36,083 Other............................................ -- -- 571 571 ------- ------- ------- ------- Total.............................................. $18,263 $17,712 $ 679 $36,654 ======= ======= ======= ======= Capital expenditures............................... $19,573 $15,031 $ 133 $34,737 Identifiable assets................................ $171,351 $412,048 $55,549 $638,948
(1) Includes three months of Piper Impact's operations. (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 Nitro Steel and Heat Treat divisions previously reported under the Steel Tubes segment. See Note 3. 32 18 - --------------------------------------------------------------------------------
Corporate Year ended Engineered Aluminum and October 31, 1995 Steel Bars(3) Products Other(1) Consolidated - ----------------------------------------------------------------------------------------------------------------- (In thousands) Net Sales: To unaffiliated companies........................ $272,420 $331,565 -- $603,985 Intersegment(2).................................. 14,229 -- $(14,229) -- ------- ------- ------- ------- Total.............................................. $286,649 $331,565 $(14,229) $603,985 ======= ======= ======= ======= Operating Income (loss)............................ $43,668 $21,128 $(17,336) $47,460 Depreciation and amortization: Operating........................................ $15,537 $13,135 $ 113 $28,785 Other............................................ -- -- 625 625 ------- ------- ------- ------- Total.............................................. $15,537 $13,135 $ 738 $29,410 ======= ======= ======= ======= Capital expenditures............................... $12,776 $ 8,704 $ 149 $21,629 Identifiable assets................................ $177,079 $230,586 $58,793 $466,458
(1) Included in "Corporate and Other" are intersegment eliminations, corporate expenses and net assets of discontinued operations. (2) Intersegment sales are conducted on an arm's length basis. (3) Includes Nitro Steel and Heat Treat divisions previously reported under the Steel Tubes segment. See Note 3. 12. 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 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. 13. PREFERRED STOCK -- DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED SHARES During May 1992, the Company issued 3,450,000 Depositary Convertible Exchangeable Preferred Shares ("Depositary Shares"), each representing 1/10th of a share of the Company's 6.88% Cumulative Convertible Exchangeable Preferred Stock ("Preferred Stock"). The net proceeds from the issuance was $82.9 million. The dividend per annum and liquidation preference for each share of Preferred Stock were $17.20 and $250, respectively, and for each Depositary Share were $1.72 and $25, respectively. Dividends on the Preferred Stock and Depositary Shares were cumulative and payable quarterly, commencing September 30, 1992. The Company was prohibited from paying any dividends on Common Stock (other than in Common Stock or junior stock) unless all required preferred dividends had been paid. The Preferred Stock was convertible at the option of the holder into shares of the Company's Common Stock at a conversion price of $31.50 per share, subject to adjustment in certain events. The Preferred Stock was exchangeable at the option of the Company, in whole but not in part, on any dividend payment date commencing June 30, 1995 for the Company's 6.88% Convertible Subordinated Debentures due June 30, 2007 ("6.88% Debentures") at the rate of $250 principal amount of 6.88% Debentures for each share of Preferred Stock and $25 principal amount of 6.88% Debentures for each Depositary Share. 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% Debentures. Interest is payable 33 19 - -------------------------------------------------------------------------------- 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. 14. RESTRICTED STOCK AND STOCK OPTION 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 1995, 1996 or 1997. The amount charged to compensation expense was $185,000 in 1997, $132,000 in 1996, and $53,000 in 1995. 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. No options may be granted under the plans after December 1, 2002. There were 722,322, 624,035, and 140,151 shares available for granting of options at October 31, 1997, 1996, and 1995, respectively. Stock option transactions for the three years ended October 31, 1997, were as follows:
Shares Average Shares Under Price Exercisable Option Per Share ------------------------------------- Balance at October 31, 1994................................. 405,299 794,801 $19 ======= Granted................................................... 295,000 20 Exercised................................................. (28,768) 15 Cancelled................................................. -- -- --------- 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 ======= =========
The Company also has a stock option plan which 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 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. 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 34 20 - -------------------------------------------------------------------------------- at October 31, 1997. There were 20,000, and 40,000 shares available for granting of options at October 31, 1996 and 1995, respectively. Stock option transactions for the three years ended October 31, 1997, were as follows:
Shares Average Shares Under Price Exercisable Option Per Share ---------------------------------------- Balance at October 31, 1994................................. 13,333 20,000 $17 ======= Granted................................................... -- -- Exercised................................................. -- -- Cancelled................................................. -- -- -------- 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 ======= ========
In addition, the Company has a stock option plan which 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. 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 30,000, 51,000, and 72,000 shares available for granting of options at October 31, 1997, 1996 and 1995, respectively. Stock option transactions for the three years ended October 31, 1997, were as follows:
Shares Average Shares Under Price Exercisable Option Per Share ---------------------------------------- Balance at October 31, 1994................................. 66,000 87,000 $20 ======= Granted................................................... 21,000 20 Exercised................................................. -- -- Cancelled................................................. -- -- -------- 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 ======= ========
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 35 21 - -------------------------------------------------------------------------------- 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. There were no shares exercisable at October 31, 1997. There were 60,000 shares exercisable at October 31, 1996 and 1995. During the year ended October 31, 1997, 60,000 shares were exercised at an average price of $15.85 per share. There were no transactions related to these stock options during the years ended October 31, 1996 and 1995. 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 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, ------------------------ 1997 1996 ------------------------ (In thousands) Net income attributable to common stockholders.............. $69,184 $30,368 SFAS No. 123 adjustment..................................... (995) (1,431) ------- ------- Pro forma net attributable to common stockholders........... $68,189 $28,937 ======= ======= Earnings per Common share: Primary as reported....................................... $ 4.93 $ 2.22 Primary pro forma......................................... $ 4.86 $ 2.12 Fully diluted as reported................................. $ 4.38 $ 2.05 Fully diluted pro forma................................... $ 4.32 $ 1.96
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 1997 and 1996.
1997 1996 ------------------ Risk-free interest rate..................................... 5.39% 5.44% Dividend yield.............................................. 2.23% 2.23% Volatility factor........................................... 29.83% 29.83% Weighted average expected life.............................. 5 YEARS 5 years
15. FINANCIAL INSTRUMENTS 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 do not extend beyond December, 1998. 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, 1997, the Company had open futures contracts at fair values of $2.8 million and unrealized losses of $16,000 on such contracts. At October 31, 1997, these contracts covered a notional volume of 3,693,000 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 (5.78125% at October 31, 1997). 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 $4.1 million ($3.1 million in 1996) on the total notional amount of $100 million ($100 million in 1996). 36 22 - -------------------------------------------------------------------------------- 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 $215.6 million and $256.9 million, as of October 31, 1997 and 1996, respectively, as compared to carrying values at October 31, 1997 and 1996 of $212.9 million and $253.5 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 were estimated by discounting expected cash flows using quoted market interest rates. 16. 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 cleanup obligations and adjusts such accruals as further information develops or circumstances change. Costs of future expenditures for environmental laws might be deemed to impose joint and several liability for remediation obligations, 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 reserves include $20 million related to costs for further investigations, environmental remediation, and corrective actions in connection with the acquisition of Piper Impact. Actual cleanup costs at the Company's current plan 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. 17. SUBSEQUENT EVENT 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"), to Vision Metals, Inc., a new company formed by certain management of the Tubing Operations and Citicorp Venture Capital, Ltd. Under the terms of the Purchase Agreement dated December 3, 1997, the Company received cash consideration of approximately $30 million, subject to post closing adjustments. The results of operations of the Tubing Operations have been classified as discontinued operations and prior periods have been restated. For business segment reporting purposes, the Tubing Operations were previously classified as "Steel Tubes". Two small divisions, Heat Treat Division and Nitro Steel Division, which were previously included within the "Steel Tubes" segment, were retained by the Company and are now included in the "Engineered Steel Bars" segment. 37 23 Quanex Corporation SUPPLEMENTARY FINANCIAL DATA QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following sets forth the selected quarterly information for the years ended October 31, 1997 and 1996. 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) 1997: Net sales................................................... $167,955 $185,999 $196,589 $195,550 Gross profit................................................ 20,732 26,265 28,807 26,671 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: Primary: Income from continuing operations...................... 0.23 0.53 0.61 0.59 Income from discontinued operations.................... 0.08 0.12 0.06 0.11 Gain on sale of discontinued operations................ -- 2.60 -- -- Earnings per primary common share...................... 0.31 3.25 0.67 0.70 Assuming full dilution.................................... $ 0.31 $ 2.78 $ 0.62 $ 0.65 1996: Net sales................................................... $121,845 $143,497 $160,294 $194,433 Gross profit................................................ 14,728 17,955 26,409 34,091 Income from continuing operations........................... 1,524 5,254 7,478 8,722 Income from discontinued operations......................... 2,523 2,878 1,667 2,844 Extraordinary charge -- early extinguishment of debt........ (2,522) -- -- -- Net income.................................................. 1,525 8,132 9,145 11,566 Earnings per share: Primary: Income from continuing operations...................... 0.11 0.39 0.55 0.63 Income from discontinued operations.................... 0.19 0.21 0.12 0.21 Extraordinary charge -- early extinguishment of debt... (.19) -- -- -- Earnings per primary common share...................... 0.11 0.60 0.67 0.84 Assuming full dilution.................................... $ 0.11 $ 0.55 $ 0.61 $ 0.75
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance beginning costs and at end Description of year expenses Write-offs Other of year - ------------------------------------------------------ ---------- ---------- ---------- ------- ---------- (In thousands) Allowance for doubtful accounts: 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 Year ended October 31, 1995......................... $2,942 $ 445 $ (454) $ -- $ 2,933
38 24 QUARTERLY FINANCIAL RESULTS (from continuing operations)
1997 1996 1995 - --------------------------------------------------------------------------------------------------------- NET SALES (millions) January..................................................... 167.96 121.85 128.64 April....................................................... 186.00 143.50 154.16 July........................................................ 196.58 160.29 160.22 October..................................................... 195.55 194.43 160.97 - --------------------------------------------------------------------------------------------------------- Total................................................ 746.09 620.07 603.99 GROSS PROFIT (millions) January..................................................... 20.73 14.73 15.48 April....................................................... 26.27 17.95 19.98 July........................................................ 28.81 26.41 23.55 October..................................................... 26.67 34.09 23.45 - --------------------------------------------------------------------------------------------------------- Total................................................ 102.48 93.18 82.46 INCOME FROM CONTINUING OPERATIONS (millions) January..................................................... 3.37 1.52 2.30 April....................................................... 7.34 5.26 6.11 July........................................................ 8.61 7.48 7.57 October..................................................... 8.40 8.72 7.40 - --------------------------------------------------------------------------------------------------------- Total................................................ 27.72 22.98 23.38 INCOME FROM CONTINUING OPERATIONS PER PRIMARY COMMON SHARE January..................................................... .23 .11 .07 April....................................................... .53 .39 .34 July........................................................ .61 .55 .48 October..................................................... .59 .63 .54 - --------------------------------------------------------------------------------------------------------- Total................................................ 1.98 1.68 1.43 QUARTERLY COMMON STOCK DIVIDENDS January..................................................... .15 .15 .14 April....................................................... .15 .15 .15 July........................................................ .15 .15 .15 October..................................................... .16 .15 .15 - --------------------------------------------------------------------------------------------------------- Total................................................ .61 .60 .59 COMMON STOCK SALES PRICE (High & Low) January..................................................... 29 1/8-24 1/4 21 1/8-18 24 5/8-20 April....................................................... 27 7/8-23 3/8 22 3/8-19 5/8 23 7/8-21 July........................................................ 34 1/8-25 1/8 23 7/8-19 3/8 26 5/8-22 1/8 October..................................................... 36 1/2-26 1/4 28 3/4-19 5/8 26-18 5/8 - ---------------------------------------------------------------------------------------------------------
39 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereto duly authorized. QUANEX CORPORATION By: /s/ WAYNE M. ROSE ------------------------- Wayne M. Rose Vice President-Finance and Corporate Development (Principal Financial Officer) By: /s/ VIREN M. PARIKH -------------------------- Viren M. Parikh Controller (Principal Accounting Officer Date: January 20, 1998 -----END PRIVACY-ENHANCED MESSAGE-----