10-K 1 h93165e10-k.txt QUANEX CORPORATION - OCTOBER 31, 2001 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5725 QUANEX CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 38-1872178 State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 1900 WEST LOOP SOUTH, SUITE 1500 77027 HOUSTON, TEXAS (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (713) 961-4600 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON STOCK, $.50 PAR VALUE NEW YORK STOCK EXCHANGE, INC. RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC. 6.88% CONVERTIBLE SUBORDINATED DEBENTURES NEW YORK STOCK EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's voting stock held by non-affiliates as of December 31, 2001, computed by reference to the closing price for the Common Stock on the New York Stock Exchange, Inc. on that date, was $376,508,322. Such calculation assumes only the registrant's officers and directors were affiliates of the registrant. At December 31, 2001, there were outstanding 13,455,580 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, 2001, for its Annual Meeting of Stockholders to be held on February 28, 2002, are incorporated herein by reference in Items 10, 11, 12, and 13 of Part III of this Annual Report. TABLE OF CONTENTS
Page PART I Item 1. Business............................................................................ 1 General...................................................................... 1 Manufacturing Processes, Markets and Product Sales by Business Segment....... 1 Raw Materials and Supplies................................................... 4 Backlog...................................................................... 5 Competition.................................................................. 5 Sales and Distribution....................................................... 5 Seasonal Nature of Business.................................................. 5 Service Marks, Trademarks, Trade Names and Patents........................... 6 Research and Development..................................................... 6 Environmental Matters........................................................ 6 Employees.................................................................... 7 Financial Information About Foreign and Domestic Operations.................. 7 Item 2. Properties.......................................................................... 7 Item 3. Legal Proceedings................................................................... 8 Item 4. Submission of Matters to a Vote of Security Holders................................. 8 PART II Item 5. Market for Registrant's Common Equity and Related Security Holder Matters...................................................................... 8 Item 6. Selected Financial Data............................................................. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 10 Item 7A. Quantitative\Qualitative Disclosure................................................. 19 Item 8. Financial Statements and Supplementary Data......................................... 21 Item 9. Disagreements on Accounting and Financial Disclosure................................ 54 PART III Item 10. Directors and Executive Officers of the Registrant.................................. 54 Item 11. Executive Compensation.............................................................. 54 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................................................... 54 Item 13. Certain Relationships and Related Transactions...................................... 54 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................................................ 55
PART I ITEM 1. BUSINESS GENERAL Quanex was organized in 1927 as a Michigan corporation under the name Michigan Seamless Tube Company. The Company reincorporated in Delaware in 1968 under the same name and then changed its name to Quanex Corporation in 1977. The Company's executive offices are located at 1900 West Loop South, Suite 1500, Houston, Texas 77027. References made to the "Company" or "Quanex" include Quanex Corporation and its subsidiaries unless the context indicates otherwise. The Company's businesses are managed on a decentralized basis. Each operating group has administrative, operating and marketing functions. Financial reporting systems measure each group's return on investment, and the Company seeks to reward superior performance with incentive compensation, which is a significant portion of total employee compensation. Intercompany sales are conducted on an arms-length basis. Operational activities and policies are managed by corporate officers and key division executives. Also, a small corporate staff provides corporate accounting, financial and treasury management, tax, and human resource services to the operating divisions. Quanex is a technological leader in the production of engineered carbon and alloy steel bars, aluminum flat-rolled products, and precision-formed metal products which primarily serve the vehicular products and building products markets. The Company uses state-of-the-art manufacturing technologies, low-cost production processes, and engineering and metallurgical expertise to provide customers with specialized products for specific applications. Quanex believes these capabilities also provide the Company with unique competitive advantages. The Company's growth strategy is focused on the continued penetration of its two core markets: vehicular products and building products. BUSINESS DEVELOPMENTS IN FISCAL 2001 In November 2000, Quanex completed the purchase of Temroc Metals, Inc. ("Temroc"), an aluminum extrusion and fabrication company based in Hamel, Minnesota. Temroc's products are used primarily in the outdoor recreational vehicle market. Temroc expands the Company's offerings in its core vehicular products market. The Company also has invested significant capital internally to grow its technologically advanced, low-cost continuous manufacturing processes to meet growing demand in its vehicular products and building products markets. In the Company's MACSTEEL operations, rotary centrifugal continuous casters are used with an in-line manufacturing process to produce bearing grade quality, seam-free, engineered carbon and alloy steel bars that enable Quanex to participate in higher margin markets within its vehicular products market. Since 1992, the Company has invested approximately $257 million to enhance its steel bar manufacturing and refining processes, to improve rolling and finishing capability, and to expand manufacturing capacity at its MACSTEEL operations to approximately 700,000 tons per year. Phases I through V of the MACSTEEL expansions have been completed. In Phase V, finished in December 2000, the Company installed additional equipment at each of the MACSTEEL plants in Jackson, Michigan, and Ft. Smith, Arkansas to increase their capacity. This project increased engineered steel bar shipping capacity by approximately 13% to 700,000 tons annually. Phase V also included projects at MACSTEEL Heat Treating, based in Huntington, Indiana, where a third processing line was built, and at Kenosha, Wisconsin-based MACSTEEL NitroSteel, where efficiency enhancing equipment has been installed. In May 2000, the Company announced Phase VI, a project that will boost capacity for MACPLUS cold-finished steel bars. The project includes installation of two additional bar turning and polishing lines, one at the plant in Jackson, which was completed in December of 2001 and the other at the Ft. Smith plant, which is scheduled for completion by 2002 year-end. After the project is complete, MACSTEEL will have a total of six value-added MACPLUS lines capable of producing 270,000 tons of cold finished steel bars for its vehicular products markets. In November 2000, Quanex completed a $4 million capital project at AMSCO, which provides an additional 40,000 square feet of manufacturing space and equipment to expand existing lines and produce new products for its building products markets. MANUFACTURING PROCESSES, MARKETS, AND PRODUCT SALES BY BUSINESS SEGMENT Information with respect to major markets for the Company's products, expressed as a percentage of consolidated net sales, is shown under the heading "Sales by Major Markets" on the following table. Although Quanex has attempted to estimate its sales by product and market categories, many products have multiple end uses for several industries and sales are not recorded on the basis of product or 1 market categories. A portion of sales is made to distributors who sell to different industries. Net sales by principal market are based upon the total dollar volume of customer invoices. For the years ended October 31, 2001 and 2000, no one customer accounted for 10% or more of the Company's sales. For the year ended October 31, 1999, one customer, Autoliv Inc., accounted for 12% of Company's sales. SALES BY MAJOR MARKETS
MARKET SALES ($ MILLIONS) MARKETS DESCRIPTION QUANEX PRODUCTS Fiscal Year Ended October 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- VEHICULAR Auto/Truck Steel bars, impact- $332.1 $408.8 $396.9 $ 364.1 $ 332.7 extruded components, aluminum 35.9% 42.4% 47.5% 44.3% 43.3% sheet Other Transportation Steel bars, treated $35.7 $35.6 $31.4 $ 33.2 $ 34.2 (including ship/ tubes and bars, aluminum sheet 3.9% 3.7% 3.8% 4.1% 4.4% railroad, recreational vehicles and military transportation) TOTAL VEHICULAR $367.8 $444.4 $428.3 $ 397.3 $ 366.9 39.8% 46.1% 51.3% 48.4% 47.7% BUILDING Residential and Aluminum sheet, fabricated $336.6 $326.7 $301.6 $ 343.7 $ 335.9 PRODUCTS Commercial Building aluminum products, 36.4% 33.9% 36.1% 41.8% 43.7% Materials, Other aluminum coil ,coated aluminum coil INDUSTRIAL General Industrial Specialized forgings, $34.6 $47.3 $39.1 $ 31.2 $ 26.0 MACHINERY Machinery (including impact-extruded 3.7% 4.9% 4.7% 3.8% 3.4% AND CAPITAL mining, agriculture products, steel bars EQUIPMENT and construction) Capital Equipment Steel bars, treated bars $32.9 $17.5 $13.0 $ 11.0 $ 18.5 (including material and tubes, partition 3.6% 1.8% 1.6% 1.3% 2.4% handling, machine products, impact-extruded tools, and products office/household) TOTAL INDUSTRIAL MACHINERY $67.5 $64.8 $52.1 $ 42.2 $ 44.5 AND CAPITAL EQUIPMENT 7.3% 6.7% 6.3% 5.1% 5.8% OTHER $152.5 $128.6 $52.9 $ 38.3 $ 21.4 16.5% 13.3% 6.3% 4.7% 2.8% TOTAL SALES $924.4 $964.5 $834.9 $ 821.5 $ 768.7 100.0% 100.0% 100.0% 100.0% 100.0%
Quanex operates 16 manufacturing facilities in ten states in the United States. These facilities feature efficient plant design and flexible manufacturing processes, enabling the Company to produce a wide variety of engineered products and materials for the Company's vehicular products and building products markets. 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. During fiscal 2001, the Company's operations were grouped into four business segments: (1) engineered steel bars, (2) aluminum mill sheet products, (3) engineered products, and (4) Piper Impact. General corporate expenses are classified as "Corporate and Other". During the latter portion of the fiscal year ending October 31, 2001, the Company completed a strategic review of its business, which resulted in a shift of strategy away from primarily a "process" oriented enterprise to a more "market focused" enterprise. The review underscored a high concentration of sales in two market segments - vehicular products and building products. Beginning in fiscal 2002, the Company will report operations in those two market focused segments. 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. VEHICULAR PRODUCTS The vehicular products segment is comprised of the former engineered steel bar segment (MACSTEEL), Piper Impact and Temroc. The segment includes engineered steel bar operations, impact extrusion operations, steel bar and tube heat-treating services, steel bar and tube corrosion and wear resistant finishing services, and aluminum extrusion and fabricated metal products. 2 MACSTEEL The Company's engineered steel bar operations are conducted through its MACSTEEL division, consisting of two plants, one located in Ft. Smith, Arkansas, and the other located in Jackson, Michigan. These plants can manufacture up to 700,000 tons of hot finished, precision engineered, carbon and alloy steel bars. The Company believes that MACSTEEL has the only two plants in North America using continuous rotary centrifugal casting technology. This casting process produces seam-free bars, without surface defects or inclusions, thereby reducing the need for subsequent surface conditioning. The continuous casting and automated in-line manufacturing operations at the MACSTEEL plants substantially reduce labor and energy costs by eliminating the intermittent steps that characterize manufacturing operations at most larger, and particularly integrated steel mills. The Company typically sells only complete heat lots, or batches, which are made to specific customer requirements. MACSTEEL produces various grades of customized, engineered steel bars by melting steel scrap and casting it in a rotary centrifugal continuous caster. MACSTEEL's molten steel is further processed through secondary refining processes that include argon stirring, ladle injection, and vacuum arc degassing prior to casting. These processes enable MACSTEEL to produce higher quality, "cleaner" steel. 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 engineered carbon and alloy steel bars. The Company believes that energy costs at MACSTEEL are significantly lower than those of its competitors because its bars are moved directly from the caster to the rolling mill before cooling, eliminating the need for costly reheating. MACSTEEL's low unit labor costs are achieved with its highly automated manufacturing process, enabling it to produce finished steel bars using less than two man-hours of labor per ton compared with an estimated average of four to five man-hours per ton for U.S. integrated steel producers. MACSTEEL products are custom manufactured primarily for the vehicular product markets serving the passenger car, light truck, sport utility vehicle (SUV), heavy truck, anti-friction bearing, off-road and farm 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 components, steering components, hydraulic mechanisms and seamless tube production. Also, MACSTEEL engineered steel bars are used for the manufacture of components for safety critical steel air bag inflators at the Company's Piper Impact plant in New Albany, Mississippi. Also included in the MACSTEEL division are a heat treating plant in Huntington, Indiana ("Heat Treat") and a plant in Kenosha, Wisconsin that improves the wear and corrosion resistance properties of steel bars and tubes ("NitroSteel"). The Heat Treat facility uses custom designed, in-line equipment to provide tube and bar heat-treating and related services, such as quench and temper, stress relieving, normalizing, "cut-to-length", and metallurgical testing. This plant primarily serves customers in the vehicular products and energy markets. The NitroSteel plant processes steel bars and tubes using the patented Nitrotec treatment to improve corrosion and wear resistance while providing an environmentally friendly, non-toxic alternative to chrome plating. NitroSteel's products are made for specific customer applications and are used for fluid power applications in primarily the vehicular products markets. Piper Impact The Piper Impact division of the vehicular products segment includes two impact-extrusion facilities in New Albany, Mississippi, dedicated to aluminum and steel impact-extruded products. Piper Impact is a manufacturer of custom designed, impact extruded aluminum and steel parts primarily for vehicular and defense applications. Piper Impact's operations use impact extrusion technology to produce highly engineered near-net shaped components from aluminum and steel slugs. The pressure resulting from the impact of the extrusion presses causes metal to flow into the desired shape. This cost efficient, cold forming of the metal results in a high quality, work hardened product with a superior finish. Products may be further processed with heat-treating and precision machining. The parts are then delivered to customers' assembly lines, requiring little or no additional processing. The majority of Piper Impact's sales are to one customer, Autoliv Inc., for use in automotive air bag systems. 3 Temroc Metals The Temroc Metals division of the vehicular products segment is located in Hamel, Minnesota. Temroc Metals is an aluminum extruder and fabricator of metal products. The single facility manufactures engineered products that primarily serve the outdoor recreational vehicular products market. BUILDING PRODUCTS The building products segment is comprised of the former aluminum mill sheet products segment (Nichols Aluminum) as well as the divisions comprising the former Engineered Products segment (AMSCO, Homeshield and Imperial), excluding Temroc. The segment includes two aluminum sheet casting and finishing operations and fabricated metal components operations. Nichols Aluminum Nichols Aluminum manufactures mill finished and coated aluminum sheet for the building products market and the food packaging market. The division comprises five plants: a thin-slab casting and hot rolling mill ("NAC") located in Davenport, Iowa, three cold rolling and finishing plants located in Davenport, Iowa ("NAD"), Lincolnshire, Illinois ("NAL"), and Decatur, Alabama ("NAA"), and Nichols Aluminum-Golden ("NAG"), an aluminum production facility located in Fort Lupton, Colorado. NAC's mini-mill uses an in-line casting process that can produce 400 million pounds of reroll (hot-rolled aluminum sheet) annually. The mini-mill converts aluminum scrap to sheet through melting, continuous casting, and in-line hot rolling processes. NAC has shredding and blending capabilities, including two rotary barrel furnaces that broaden its sources of raw material and allow it to melt cheaper grades of scrap. Delacquering equipment improves the quality of the raw material before it reaches the melting furnaces by burning off combustibles in the scrap. Scrap is blended using computerized processes to most economically achieve the desired molten aluminum alloy composition. The molten metal flows into a Hazelett thin-slab caster, which casts an aluminum slab up to 52-inches wide and .75 inches thick. The slab is fed directly to a hot mill where three in-line rolling stands reduce the slab to gauges as thin as .045 inches. This hot rolling process substantially reduces subsequent cold rolling requirements. NAC also has an efficient, in-house dross recovery system to improve raw material yields. The Company believes the combination of base capacity increases and technological enhancements directed at producing higher quality reroll results in a significant manufacturing advantage with savings derived from reduced raw material costs, optimized scrap utilization, reduced unit energy cost, reduced cold rolling requirements and lower labor costs. Further processing of the reroll occurs at NAD, NAL or NAA, where customers' specific product requirements can be met through cold rolling to various gauges, annealing for additional mechanical and formability properties, tension leveling to improve the flatness of the sheet, and slitting to specific widths. Products at the NAD and NAA plants can also be custom painted, an important value-added feature for the applications of certain customers in the building products market. Operations at NAG include melting and casting aluminum into sheet, cold rolling to specific gauge, annealing, leveling, custom coating and slitting to width. NAG manufactures high quality aluminum sheet from scrap, then manufactures the sheet into engineered applications primarily for the food packaging markets. Engineered Products AMSCO in Rice Lake, Wisconsin, Homeshield ("HFP"), with 2 plants in Chatsworth, Illinois, and Imperial ("IFP") in Richmond, Indiana produce various engineered products for the building products markets. These products include aluminum window and patio door screens, window frames, residential exterior door products, and a broad line of custom designed, roll formed products and stamped shapes for manufacturers of premium wood windows and vinyl windows for the home improvement, residential, and commercial construction markets. AMSCO combines strong product design and development expertise with reliable, just-in-time delivery. HFP also coats and/or paints aluminum sheet in many colors, sizes, and finishes, and it fabricates aluminum coil into rain carrying systems, soffit, exterior housing trim and roofing products. IFP produces sophisticated residential exterior door thresholds, astragals, patio door systems and other miscellaneous door components. RAW MATERIALS AND SUPPLIES The Company's MACSTEEL plants purchase on the open market their principal raw material, steel scrap or substitutes such as pig iron, beach iron and hot briquetted iron. Collection and transportation 4 of these raw materials to the Company's plants can be adversely affected by extreme weather conditions. Prices for scrap also vary in relation to the general business cycle, typically declining in periods of slow economic activity. Temroc's raw material consists primarily of aluminum billet, which it purchases from several suppliers on the open market. Piper Impact's raw material consists of aluminum bars and slugs that it purchases on the open market, and steel bars that it purchases from MACSTEEL. Nichols Aluminum's principal raw material is aluminum scrap purchased on the open market, which can also be adversely affected by extreme weather conditions. Nichols purchases and sells aluminum ingot futures contracts on the London Metal Exchange to hedge against fluctuations in the price of aluminum scrap required to manufacture products for fixed-price sales contracts. AMSCO and HFP's primary raw material is coated and uncoated aluminum sheet purchased primarily from Nichols Aluminum. Raw materials utilized at IFP include aluminum, wood and vinyl that are available from a number of suppliers. Prices for aluminum are typically set on a monthly basis based upon market rates. In addition, IFP purchases two types of wood materials - hardwood and softwood, which it purchases at market prices. BACKLOG At October 31, 2001, Quanex's backlog of orders to be shipped in the next twelve months was approximately $185 million. This compares to approximately $158 million at October 31, 2000. Because many of the markets in which Quanex operates have short lead times, the Company does not believe that backlog figures are reliable indicators of annual sales volume or operating results. COMPETITION The Company's products are sold under highly competitive conditions. Quanex competes with a number of companies, some of which have greater financial and other resources. Competitive factors include product quality, price, delivery, and the ability to manufacture to customer specifications. The amounts of engineered steel bars, aluminum mill sheet products, engineered products and impact extruded products manufactured by the Company generally represent a small percentage of annual domestic production. The Company's engineered steel bar group (MACSTEEL) competes primarily with one large integrated steel producer and two large non-integrated steel producers. Although these producers may be larger and have greater resources than the Company, Quanex believes that the technology used at MACSTEEL facilities permits it to compete effectively in the markets it serves. The Company's aluminum mill sheet group (Nichols Aluminum) competes with many small and large aluminum sheet manufacturers. Some of these competitors are divisions or subsidiaries of major corporations with substantially greater resources than the Company. The Company also competes with major aluminum producers in coil-coated and mill finished products, primarily on the basis of the breadth of product lines, the quality and responsiveness of its services, and price. The Company's engineered products group (AMSCO, Homeshield, Imperial, and Temroc) competes with many small metal fabricators and aluminum extrusion facilities, primarily on the basis of custom engineering, quality, service, and price. Piper Impact competes with several other impact extrusion companies, and companies that offer other technologies that can provide similar products, on the basis of design, quality, price and service. SALES AND DISTRIBUTION The Company has sales organizations with sales representatives in many parts of the U.S. MACSTEEL sells engineered steel bars primarily to tier one suppliers through its sales organization and manufacturers' representatives. Nichols Aluminum products are sold directly to original equipment manufacturers ("OEMs") and through metal service centers. The engineered products group's products are sold primarily to OEMs, except for some residential building products, which are also sold through distributors. Piper Impact sells directly to OEMs. SEASONAL NATURE OF BUSINESS Nichols Aluminum and the Company's engineered products businesses are seasonal. The primary markets of these businesses are in the Northeast and Midwest regions of the United States, where winter 5 weather reduces homebuilding and home improvement activity. Historically in these businesses, lowest sales have occurred during the Company's first fiscal quarter. Profits for the operations in these businesses tend to be lower in quarters with lower sales because a high percentage of their manufacturing overhead and operating expense is due to labor and other costs that are generally fixed throughout the year. The other businesses in which the Company competes are generally not seasonal. However, due to the holidays in the Company's first fiscal quarter and steel plant shutdowns for vacations and maintenance in the Company's third fiscal quarter, sales have historically been lower in those periods. As a result of these trends, combined with the effects of seasonality, the Company generally expects that, absent unusual activity or changes in economic conditions, its lowest sales will occur in the first fiscal quarter. SERVICE MARKS, TRADEMARKS, TRADE NAMES, AND PATENTS The Company's Quanex, Quanex design, Seam-Free design, NitroSteel, MACGOLD, MACSTEEL, MACSTEEL design, MAC+, Ultra-Bar, Homeshield, Homeshield design, and "The Best Alloy & Specialty Bars" marks are registered trademarks or service marks. The Company's Piper Impact name is used as a service mark, but is not yet registered in the United States. The trade name Nichols-Homeshield and the Homeshield design trademarks are used in connection with the sale of the Company's aluminum mill sheet products and residential building products. The Homeshield, Piper Impact, MACSTEEL and Quanex word and design marks and associated trade names are considered valuable in the conduct of the Company's business. The businesses conducted by the Company generally do not depend upon patent protection. Although the Company holds numerous patents, in many cases, the proprietary technology that the Company has developed for using the patents is more important than the patents themselves. RESEARCH AND DEVELOPMENT Expenditures for research and development of new products or services during the last three years were not significant. Although not technically defined as research and development, a significant amount of time, effort and expense is devoted to custom engineering and qualifying the Company's products for specific customer applications. ENVIRONMENTAL MATTERS As a manufacturer of specialized metal products, Quanex is subject to extensive laws and regulations concerning the discharge of materials into the environment and the remediation of chemical contamination. Quanex is required to make capital and other expenditures on an ongoing basis in order to satisfy such requirements. The cost of environmental matters has not had a material adverse effect on Quanex's operations or financial condition in the past, and management is not aware of any existing conditions that it currently believes are likely to have a material adverse effect on Quanex's operations or financial condition. Under applicable state and federal laws, the Company may be responsible for, among other things, all or part of the costs required to remove or remediate wastes or hazardous substances at locations Quanex has owned or operated at any time. The Company is currently participating in environmental assessments or remediation at a number of those locations. From time to time, Quanex also has been alleged to be liable for all or part of the costs incurred to clean up third-party sites where it is alleged to have arranged for disposal of hazardous substances. The Company's allocable share of liability at those sites, taking into account the likelihood that other parties will pay their shares, has not been material to its operations or financial condition. Total remediation reserves, at October 31, 2001, for Quanex's current plants, former operating locations, and disposal facilities were approximately $18 million. Of that, approximately 80% is allocated to the cleanup of historical soil and groundwater contamination and other corrective measures at a plant operated by the Company's Piper Impact division in New Albany, Mississippi. Depending upon such factors as the nature and extent of contamination, the cleanup technologies employed, and regulatory concurrences, final remediation costs may be more or less than amounts accrued; however, management believes it has established adequate reserves for all probable and reasonably estimable remediation liabilities. Environmental agencies continue to develop regulations implementing the Federal Clean Air Act. Depending on the nature of the regulations adopted, Quanex may be required to incur additional capital and other expenditures sometime in the next several years for air pollution control equipment, to maintain or obtain operating permits and approvals, and to address other air emission-related issues. 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. The Company plans to have capital expenditures in fiscal 2002 for equipment upgrades in 6 order to comply with secondary aluminum production emissions standards at two of its Nichols Aluminum facilities. Quanex incurred approximately $3 million and $5 million during fiscal 2001 and 2000, respectively, in expenses in order to comply with existing or proposed environmental regulations. The Company estimates expenses at various of its facilities during fiscal 2002 will be approximately $5 million for continuing compliance with environmental regulations. Capital expenditures for these environmental regulations during fiscal 2001 and 2000 were immaterial. Capital expenditures for fiscal 2002 are expected to be approximately $5 million including upgrades related to secondary aluminum production emissions standards at two of its Nichols Aluminum facilities. Future expenditures relating to environmental matters will necessarily depend upon the application to Quanex and its facilities of future regulations and government decisions. Quanex will continue to have expenditures in connection with environmental matters beyond 2002, but it is not possible at this time to reasonably estimate the amount of these expenditures. EMPLOYEES At October 31, 2001, the Company employed 3,321 persons. Of the total employed, 32% were covered by collective bargaining agreements. In November 2001, a five-year agreement was ratified by the United Steel Workers representing 95 employees at Nichols Aluminum Alabama. Temroc's collective bargaining agreement expires January 31, 2002 and negotiations will begin mid-January. 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. ITEM 2. PROPERTIES The following table lists Quanex's principal plants together with their locations, general character and the industry segment which uses the facility. Each of the facilities identified as being owned by the Company is free of any material encumbrance.
SQUARE LOCATION PLANT FOOTAGE -------- ----- ------- Owned: ENGINEERED STEEL BARS Fort Smith, Arkansas MACSTEEL 614,000 Jackson, Michigan MACSTEEL 386,000 Huntington, Indiana Heat Treating 96,000 Kenosha, Wisconsin NitroSteel 35,000 Owned: ALUMINUM MILL SHEET PRODUCTS Lincolnshire, Illinois Nichols Aluminum 142,000 Davenport, Iowa Nichols Aluminum 236,000 Davenport, Iowa Nichols Aluminum Casting 245,000 Fort Lupton, Colorado Nichols Aluminum Golden 238,000 Leased (4 leases expiring 2003, 2004, 2005 and 2018): Decatur, Alabama Nichols Aluminum Alabama 410,000 Owned: ENGINEERED PRODUCTS Rice Lake, Wisconsin AMSCO 336,000 Chatsworth, Illinois Homeshield Fabricated Products (two plants) 218,000 Richmond, Indiana Imperial Fabricated Products 92,000 Hamel, Minnesota Temroc 140,000 Owned: PIPER IMPACT New Albany, Mississippi Piper Impact (two plants) 683,000 Leased (expires 2010): EXECUTIVE OFFICES Houston, Texas Quanex Corporation 21,000
7 ITEM 3. LEGAL PROCEEDINGS Other than the proceedings described under Item 1, "Environmental Matters", there are no material legal proceedings to which Quanex, its subsidiaries, or their property is subject. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Quanex's common stock, $.50 par value, is traded on the New York Stock Exchange, under the ticker symbol: NX. Quarterly stock price information and annual dividend information for the common stock is as follows:
QUARTERLY COMMON STOCK DIVIDENDS Quarter Ended: 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- January ...................... .16 .16 .16 .16 .15 April ........................ .16 .16 .16 .16 .15 July ......................... .16 .16 .16 .16 .15 October ...................... .16 .16 .16 .16 .16 -------- -------- -------- -------- -------- TOTAL .............. .64 .64 .64 .64 .61
QUARTERLY COMMON STOCK SALES PRICE (High & Low) Quarter Ended: 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- January ...................... 21 26.5625 23.875 30.4375 29.125 16.375 19.0625 16.8125 27.0625 24.25 April ........................ 21.15 23.6875 26.25 33.8125 27.875 17.35 16.125 15.375 28.50 23.375 July ......................... 27.55 18.625 29 32.1875 34.125 20.70 14.375 25.125 27.25 25.125 October ...................... 27.48 20.6875 27.375 27.875 36.50 20.75 17.0625 20.125 15.625 26.25
The terms of Quanex's revolving credit arrangements with certain banks limit the total amount of common and preferred stock dividends and other distributions on such stock. Under the most restrictive test under such credit facilities, the total common stock dividends the Company may declare and pay is limited to $21 million, plus 50% of consolidated net income earned after October 31, 1989, adjusted for other factors as set forth in the credit agreement. As of October 31, 2001, the aggregate amount available for dividends and other restricted payments under its credit facilities was approximately $26 million. There were 5,538 holders of Quanex common stock on record as of December 31, 2001. ITEM 6. SELECTED FINANCIAL DATA GLOSSARY OF TERMS The exact definitions of commonly used financial terms and ratios vary somewhat among different companies and investment analysts. The following list gives the definition of certain financial terms that are used in this report: Capital expenditures: Additions to property, plant and equipment. Book value per common share: Stockholders' equity less the stated value of preferred stock divided by the number of common shares outstanding. Asset turnover: Net sales divided by average total assets. Current ratio: Current assets divided by current liabilities. Return on investment: The sum of net income and the after-tax effect of interest expense less capitalized interest divided by the sum of the averages for long-term debt and stockholders' equity. Return on common stockholders' equity: Net income attributable to common stockholders divided by average common stockholders' equity. 8 ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY 1996 - 2001 ($ THOUSANDS, EXCEPT PER SHARE DATA) Fiscal years ended October 31, 2001 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- -------- REVENUES AND EARNINGS Net sales(1), (8) 924,353 964,518 834,902 821,507 768,743 640,121 Cost of sales including operating depreciation and amortization 809,027 841,047 706,607 707,971 666,691 546,938 -------- -------- -------- -------- -------- -------- Gross profit 115,326 123,471 128,295 113,536 102,052 93,183 Piper Impact Asset Impairment Charge -- 56,300(2) -- 58,500(2) -- -- Loss on sale of Piper Impact Europe -- 14,280(3) -- -- -- -- Other depreciation and amortization 3,808 3,308 3,434 5,059 3,669 1,791 Selling, general and administrative expenses 54,202 53,545 53,104 47,713 43,375 44,959 -------- -------- -------- -------- -------- -------- Operating income (loss) 57,316 (3,962) 71,757 2,264 55,008 46,433 Percent of net sales(8) 6.2 (0.4) 8.6 0.3 7.2 7.3 Other income - net 2,623 1,870 1,383 2,278 1,637 4,544 Interest expense-net 14,889 13,314 12,791 10,506 14,002 11,360 -------- -------- -------- -------- -------- -------- Income (loss) before income taxes, extraordinary items, cumulative effect of accounting change, and income from discontinued operations 45,050 (15,406) 60,349 (5,964) 42,643 39,617 Income taxes (credit) 16,228 (5,383) 21,048 (2,087) 14,925 16,639 -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations 28,822 (10,023) 39,301 (3,877) 27,718 22,978 Income from discontinued operations -- -- -- -- 5,176 9,912 Gain on sale of discontinued operations -- -- -- 13,046 36,290 -- Extraordinary items - early extinguishment of debt, net of taxes 372 358 415 -- -- (2,522) -------- -------- -------- -------- -------- -------- Net income (loss) 29,194 (9,665) 39,716 9,169 69,184 30,368 Percent of net sales(8) 3.2 (1.0)(7) 4.8 1.1(6) 9.0(5) 4.7 -------- -------- -------- -------- -------- -------- PER SHARE DATA Basic Earnings per share: Income (loss) from continuing operations 2.15 (0.73) 2.76 (0.27) 2.01 1.70 Income from discontinued operations -- -- -- -- 0.37 0.73 Gain on sale of discontinued operations -- -- -- 0.92 2.63 -- Extraordinary items and cumulative effect of accounting change 0.03 0.03 0.03 -- -- (0.19) Net earnings (loss) 2.18 (0.70)(7) 2.79 0.65(6) 5.01 2.24 Cash dividends declared 0.64 0.64 0.64 0.64 0.61 0.60 Book value 20.88 19.90 21.24 19.19 19.13 14.50 Average shares outstanding (000) 13,399 13,727 14,234 14,149 13,807 13,524 Market closing price range High 27.38 26.56 28.94 33.50 36.50 28.63 Low 17.00 14.38 15.50 16 23.38 18.38 -------- -------- -------- -------- -------- -------- FINANCIAL POSITION - YEAR END Working capital 102,288 104,944 76,247 62,979 52,818 88,238 Property, plant and equipment - net 357,635 338,248 406,841 395,054 379,071 319,165 Other assets 103,118 71,665 71,218 69,422 119,738 117,142 Total assets 697,631 645,859 690,446 674,288 685,705 638,948 -------- -------- -------- -------- -------- -------- Noncurrent deferred income taxes 29,282 27,620 43,910 33,412 48,111 40,454 Long-term debt 219,608 191,657 179,121 188,302 201,858 253,513 Stockholders' equity 279,977 266,497 301,061 272,044 268,823 197,009 Total capitalization 499,585 458,154 480,182 460,346 470,681 450,522 Long-term debt percent of capitalization 44.0 41.8 37.3 40.9 42.9 56.3 -------- -------- -------- -------- -------- -------- OTHER DATA Asset turnover(8) 1.4 1.4 1.2 1.2 1.2 1.2 Current ratio 1.8 TO 1 1.8 to 1 1.6 to 1 1.4 to 1 1.4 to 1 1.8 to 1 Return on average investment - percent 8.1 (0.2)(7) 10.0 3.4(6) 16.7(5) 9.8 Return on average common equity - percent 10.7 (3.4)(7) 13.9 3.4(6) 29.7(5) 16.4 -------- -------- -------- -------- -------- -------- Working capital provided by operations(4) 73,858 90,441 94,905 82,830 73,321 60,378 Depreciation and amortization 43,910 48,445 45,883 42,400 37,865 36,499 Capital expenditures 55,640 42,355 60,934 60,936 69,146 34,737 Backlog for shipment in next 12 months 185,000 157,830 164,128 183,847 225,498 123,382 -------- -------- -------- -------- -------- -------- Number of stockholders 5,313 5,697 5,113 5,720 5,488 3,425 Average number of employees 3,340 3,361 3,393 3,261 2,994 1,950 Sales per employee(8) 277 287 246 252 257 328 -------- -------- -------- -------- -------- --------
Note: Several acquisitions and divestitures have been made in past 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 and 1996, respectively of $187,123 and $275,641. (2) During fiscal 2000 and 1998, Piper Impact recorded a $56.3 million and $58.5 million, respectively, asset impairment charge as described by Statement of Financial Accounting Standards No. 121. See Footnote 4 to the financial statements for further information. (3) See Note 3 to the financial statements for further information regarding the loss on the sale of Piper Impact Europe. (4) Working capital provided by operations is a supplemental financial measurement used in the company's business and should not be construed as an alternative to operating income or cash provided by operating activities since it excludes the effects of changes in working capital. Working capital from operations is calculated as income from continuing operations, net of taxes, adjusted for non-cash and nonrecurring items. (5) Includes gain on sale of discontinued operations. (6) Includes effect of Piper Impact's asset impairment charge ($58.5 million in FY 1998) and gain on sale of discontinued operations ($13 million in FY 1998). (7) Includes effect of Piper Impact's asset impairment charge ($56.3 million in FY 2000) and the loss on sale of Piper Impact Europe ($14.3 million in FY 2000). (8) Beginning in fiscal 2001, freight costs are no longer netted against sales, they are included in cost of sales. Prior year's net sales and sales ratios have been restated to conform to this presentation. 9 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 of the statements contained in this document and in documents incorporated by reference herein, including those made under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" are "forward-looking" statements as defined under the Private Securities Litigation Reform Act of 1995. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will" and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements which address future operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to volume, sales, operating income and earnings per share, and statements expressing general optimism about future operating results, are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. As and when made, management believes that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made and there can be no assurance that such forward-looking statements will occur. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors exist that could cause the Company's actual results to differ materially from the expected results described in or underlying our Company's forward-looking statements. Such factors include domestic and international economic activity, prevailing prices of steel and aluminum scrap and other raw material costs, energy costs, interest rates, construction delays, market conditions for the Company's customers, any material changes in purchases by the Company's principal customers, environmental regulations, changes in estimates of costs for known environmental remediation projects and situations, world-wide political stability and economic growth, the Company's successful implementation of its internal operating plans, performance issues with key customers, suppliers and subcontractors, and regulatory changes and legal proceedings. Accordingly, there can be no assurance that the forward-looking statements contained herein will occur or that objectives will be achieved. All written and verbal forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such factors. RESULTS OF OPERATIONS Overview Summary Information as % of Sales: (Dollars in millions)
FISCAL YEAR ENDED OCTOBER 31, 2001 2000 1999 Dollar % of Dollar % of Dollar % of Amount Sales Amount Sales Amount Sales ------ ------ ------ ------ ------ ------ Net Sales $924.3 100% $964.5 100% $834.9 100% Cost of Sales 769.3 83 796.4 83 664.7 80 Selling, general and admin 54.2 6 53.5 5 53.1 6 Depreciation and amortization 43.5 5 47.9 5 45.3 5 Piper Impact Impairment Charge -- -- 56.3 6 -- -- Loss on sale of Piper Impact Europe -- -- 14.3 1 -- -- ------ ------ ------ ------ ------ ------ Operating Income (Loss) 57.3 6% (3.9) 0% 71.8 9% Interest Expense (16.6) (1) (15.3) (2) (14.4) (2) Capitalized Interest 1.7 0 1.9 0 1.6 0 Other, net 2.6 0 1.9 0 1.4 0 Income tax benefit (expense) (16.2) (2) 5.4 1 (21.1) (2) ------ ------ ------ ------ ------ ------ Income (Loss) before extraordinary gain $ 28.8 3% $(10.0) (1)% $ 39.3 5% ====== ====== ======
Despite a slow business environment, Quanex achieved relatively strong earnings for the fiscal year ended October 31, 2001. The Company was able to achieve sequentially better earnings quarter- 10 to-quarter during the year. A focus on reducing conversion and overhead costs, coupled with the introduction of new products, were the three key drivers, which helped the Company achieve these results. Acquisitions / Divestitures Since October 31, 1998 In January 2000, the Company purchased from Alcoa, Inc. the Golden Aluminum production facility based in Fort Lupton, Colorado. Quanex acquired the assets of the facility for $9 million plus working capital valued at approximately $13 million. The newly acquired facility became part of Quanex's flat-rolled aluminum sheet business - Nichols Aluminum (the aluminum mill sheet products segment). It was renamed Nichols Aluminum - Golden, Inc., ("Nichols Aluminum - Golden"), a wholly owned subsidiary of Quanex. Operations at Nichols Aluminum-Golden include melting and casting aluminum into sheet made from a blend of primary P1020 ingot and selected grades of scrap metal, cold rolling it to specific gauge, annealing, leveling, custom coating and slitting to width. Nichols Aluminum-Golden can produce more than 50 million pounds annually of high quality metal for engineered applications in niche markets, such as end and tab stock for food and beverage packaging, metal components for computer disks, and home accessory products. In April 2000, the Company acquired the stock of Imperial Products, Inc., a leading manufacturer of value-added exterior door components based in Richmond, Indiana, for approximately $15 million. Imperial Products, Inc., now doing business as Imperial Fabricated Products ("Imperial"), operates as a wholly owned subsidiary of Quanex. This acquisition expands the specialized design and manufacturing operations of Quanex's Engineered Products Group. In July 2000, the Company sold Piper Impact Europe, an impact-extrusion facility based in The Netherlands, to the plant's existing management group for a nominal amount. The transaction was structured as a sale of stock. As a result of this transaction, the Company recorded a pretax charge of $14.3 million for the fiscal third quarter ending July 31, 2000. In connection with the sale, the Company's range forward foreign currency agreement with a notional amount of 30 million Guilders was closed. This agreement was entered into to protect the Company's investment in Piper Impact Europe from foreign currency fluctuations. The settlement of this agreement resulted in a gain, which was offset against the charge on the sale of Piper Impact Europe. On November 30, 2000, the Company completed the purchase of all of the Capital stock of Temroc Metals, Inc., a Minnesota corporation for approximately $22 million in cash. Temroc, as a surviving corporation, became a wholly owned subsidiary of the Company. Temroc has production facilities in Hamel, Minnesota, where it manufactures customized aluminum extrusions and fabricated metal products for recreational vehicles, architectural products, electronics and other markets. Temroc has become part of the Company's Engineered Products Group and will continue to operate as a manufacturer of aluminum extrusions and fabricated metal products. Business Segments Business segments are reported in accordance with Statement of Financial Accounting Standards ("SFAS") No. 131. SFAS No. 131 requires that the Company disclose certain information about its operating segments where operating segments are defined as "components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance". Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. During fiscal 2001, the Company's operations were grouped into four business segments: (1) engineered steel bars, (2) aluminum mill sheet products, (3) engineered products, and (4) Piper Impact. General corporate expenses are classified as "Corporate and Other". During the latter portion of the fiscal year ending October 31, 2001, the Company completed a strategic review of its business, which resulted in a shift of strategy away from primarily a "process" oriented enterprise to a more "market focused" enterprise. The review underscored a high concentration of sales in two market segments - vehicular products and building products. Beginning in fiscal 2002, the Company will report operations in those two market focused segments. For financial information regarding each of Quanex's business segments as well as a presentation under the new segments, see Note 13 to the Consolidated Financial Statements. The Company's engineered steel bar segment consists of manufacturing engineered steel bars, steel bar and tube heat treating services and steel bar and tube wear and corrosion resistant finishing services. The aluminum mill sheet segment manufactures mill finished and coated aluminum sheet. The engineered products segment manufactures aluminum window and patio door screens, window frames, 11 exterior door components and other roll formed products and stamped shapes. The Piper Impact segment manufactures impact-extruded aluminum and steel parts. The following table sets forth selected operating data for the Company's four business segments:
Years Ended October 31, ------------------------------------- 2001 2000 1999 ---------- ---------- ---------- (In thousands) Engineered Steel Bars: Net sales ............................ $ 336,318 $ 360,437 $ 311,342 Operating income ..................... 41,955 57,702 60,446 Depreciation and amortization ........ 21,017 18,775 16,293 Identifiable assets .................. $ 291,220 $ 267,476 $ 241,783 Aluminum Mill Sheet Products:(1) Net sales ............................ $ 380,068 $ 415,777 $ 320,283 Operating income ..................... 5,934 21,529 15,306 Depreciation and amortization ........ 13,193 12,965 12,334 Identifiable assets .................. $ 207,104 $ 227,365 $ 200,733 Engineered Products:(2) Net sales ............................ $ 146,487 $ 106,865 $ 94,476 Operating income ..................... 19,983 14,301 13,006 Depreciation and amortization ........ 5,070 3,443 3,349 Identifiable assets .................. $ 88,424 $ 65,527 $ 46,977 Piper Impact:(3) Net sales ............................ $ 85,514 $ 106,416 $ 135,201 Operating income (loss) .............. 3,256 (82,470) (853) Depreciation and amortization ........ 3,686 12,362 12,836 Identifiable assets .................. $ 47,490 $ 54,518 $ 162,176
(1) Fiscal 2000 results include Nichols Aluminum-Golden operations since the acquisition date of January 25, 2000. See Note 2 to the consolidated financial statements. (2) Results include Imperial operations, acquired April 2000, and Temroc operations, acquired November 2000. See Note 2 to the consolidated financial statements. (3) Fiscal 2000 results include the one-time $14.3 million loss on the sale of Piper Impact Europe and $56.3 million asset impairment charge relating to Piper Impact facilities in New Albany, Mississippi. See Note 3 and 4 to the consolidated financial statements. The engineered steel bar business, MACSTEEL, had a surprisingly strong fourth quarter finish to the year. Overall results for the year were excellent given the difficult steel market environment. MACSTEEL's sales for the year are off about 7% from the prior year, but the group gained market share within its vehicular products market. MACSTEEL continues to be rated number one in customer service and quality in the engineered bar market and remains the supplier of choice for bar products. One of MACSTEEL's strengths is its ability to adjust to a changing marketplace. When business activity softens in its core market, as it did this year, MACSTEEL is able to shift into secondary markets such as energy and defense. While these markets and products typically don't have as good of a mix as traditional markets, these sales help improve overall results in difficult times. For fiscal 2001, MACSTEEL maintained strict control over its costs and the group benefited from favorable scrap pricing. The aluminum mill sheet products business, Nichols Aluminum, operated profitably in a very difficult business environment. The group not only reported its highest operating income for the year in the fourth quarter, it also improved financial results sequentially throughout the year. Estimates from the Aluminum Association indicate that flat roll demand in our markets was down some 22% year over year, while at Nichols, output was off about 10% for the same period. Superior customer service along with excellent, consistent quality made the difference with customers. The engineered products business set all-time records in net sales, cash from operations and operating income. While somewhat softer than this time last year, attractive interest rates continue to draw buyers into the housing market, and remodeling spending has held up well. The combination of improved productivity, profitable acquisitions (Imperial and Temroc), cost control and new product development all contributed to an outstanding performance for fiscal 2001. Piper Impact reported four consecutive quarters of profitability in fiscal 2001 and demonstrated a substantial turnaround since 2000 for this business. More work and improvement are needed at Piper, but they are making progress. Focus remains on leaning-out manufacturing processes, fixed cost reductions and new product development. As business activity continues to shift away from 12 traditional air bag components to other vehicular product offerings, Piper has the management team to make this transition successful. It will not happen overnight, but the Company is confident they have the people, assets and processes in place to make a successful transition and improve results. Outlook Given the current uncertainty in the economy, it remains difficult to predict the demand level for the Company's two core markets, vehicular products and building products, in fiscal 2002. The Company believes that the North American automotive build rate for fiscal 2002 will be in a range of 15 to 15.5 million units, certainly a bit slower than 2001, but still a good level. This build rate assumes some recovery will take place in the first half of 2002. Given this set of assumptions, taking into account new programs and the benefit of increased "in house" value added capacity at MACSTEEL, (a result of the Phase VI expansion at Michigan) as well as the lean manufacturing and continuing cost reduction programs at Piper, the Company's management is upbeat about fiscal 2002 and expects the vehicular segment's results to exceed fiscal 2001. Demand during 2002 in the Company's building products market is anticipated to remain stable considering that projections for new home construction and residential remodeling activities remain at levels similar to 2001. Nichols Aluminum, however, continues to face a very difficult market environment as the aluminum market's capacity exceeds demand. Looking to the first half of 2002, the extreme pricing pressures and the resulting narrow spreads together with lower seasonal demand will continue to challenge them. The engineered products division, with its focus on increasing market share and reducing costs, anticipates improved results. The Company's fiscal first quarter (November, December and January) is historically its least profitable of the year as there are fewer production days, the Company's vehicular and building products customers take holiday shutdowns and customers manage year-end inventories closely. First quarter 2002 earnings per share are expected to be near this year's $0.27. For the year, we expect to again show sequentially improving quarterly results. 2001 Compared to 2000 Net sales - Consolidated net sales for fiscal 2001 were $924.4 million, representing a decrease of $40.2 million, or 4%, when compared to fiscal 2000. All operating segments, with the exception of the engineered products group experienced decreased net sales. Net sales from the Company's engineered steel bar business for fiscal 2001 were $336.3 million, representing a decrease of $24.1 million, or 7%, when compared to fiscal 2000. This decrease was principally due to lower volume resulting from weaker markets in the transportation and capital goods industries as well as lower sales prices. The business continued to experience pricing pressures; however, due to the increased proportion of MACPLUS volume, a value added product, the impact on overall average sales price was lessened. Net sales for fiscal 2001 from the Company's aluminum mill sheet products business decreased by $35.7 million, or 9%, to $380.1 million when compared to fiscal 2000. Fiscal 2001 included a full year of Nichols Aluminum Golden, which was acquired January 25, 2000. The decrease in net sales was due to lower volume as well as lower sales prices. Volume was affected by more severe winter weather during the first fiscal quarter than was experienced in the prior year, as well as a general economic slowdown. These factors negatively affected the building and construction and truck-trailer markets that Nichols Aluminum serves. Sales prices were also negatively impacted by the extremely competitive pricing environment, and the fact that other mills were aggressively seeking available business during the economic slowdown. Net sales from the Company's engineered products business for fiscal 2001 were $146.5 million, representing an increase of $39.6 million, or 37%, from last year. The increase was largely due to the acquisition of Imperial in April of 2000 and Temroc, acquired November 2000. Additionally, the group's net sales improved at the other facilities, benefiting from the capital expansion project at AMSCO, which was completed in November 2000, and new product development initiatives. Net sales for fiscal 2001 for the Company's Piper Impact business declined by $20.9 million, or 20%, to $85.5 million when compared to fiscal 2000. Net sales for the period ending October 31, 2000 included sales from Piper Impact Europe which was sold in July of 2000. Comparable net sales of Piper's operations, excluding Piper Europe, decreased 3% over the same prior year periods. These results were impacted by declining aluminum air bag product sales and competitive pricing pressures. Operating income - Consolidated operating income for fiscal 2001 was $57.3 million, compared to $66.6 million in 2000, excluding the $14.3 million loss on the sale of Piper Impact Europe and the 13 $56.3 million asset impairment charge. This represents a decrease of $9.3 million, or 14%. During fiscal 2001, the engineered steel bar business and the aluminum mill sheet products business had decreased operating income while the engineered products and Piper Impact businesses had higher operating income. Operating income from the Company's engineered steel bar business was $42.0 million for fiscal 2001, representing a decrease of $15.7 million, or 27%, when compared to fiscal 2000. The decrease was due largely to lower net sales resulting from the sluggish demand in the transportation and capital goods markets as well as competitive pricing pressures. Lower material scrap prices helped offset some of the impact of reduced volume and lower selling price. The business experienced increased utility costs as energy prices rose and recognized higher depreciation expense with the completion of capital projects. Operating income for fiscal 2001 from the Company's aluminum mill sheet products business was $5.9 million, representing a decrease of $15.6 million, or 72%, from last year. This decrease was largely due to significantly lower net sales, lower spreads and higher energy costs. Operating income from the Company's engineered products business was $20.0 million for fiscal 2001, representing an increase of $5.7 million, or 40%, from last year. This increase was due in part to the acquisition of Imperial, acquired in April of 2000 and Temroc, acquired in November of 2000. Additionally, operating income increased at the other facilities as a result of new product development and higher net sales along with cost control and improved productivity. Operating income from the Company's Piper Impact business for fiscal 2001 was $3.3 million, compared to an operating loss of $11.9 million, excluding the one-time loss on the sale of Piper Impact Europe of $14.3 million and the $56.3 million asset impairment charge in the prior year. The fiscal 2000 operating loss also included operating losses from Piper Europe before its sale in July 2000. Comparative operating income excluding Piper Europe, improved $12.7 million from the prior year's results, despite a decline in net sales. This improvement is a result of lower costs realized from cellular manufacturing and cost cutting efforts as well as a $6.3 million reduction of depreciation expense. Depreciation expense decreased due to the asset impairment charge recorded in the fourth quarter of fiscal 2000. In addition to the four operating segments mentioned above, operating expenses for corporate and other for fiscal 2001 were $13.8 million, representing a decrease of $1.2 million from the $15.0 million recorded in fiscal 2000. Included in corporate and other are the corporate office expenses, impact of inventory accounting using LIFO method and inter-segment eliminations. See Notes 8 and 13 to the financial statements regarding LIFO valuation method of inventory accounting. Selling, general and administrative expenses - Selling, general and administrative expenses increased by $657 thousand, or 1%, in fiscal 2001 as compared to last year. This increase largely resulted from the following items: 1) acquisitions of Imperial in April 2000 and Temroc in November 2000 2) write-down of assets held for disposition to estimated realizable value in the corporate and other segment and 3) severance costs. These increases were partially offset, however, by 1) reduced expenses due to the sale of Piper Europe in July 2000, and 2) cost cutting initiatives throughout the Company. Depreciation and amortization - Depreciation and amortization decreased by $4.4 million, or 9%, in fiscal 2001 as compared to last year. The engineered steel bar, aluminum mill sheet products and engineered products segments' depreciation expense all increased as compared to last year due to the completion of capital projects as well as recent acquisitions. Piper Impact's depreciation and amortization decreased substantially from the prior year due to the sale of Piper Europe in July of 2000, as well as the reduced asset base, which resulted from the asset impairment charge recorded in the fourth quarter of fiscal 2000. Interest expense - Interest expense increased by $1.3 million, or 9%, in fiscal 2001 as compared to the prior year. The increase was primarily due to 1) higher outstanding debt balances during fiscal 2001 (resulting largely from the Temroc acquisition) and 2) the ineffective portion of the loss on certain interest rate swap derivatives recognized during that period. (See Note 11 and 17 to the financial statements.) Capitalized interest - Capitalized interest decreased by $275 thousand in fiscal 2001 as compared to fiscal 2000 primarily due to the completion of the Phase V capital project at MACSTEEL in December of 2000. Other, net - "Other, net" increased by $753 thousand in fiscal 2001 as compared to last year primarily as a result of increased investment income. 14 Income before extraordinary gain - The Company earned income before extraordinary gain of $28.8 million in fiscal 2001 compared to $35.9 million in the prior year, excluding the $9.3 million (net of tax) loss on the sale of Piper Impact Europe and the $36.6 million (net of tax) asset impairment charge. This represents a decrease of $7.0 million, or 20%, when compared to fiscal 2000. The decrease was largely due to lower operating income and increased interest expense. Additionally, the Company's effective income tax rate was 36% for fiscal 2001 compared to 35% in fiscal 2000. Net income / loss - Fiscal 2001 net income was $29.2 million, compared to a net loss of $9.7 million for fiscal 2000. Included in the net loss for fiscal 2000 was a $9.3 million (after-tax) loss on the sale of Piper Impact Europe and a $36.6 million (after-tax) impairment charge associated with Piper Impact. Additionally, fiscal 2001 net loss included a $372 thousand extraordinary gain on the early extinguishment of debt. Included in net income for fiscal 2000 was a $358 thousand extraordinary gain on early extinguishment of debt. 2000 Compared to 1999 Net sales - Consolidated net sales for fiscal 2000 were $964.5 million, representing an increase of $129.6 million, or 16%, when compared to fiscal 1999. This increase reflects higher net sales at all of the business segments except Piper Impact. The acquisitions of Nichols Aluminum-Golden in January of 2000 and Imperial in April of 2000 contributed to this increase. Net sales from the Company's engineered steel bar business for fiscal 2000, were $360.4 million, representing an increase of $49.1 million, or 16%, when compared to fiscal 1999. This increase was principally due to increased sales volumes as a result of strong primary transportation markets. Net sales for fiscal 2000 from the Company's aluminum mill sheet products business increased by $95.5 million, or 30%, to $415.8 million when compared to fiscal 1999. This increase was due to increased volume from the seasonally strong construction market, increased selling prices resulting from sales of more value-added painted product and the acquisition of Nichols Aluminum-Golden in January 2000. Net sales from the Company's engineered products business for fiscal 2000 were $106.9 million, representing an increase of $12.3 million, or 13%, from last year. The increase was largely due to the acquisition of Imperial in April of 2000. Net sales for fiscal 2000 for the Company's Piper Impact business declined by $28.8 million, or 21%, to $106.4 million when compared to fiscal 1999. These results were impacted by the sale of Piper Impact Europe in July of 2000 as well as declining aluminum air bag product sales and competitive pricing pressures. Operating income - Consolidated operating income for fiscal 2000 was $66.6 million, excluding the $14.3 million loss on the sale of Piper Impact Europe and the $56.3 million asset impairment charge. This represents a decrease of $5.1 million, or 7%, when compared to the operating income of $71.8 million in fiscal 1999. During fiscal 2000, the aluminum mill sheet products business and the engineered products business had increased operating income while the engineered steel bar and Piper Impact businesses had lower operating income. Operating income from the Company's engineered steel bar business was $57.7 million for fiscal 2000, representing a decrease of $2.7 million, or 5%, when compared to fiscal 1999. This lower operating income resulted despite higher net sales. The major factors in such decrease were lower realized spread as a result of higher material costs and pricing pressures as well as higher costs associated with outside processing. Depreciation expense for fiscal 2000 was also higher than the prior year due to the recent completion of certain capital projects. Operating income for fiscal 2000 from the Company's aluminum mill sheet products business was $21.5 million, representing an increase of $6.2 million, or 41%, from last year. This increase was largely due to significantly higher sales attributable to increased volume and sale of more value-added products, stable spreads and contribution from Nichols Aluminum-Golden, acquired in January 2000. Operating income from the Company's engineered products business was $14.3 million for fiscal 2000, representing an increase of $1.3 million, or 10%, from last year. The increase was due largely to increased volume and sale of more value-added, higher margin products, as well as the acquisition of Imperial in April 2000. 15 Operating losses from the Company's Piper Impact business for fiscal 2000 were $11.9 million, excluding the one-time loss on the sale of Piper Impact Europe of $14.3 million and the $56.3 million asset impairment charge. See Note 4 to the financial statements. The operating loss for fiscal 1999 was $853 thousand. The declining results are largely due to reduced sales of aluminum automotive airbag components, higher material costs and higher manufacturing costs associated with new product development as well as cellular manufacturing implementation. In addition to the four operating segments mentioned above, operating expenses for corporate and other for fiscal 2000 were $15.0 million, representing a decrease of $1.1 million from the $16.1 million recorded in fiscal 1999. Included in corporate and other are the corporate office expenses, impact of inventory accounting using LIFO method and inter-segment eliminations. See Notes 8 and 13 to the financial statements regarding LIFO valuation method of inventory accounting. Selling, general and administrative expenses - Selling, general and administrative expenses increased by $441 thousand, or 1%, in fiscal 2000 as compared to last year. This increase is largely a result of the acquisitions of Nichols Aluminum-Golden and Imperial as well as increased sales volume at most business segments. Depreciation and amortization - Depreciation and amortization increased by $2.6 million, or 6%, in fiscal 2000 as compared to last year. The increase is principally due to increased depreciation at the engineered steel bar, aluminum mill sheet products and engineered products businesses for recently completed projects, partially offset by lower depreciation at the Piper Impact business. Interest expense - Interest expense increased by $853 thousand in fiscal 2000 primarily resulting from additional borrowings made during the fiscal year to finance the acquisitions as well as higher interest rates. Capitalized interest - Capitalized interest increased by $330 thousand in fiscal 2000 as compared to fiscal 1999 primarily due to the completion of the Phase V capital project underway at MACSTEEL during 2000. Other, net - "Other, net" increased by $487 thousand in fiscal 2000 as compared to last year primarily as a result of increased investment income. Income before extraordinary gain - The Company earned income before an extraordinary gain of $35.9 million in fiscal 2000 excluding the $9.3 million (net of tax) loss on the sale of Piper Impact Europe and the $36.6 million (net of tax) asset impairment charge. This represents a decrease of $3.4 million, or 9%, when compared to fiscal 1999 income before extraordinary gain of $39.3 million. The decrease (excluding the loss on the sale of Piper Impact Europe and the Piper Impact asset impairment charge) in fiscal 2000 was principally due to lower operating earnings at the engineered steel bar and Piper Impact business segments partially offset by improved results in the other two business segments. Net income / loss - Fiscal 2000 net loss was $9.7 million, compared to net income of $39.7 million for fiscal 1999. Included in the net loss for fiscal 2000 was a $9.3 million (after-tax) loss on the sale of Piper Impact Europe and a $36.6 million (after-tax) impairment charge associated with Piper Impact. Additionally, fiscal 2000 net loss included $358 thousand extraordinary gain on the early extinguishment of debt. Included in net income for fiscal 1999 was a $415 thousand extraordinary gain on early extinguishment of debt. LIQUIDITY AND CAPITAL RESOURCES Total capitalization at October 31, 2001 was $500.0 million, consisting of $220.0 million of debt and $280.0 million of equity. The debt-to-capitalization ratio at the end of fiscal 2001 was 44.0% compared with 41.9% at the end of fiscal 2000. The higher debt-to-capitalization ratio results primarily from the borrowings made to finance the Temroc acquisition and the repayment of borrowings against life insurance policies. The Company's principal sources of funds are cash on hand, cash flow from operations, and borrowings under an unsecured $250 million Revolving Credit and Term Loan Agreement ("Bank Agreement"). The Bank Agreement currently consists of a revolving line of credit ("Revolver"). In July 1997, the term loan provisions of the Bank Agreement expired. The Bank Agreement expires July 23, 2003 and provides for up to $25 million for standby letters of credit, limited to the undrawn amount available under the Revolver. As of October 31, 2001, there was $140 million outstanding under the Revolver. See footnote 11 to the financial statements for a detailed description of all of the Company's debt instruments, outstanding balances and aggregate maturities over each of the next five years and beyond. The Company has started negotiations with a group of banks to replace the existing Bank Agreement with a new one during the fiscal year ending October 31, 2002. 16 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, 2001, retained earnings of approximately $26 million were available for dividends and other restricted payments. As of October 31, 2001, the Company was in compliance with all covenants under the Bank Agreement. The Company accepted unsolicited block offers to buy back $4.6 and $10.4 million principal amount of the 6.88% Convertible Subordinated Debentures for $3.9 and $9.6 million in cash during the years ended October 31, 2001 and 2000, respectively. An after tax extraordinary gain of $372 and $358 thousand was recorded on these transactions in those years, respectively. The outstanding balance of these debentures as of October 31, 2001 was $58.7 million. On June 1, 1999, the Company borrowed $3 million through unsecured Scott County, Iowa Variable Rate Demand Industrial Waste Recycling Revenue Bonds Series 1999. On December 9, 1999, the Company announced that its Board of Directors approved a program to repurchase shares of the Company's common stock. Under terms of the program, the Company may periodically purchase up to a total of 2 million shares of its common stock in the open market or in privately negotiated transactions. The repurchase plan does not have a time limit, and funds for the program will be provided from the Company's available working capital and bank credit line. During the fiscal year ended October 31, 2001, the Company repurchased 119,000 shares for $2.2 million. During the fiscal year ended October 31, 2000, the Company repurchased 834,300 shares for $17.2 million. See Note 15 to the financial statements. At October 31, 2001, the Company had commitments of $15 million for the purchase or construction of capital assets. The most significant project included in this total relates to the Company's continued expansion of value added product capability at MACSTEEL. The Company plans to fund these capital expenditures through cash flow from operations and, if necessary, additional borrowings. The Company believes that it has sufficient funds and adequate financial sources available to meet its anticipated liquidity needs. The Company also believes that cash flow from operations, cash balances and available borrowings will be sufficient for the foreseeable future to finance anticipated working capital requirements, capital expenditures, debt service requirements, environmental expenditures and dividends. Operating Activities Cash provided by operating activities during fiscal 2001 was $85.0 million, compared to $77.9 million the prior year. This represents an increase of $7.1 million, or 9%, compared to fiscal 2000, due largely to lower working capital requirements as a result of slowing business and a focused effort to optimize investment in working capital. The year ended October 31, 2001 included a tax refund of $219 thousand, compared to a $7.3 million refund in the prior year, which resulted from an overpayment in fiscal 1999. Investment Activities Net cash used by investment activities in fiscal 2001 was $77.1 million compared to a use of cash of $79.6 million in fiscal 2000. Fiscal 2001 cash from investing activities included the acquisition of Temroc Metals, whereas fiscal 2000 cash from investing activities included the acquisitions of Nichols Aluminum-Golden and Imperial. Net capital expenditures increased from $42.3 million in 2000 to $55.6 million in 2001. The Company estimates that fiscal 2002 capital expenditures will approximate $43 million. Financing Activities Net cash used by financing activities for fiscal 2001 was $692 thousand, compared to $1.8 million in the prior year. During fiscal 2001, the Company had net bank borrowings of $30 million, however it used $3.9 million to purchase subordinated debentures and $2.2 million to purchase Quanex common stock. Additionally, in fiscal 2001, Quanex repaid $17.3 million of life insurance cash surrender value policy loans. During fiscal 2000, the Company had net bank borrowings of $33.4 million and used $9.6 million to purchase subordinated debentures and $17.2 million to purchase Quanex common stock. Dividend payments amounted to $8.6 million in fiscal 2001 and $8.9 million in fiscal 2000. Proceeds from the issuance of stock totaled $2.5 million in fiscal 2001 compared to $1.0 million in fiscal 2000. EFFECTS OF INFLATION Inflation has not had a significant effect on earnings and other financial statement items. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards 17 for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" which deferred the effective date of SFAS No. 133 until the Company's year ending October 31, 2001. The Company adopted SFAS No. 133, as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133", issued in June 2000, as of November 1, 2000. See Note 17 to the financial statements for further discussion. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101. SAB No. 101 provides the staff's views in applying Generally Accepted Accounting Principles ("GAAP") to revenue recognition in financial statements. It does not change any of the existing rules on revenue recognition. All registrants are expected to apply the accounting and disclosures described in this bulletin. SAB No. 101B delayed the implementation of SAB No. 101 until no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company adopted SAB No. 101B in the fourth fiscal quarter of the Company's year ending October 31, 2001. The impact was considered immaterial. In coordination with SAB No. 101B, the Company also adopted EITF 00-10, "Accounting for Shipping and Handling Fees and Costs". This EITF gives specific guidance related to recording shipping and handling fees such as freight. Prior to adoption of this EITF, the Company reflected freight costs in the "Net sales" item of the income statement. This EITF specifically states that freight costs are not to be netted against revenues. In accordance with this EITF, the Company now reflects freight costs as part of the "Cost of sales" item on the income statement. Prior periods information has been reclassified throughout this document. In June 2001, the FASB issued SFAS No. 141 "Business Combinations". SFAS No. 141 addresses financial accounting and reporting for business combinations. The provisions of this statement apply to all business combinations initiated after June 30, 2001. This statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Company will follow the guidance of this statement for any future acquisitions it may undertake. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill is no longer amortized, but reviewed for impairment annually, or more frequently if certain indicators arise. The provisions of this statement are required to be applied starting with fiscal years beginning after December 15, 2001 (Quanex's fiscal year beginning November 1, 2002). Early application is permitted for entities with fiscal years beginning after March 15, 2001 (Quanex's fiscal year beginning November 1, 2001). The Company adopted this statement on November 1, 2001 for its fiscal year ended October 31, 2002. The Company is required to complete the initial step of a transitional impairment test within six months of adoption of SFAS No. 142 and to complete the final step of the transitional impairment test by the end of the fiscal year, if necessary. Any impairment loss resulting from the transitional impairment test would be recorded as a cumulative effect of a change in accounting principle for the quarter ended January 31, 2002. Subsequent impairment losses will be reflected in operating income or loss in the consolidated statements of operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred by capitalizing it as part of the carrying amount of the long-lived assets. The provisions of this statement are required to be applied starting with fiscal years beginning after June 15, 2002 (Quanex's fiscal year beginning November 1, 2002). The Company is currently evaluating the effects of adopting this pronouncement. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement establishes a single accounting model for the impairment or disposal of long-lived assets. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001 (Quanex's fiscal year beginning November 1, 2002). The Company is currently evaluating the effects of adopting this pronouncement. 18 ITEM 7A. QUANTITATIVE / QUALITATIVE DISCLOSURE The following discussion of the Company and its subsidiaries' exposure to various market risks contains "forward looking statements" that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in light of information currently available to the Company. Nevertheless, because of the inherent unpredictability of interest rates, foreign currency rates and metal commodity prices as well as other factors, actual results could differ materially from those projected in such forward looking information. For a description of the Company's significant accounting policies associated with these activities, see Notes 1 and 17 to the Consolidated Financial Statements. Interest Rate Risk The Company and its subsidiaries have a Revolving Credit Facility, Convertible Subordinated Debentures, interest rate swap agreements and other long-term debt which subject the Company to the risk of loss associated with movements in market interest rates. At October 31, 2001 and 2000, the Company had fixed-rate debt totaling $73 and $74 million, respectively. This debt is fixed-rate and, therefore, does not expose the Company to the risk of earnings loss due to changes in market interest rates. See Notes 11 and 17 to the Company's Consolidated Financial Statements. The conversion feature of the Company's Subordinated Debentures makes it impractical to estimate the effect of a hypothetical 10% change in interest rates. This is due to the correlation between the market value of these instruments and the market value of the Company's common stock. In general, any changes in fair value would impact earnings and cash flows only if the Company were to reacquire all or a portion of these instruments in the open market prior to their maturity. The Company and certain of its subsidiaries' floating-rate obligations total $147.1 and $117.6 million at October 31, 2001 and 2000, respectively. See Note 11 to the Company's Consolidated Financial Statements. The exposure of these obligations to increases in short-term interest rates is limited for $100 million of this variable rate debt by interest rate swap agreements entered into by the Company. These swap agreements effectively fix the interest rate, 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 (2.31% and 6.76% at October 31, 2001 and 2000, respectively). At October 31, 2001 and 2000, the fair market value related to the interest rate swap agreements was a loss of $7.3 million and $918 thousand, respectively. If the floating rates were to change by 10% from October 31 levels, the fair market value of these swaps would change by approximately $411 thousand and $1.5 million as of October 31, 2001 and 2000, respectively. However, it should be noted that any change in value of these contracts, real or hypothetical, would be substantially offset by an inverse change in the value of the underlying hedged item. As mentioned above, $100 million of the floating rate obligations are protected by interest swap agreements. To the extent these obligations exceed $100 million, the Company is subject to changes in the underlying interest rates. For the years ended October 31, 2001 and 2000, the Company's floating rate obligations exceeded the amount covered by the swap agreements by $47.1 and $17.6 million, respectively. Increases or decreases in the underlying interest rates of the obligations would have a direct impact on interest expense for those uncovered balances. Foreign Currency Exchange Rate Risk The Company utilized a range forward zero-cost agreement to protect its initial equity investment in its Netherlands subsidiary, Piper Impact Europe, from fluctuations in US Dollar/Dutch Guilder exchange rates. This agreement, which was entered into with a major financial institution, had a notional value of 30 million guilders. By establishing minimum and maximum exchange rates, this agreement limited the potential devaluation of the Company's initial investment in its subsidiary while also limiting any potential appreciation. During the third quarter ended July 31, 2000, the Company sold the Piper Impact Europe subsidiary. As such, this range forward agreement was closed, realizing a gain of approximately $1.7 million. This gain was offset against the loss on the sale of Piper Impact Europe, as the investment in Piper Impact Europe was the underlying hedged item. Commodity Price Risk In the normal course of business, the Company enters into long-term firm price aluminum sheet sales contracts. In order to hedge the risk of higher prices for the anticipated aluminum purchases required to fulfill these long-term contracts, the Company enters into long futures positions. At October 31, 2001 and 2000, the Company had open futures contracts for aluminum pounds with fair values of $27.1 and $17.6 million, respectively. The contracts had fair value losses of $1.8 million and $372 thousand at October 31, 2001 and 2000, respectively, and covered a notional volume of 45,415,185 and 25,738,940 pounds of aluminum, respectively. A hypothetical 10% change from the 19 October 31, 2001 and 2000 average London Metal Exchange ("LME") ingot price on open contracts of $.596 and $.682, respectively, per pound would increase or decrease the unrealized pretax gains/losses related to these contracts by approximately $2.7 million and $1.8 million, respectively. However, it should be noted that any change in the value of these contracts, real or hypothetical, would be substantially offset by an inverse change in the cost of purchased aluminum scrap. See Note 17 to the financial statements for further information. 20 Item 8. Financial Statements and Supplementary 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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 2001. Our audits also included the financial statement schedule listed in the index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Quanex Corporation and subsidiaries as of October 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Houston, Texas November 27, 2001 21 RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements of Quanex Corporation and subsidiaries were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management's best judgments and estimates. Quanex's system of internal controls is designed to provide reasonable assurance, at justifiable cost, as to the reliability of financial records and reporting and the protection of assets. The system of controls provides for appropriate division of responsibility and the application of policies and procedures that are consistent with high standards of accounting and administration. Internal controls are monitored through recurring internal audit programs and are updated as our businesses and business conditions change. The Audit Committee, composed solely of outside directors, determines that management is fulfilling its financial responsibilities by meeting periodically with management, Deloitte & Touche LLP, and Quanex's internal auditors, to review internal accounting control and financial reporting matters. The internal and independent auditors have free and complete access to the Audit Committee. We believe that Quanex's system of internal controls, combined with the activities of the internal and independent auditors and the Audit Committee, provides reasonable assurance of the integrity of our financial reporting. /s/ Raymond A. Jean /s/ Terry M. Murphy --------------------------------------- ------------------------------------ Raymond A. Jean Terry M. Murphy Chairman of the Board, President and Vice President - Finance and Chief Chief Executive Officer Financial Officer 22 Quanex Corporation CONSOLIDATED BALANCE SHEETS ================================================================================
October 31, 2001 2000 ---------- ---------- (In thousands) ASSETS Current assets: Cash and equivalents ................................................................... $ 29,573 $ 22,409 Accounts and notes receivable, less allowance for doubtful accounts of $8,953,000 in 2001 and $11,240,000 in 2000 ................................ 109,706 98,465 Inventories ............................................................................ 83,109 101,274 Deferred income taxes .................................................................. 10,907 12,771 Other current assets ................................................................... 3,583 1,027 ---------- ---------- Total current assets ................................................................ 236,878 235,946 Property, plant and equipment, net ....................................................... 357,635 338,248 Goodwill, net ............................................................................ 59,226 47,539 Cash surrender value insurance policies, net ............................................. 37,300 15,909 Other assets ............................................................................. 6,592 8,217 ---------- ---------- $ 697,631 $ 645,859 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ....................................................................... $ 76,831 $ 77,339 Accrued expenses ....................................................................... 50,659 50,189 Current maturities of long-term debt ................................................... 420 256 Income taxes payable ................................................................... 1,087 3,218 Other current liabilities .............................................................. 5,593 -- ---------- ---------- Total current liabilities ........................................................... 134,590 131,002 Long-term debt ........................................................................... 219,608 191,657 Deferred pension credits ................................................................. 7,962 7,026 Deferred postretirement welfare benefits ................................................. 7,777 7,634 Deferred income taxes .................................................................... 29,282 27,620 Other liabilities ........................................................................ 18,435 14,423 ---------- ---------- Total liabilities ................................................................... 417,654 379,362 Stockholders' equity: Preferred stock, no par value, 1,000,000 shares authorized; issued & outstanding - none in 2001 and 2000 ....................................... -- -- Common stock, $.50 par value, 50,000,000 shares authorized; 14,085,642 and 14,220,666 shares issued in 2001 and 2000, respectively ............................ 7,043 7,110 Additional paid-in capital ............................................................. 108,314 111,061 Retained earnings ...................................................................... 186,274 165,841 Unearned compensation .................................................................. (897) (467) Accumulated other comprehensive income ................................................. (7,212) (301) ---------- ---------- 293,522 283,244 Less common stock held by rabbi trust - 42,484 and 147,689 shares in 2001 and 2000, respectively ......................................................... (873) (3,349) Less cost of shares of common stock in treasury (633,935 and 677,526 shares in 2001 and 2000, respectively) ........................................................ (12,672) (13,398) ---------- ---------- Total stockholders' equity .......................................................... 279,977 266,497 ---------- ---------- $ 697,631 $ 645,859 ========== ==========
================================================================================ See notes to consolidated financial statements. 23 Quanex Corporation CONSOLIDATED STATEMENTS OF INCOME ================================================================================
Years ended October 31, 2001 2000 1999 ---------- ---------- ---------- (In thousands, except per share amounts) Net sales .................................................. $ 924,353 $ 964,518 $ 834,902 Costs and expenses: Cost of sales ............................................ 769,328 796,434 664,719 Selling, general and administrative ...................... 54,202 53,545 53,104 Depreciation and amortization ............................ 43,507 47,921 45,322 Loss on sale of Piper Impact Europe ...................... -- 14,280 -- Piper Impact asset impairment charge ..................... -- 56,300 -- ---------- ---------- ---------- Operating income (loss) .................................... 57,316 (3,962) 71,757 Other income (expense): Interest expense ......................................... (16,555) (15,255) (14,402) Capitalized interest ..................................... 1,666 1,941 1,611 Other, net ............................................... 2,623 1,870 1,383 ---------- ---------- ---------- Income (loss) before income taxes and extraordinary gain ... 45,050 (15,406) 60,349 Income tax benefit (expense) ............................... (16,228) 5,383 (21,048) ---------- ---------- ---------- Income (loss) before extraordinary gain .................... 28,822 (10,023) 39,301 Extraordinary gain on early extinguishment of debt, net of income taxes .................................... 372 358 415 ---------- ---------- ---------- Net income (loss) attributable to common stockholders ...... $ 29,194 $ (9,665) $ 39,716 ========== ========== ========== Earnings (loss) per common share: Basic: Before extraordinary gain ............................. $ 2.15 $ (0.73) $ 2.76 Extraordinary gain .................................... 0.03 0.03 0.03 ---------- ---------- ---------- Total basic net earnings (loss) .................... $ 2.18 $ (0.70) $ 2.79 ========== ========== ========== Diluted: Before extraordinary gain ............................. $ 2.05 $ (0.73) $ 2.56 Extraordinary gain .................................... 0.02 0.03 0.03 ---------- ---------- ---------- Total diluted net earnings (loss) .................. $ 2.07 $ (0.70) $ 2.59 ========== ========== ========== Weighted average number of shares outstanding Basic ................................................. 13,399 13,727 14,234 Diluted ............................................... 15,426 13,727 16,776
================================================================================ See notes to consolidated financial statements. 24 Quanex Corporation CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollar amounts in thousands)
Additional Years Ended October 31, 2001, Comprehensive Common Paid-in Retained 2000, and 1999 Income Stock Capital Earnings ------------- --------- ---------- --------- Balance at October 31, 1998 $ 7,090 $ 108,624 $ 156,278 Comprehensive income: Net income $ 39,716 39,716 Adjustment for minimum pension liability (net of tax expense of $395) 618 Foreign currency translation adjustment (1,435) --------- Total Comprehensive income $ 38,899 Common dividends ($.64 per share) (9,124) Common stock held by Rabbi Trust Other 45 1,693 (3) --------- --------- --------- --------- Balance at October 31, 1999 $ 7,135 $ 110,317 $ 186,867 Comprehensive loss: Net loss $ (9,665) (9,665) Adjustment for minimum pension liability (net of tax expense of $103) 161 Foreign currency translation adjustment 303 --------- Total Comprehensive loss $ (9,201) Common dividends ($.64 per share) (8,884) Common stock held by Rabbi Trust Cost of common stock in treasury Other (25) 744 (2,477) --------- --------- --------- --------- Balance at October 31, 2000 $ 7,110 $ 111,061 $ 165,841 Comprehensive income: Net income $ 29,194 29,194 Adjustment for minimum pension liability (net of tax expense of $965) (1,508) Adoption of SFAS 133: Current period hedging transactions (7,478) Reclassifications into earnings 2,075 --------- Total Comprehensive income $ 22,283 Common dividends ($.64 per share) (8,621) Common stock held by Rabbi Trust Cost of common stock in treasury Other (67) (2,747) (140) --------- --------- --------- --------- Balance at October 31, 2001 $ 7,043 $ 108,314 $ 186,274 Accumulated Other Comprehensive Income --------------------------------------- Minimum Foreign Derivative Treasury Total Years Ended October 31, 2001, Pension Currency Gain Stock and Stockholders' 2000, and 1999 Liability Translation (Loss) Other Equity --------- ----------- ---------- --------- ------------- Balance at October 31, 1998 $ (1,080) $ 1,132 $ -- $ -- $ 272,044 Comprehensive income: 39,716 Net income Adjustment for minimum pension liability (net of tax expense of $395) 618 618 Foreign currency translation adjustment (1,435) (1,435) Total Comprehensive income Common dividends ($.64 per share) (9,124) Common stock held by Rabbi Trust (2,322) (2,322) Other (171) 1,564 --------- --------- --------- --------- --------- Balance at October 31, 1999 $ (462) $ (303) $ -- $ (2,493) $ 301,061 Comprehensive loss: Net loss (9,665) Adjustment for minimum pension liability (net of tax expense of $103) 161 161 Foreign currency translation adjustment 303 303 Total Comprehensive loss Common dividends ($.64 per share) (8,884) Common stock held by Rabbi Trust (1,027) (1,027) Cost of common stock in treasury (13,398) (13,398) Other (296) (2,054) --------- --------- --------- --------- --------- Balance at October 31, 2000 $ (301) $ -- $ -- $ (17,214) $ 266,497 Comprehensive income: Net income 29,194 Adjustment for minimum pension liability (net of tax expense of $965) (1,508) (1,508) Adoption of SFAS 133: Current period hedging transactions (7,478) (7,478) Reclassifications into earnings 2,075 2,075 Total Comprehensive income Common dividends ($.64 per share) (8,621) Common stock held by Rabbi Trust 2,476 2,476 Cost of common stock in treasury 726 726 Other (430) (3,384) --------- --------- --------- --------- --------- Balance at October 31, 2001 $ (1,809) $ -- $ (5,403) $ (14,442) $ 279,977
See notes to consolidated financial statements. 25 Quanex Corporation CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONT.)
Preferred Shares Common Shares ----------- -------------------------------------------------------------------- Years Ended October 31, 2001, Rabbi Net 2000 and 1999 Issued Issued Treasury Trust Outstanding ----------- ----------- ----------- ----------- ------------ Balance at October 31, 1998 -- 14,179,834 -- -- 14,179,834 Stock issued - options exercised 14,000 14,000 Stock issued - compensation plans 75,966 75,966 Rabbi Trust (94,606) (94,606) ----------- ----------- ----------- ----------- ----------- Balance at October 31, 1999 -- 14,269,800 -- (94,606) 14,175,194 Shares purchased and cancelled (156,700) (156,700) Treasury shares purchased (677,600) (677,600) Stock issued - options exercised 3,337 74 3,411 Stock issued - compensation plans 104,229 104,229 Rabbi Trust (53,083) (53,083) ----------- ----------- ----------- ----------- ----------- Balance at October 31, 2000 -- 14,220,666 (677,526) (147,689) 13,395,451 Treasury shares purchased (119,000) (119,000) Stock issued - options exercised 47,960 47,960 Stock issued - compensation plans 84,812 84,812 Rabbi Trust (135,024) 29,819 105,205 -- ----------- ----------- ----------- ----------- ----------- Balance at October 31, 2001 -- 14,085,642 (633,935) (42,484) 13,409,223
See notes to consolidated financial statements. 26 Quanex Corporation CONSOLIDATED STATEMENTS OF CASH FLOW ================================================================================
Years Ended October 31, 2001 2000 1999 -------- -------- -------- (In thousands) OPERATING ACTIVITIES: Net Income (Loss) ....................................................................... $ 29,194 $ (9,665) $ 39,716 Adjustments to reconcile net income (loss) to cash provided by operating activities: Piper Impact asset impairment charge (net of deferred taxes of $19,705 in fiscal 2000 ......................................................................... -- 36,595 -- Loss on sale of Piper Impact Europe (net of taxes of $4,998) ...................... -- 9,282 -- Extraordinary gain on early extinguishment of debt (net of taxes of $200, $192 and $223 in fiscal 2001, 2000 and 1999, respectively) ............................ (372) (358) (415) Depreciation and amortization ........................................................ 43,910 48,445 45,883 Deferred income taxes ................................................................ 2,357 5,483 10,150 Deferred pension and postretirement benefits ......................................... (1,231) 659 (429) Changes in assets and liabilities net of effects from acquisitions and dispositions: Increase in accounts and notes receivable ............................................ (7,917) (9,149) (2,665) Decrease (increase) in inventory ..................................................... 20,808 (12,474) 6,485 Increase (decrease) in accounts payable .............................................. (2,569) 5,412 (4,648) Decrease in accrued expenses ......................................................... (911) (6,314) (1,510) Other, net (including income tax refund) ............................................. 1,681 9,954 (14,879) -------- -------- -------- Cash provided by operating activities .............................................. 84,950 77,870 77,688 INVESTMENT ACTIVITIES: Acquisition of Temroc Metals, Inc., net of cash and equivalents acquired ................ (17,922) -- -- Acquisition of Golden Aluminum, net of cash and equivalents acquired .................... -- (20,148) -- Acquisition of Imperial Fabricated Products, net of cash and equivalents acquired ....... -- (15,303) -- Capital expenditures, net of retirements ................................................ (55,575) (42,327) (60,848) Other, net .............................................................................. (3,597) (1,809) (1,832) -------- -------- -------- Cash used by investment activities ................................................. (77,094) (79,587) (62,680) -------- -------- -------- Cash provided (used) by operating and investment activities ........................ 7,856 (1,717) 15,008 FINANCING ACTIVITIES: Bank borrowings, net .................................................................... 30,000 33,394 1,035 Repayment of borrowing on insurance policies ............................................ (17,273) -- -- Purchase of subordinated debentures ..................................................... (3,942) (9,586) (8,799) Purchase of Quanex common stock ......................................................... (2,226) (17,185) -- Common stock dividends paid ............................................................. (8,621) (8,884) (9,124) Issuance of common stock, net ........................................................... 2,473 1,002 1,567 Other, net .............................................................................. (1,103) (556) (60) -------- -------- -------- Cash used by financing activities .................................................. (692) (1,815) (15,381) -------- -------- -------- Effect of exchange rate changes on cash and equivalents ................................... -- 67 (32) -------- -------- -------- Increase (decrease) in cash and equivalents ............................................... 7,164 (3,465) (405) Cash and equivalents at beginning of period ............................................... 22,409 25,874 26,279 -------- -------- -------- Cash and equivalents at end of period ..................................................... $ 29,573 $ 22,409 $ 25,874 ======== ======== ========
================================================================================ See notes to consolidated financial statements. 27 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Quanex Corporation and its subsidiaries (the "Company" or "Quanex"), all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. SCOPE OF OPERATIONS The Company operates primarily in four industry segments: manufacturing of engineered steel bars, aluminum mill sheet products, engineered products and Piper Impact's impact extrusion products. The Company's products include engineered steel bars, coiled aluminum sheet (mill finish and coated), aluminum and steel fabricated products and impact extrusions. The Company's manufacturing operations are conducted primarily in the United States. REVENUES The Company recognizes revenues when products are shipped and the title and risk of ownership pass to the customer. STATEMENTS OF CASH FLOWS The Company generally considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Similar investments with original maturities beyond three months are considered short-term investments. For fiscal years 2001, 2000, and 1999, cash paid for income taxes was $11,324,000, $10,650,000, and $22,005,000, respectively. These amounts are before refunds of $219,000, $7,290,000, and $1,181,000, respectively. Cash paid for interest for fiscal 2001, 2000, and 1999 was $15,894,000, $14,421,000, and $13,931,000, respectively. INVENTORIES Inventories are valued at the lower of cost or market. The accounting methods used in valuing the Company's inventories are described in Note 8. LONG-LIVED ASSETS Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of certain categories are as follows:
Years -------- Land improvements ................. 10 to 25 Buildings ......................... 10 to 40 Machinery and equipment ........... 3 to 20
Goodwill represents the excess of the purchase price over the fair value of acquired companies and is being amortized on a straight line basis over forty years for the goodwill resulting from the acquisition of Nichols Homeshield in 1989, and over twenty-five years for the goodwill resulting from all other acquisitions (See Note 2). At October 31, 2001 and 2000, accumulated amortization was approximately $14,069,000 and $11,746,000, respectively. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142 as of November 1, 2002. This standard requires that goodwill no longer be amortized. See further discussion about this SFAS in the "New Accounting Pronouncements" discussion of this footnote. In accordance with SFAS No. 121, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. See Note 4 regarding the impact of this statement. 28 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ HEDGING The Company enters into various derivative instruments to protect itself from fluctuating prices and interest rates. The Company uses futures contracts to hedge a portion of its exposure to price fluctuations of aluminum. The Company enters into interest rate swap agreements, which effectively exchange variable interest rate debt for fixed interest rate debt. The agreements are used to reduce the exposure to possible increases in interest rates. The Company enters into these swap agreements with major financial institutions. Prior to the sale of Piper Impact Europe, the Company used foreign currency swap agreements to protect the value of its investment in Piper Impact Europe as well as to protect itself from currency fluctuations on certain sales and purchases. The impact of the foreign currency instruments, which protected the investment in Piper Impact Europe, was recorded as a foreign currency translation adjustment in the equity section of the financial statements when exchange rates went outside of the limits set forth in the agreement. As of November 1, 2000, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, which requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Prior to November 1, 2000, the gains and losses on the forward contracts related to the sales and purchases were deferred off-balance sheet and included as a component of the related transaction when recorded. See Note 17 for further discussion of such financial instruments. EARNINGS PER SHARE DATA Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates, and income and expense items are translated at the average exchange rates for the year. Resulting translation adjustments are reported as a separate component of stockholders' equity. USE OF ESTIMATES The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts for prior periods have been reclassified in the accompanying consolidated financial statements to conform to fiscal 2001 presentations. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", which deferred the effective date of SFAS No. 133 until the Company's year ending October 31, 2001. The Company adopted SFAS No. 133, as amended by SFAS No. 138 "Accounting for Certain 29 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133", issued in June 2000, as of November 1, 2000. See Note 17 to the financial statements for further discussion. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101. SAB No. 101 provides the staff's views in applying Generally Accepted Accounting Principles ("GAAP") to revenue recognition in financial statements. It does not change any of the existing rules on revenue recognition. All registrants are expected to apply the accounting and disclosures described in this bulletin. SAB No. 101B delayed the implementation of SAB No. 101 until no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company adopted SAB No. 101B in the fourth fiscal quarter of the Company's year ending October 31, 2001. The impact was considered immaterial. In coordination with SAB No. 101B, the Company also adopted EITF 00-10, "Accounting for Shipping and Handling Fees and Costs". This EITF gives specific guidance related to recording shipping and handling fees such as freight. Prior to adoption of this EITF, the Company reflected freight costs in the "Net sales" item of the income statement. This EITF specifically states that freight costs are not to be netted against revenues. In accordance with this EITF, the Company now reflects freight costs as part of the "Cost of sales" item on the income statement. Prior periods information has been reclassified throughout this document. In June 2001, the FASB issued SFAS No. 141 "Business Combinations". SFAS No. 141 addresses financial accounting and reporting for business combinations. The provisions of this statement apply to all business combinations initiated after June 30, 2001. This statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Company will follow the guidance of this statement for any future acquisitions it may undertake. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill is no longer amortized, but reviewed for impairment annually, or more frequently if certain indicators arise. The provisions of this statement are required to be applied starting with fiscal years beginning after December 15, 2001 (Quanex's fiscal year beginning November 1, 2002). Early application is permitted for entities with fiscal years beginning after March 15, 2001 (Quanex's fiscal year beginning November 1, 2001). The Company adopted this statement on November 1, 2001 for its fiscal year ended October 31, 2002. The Company is required to complete the initial step of a transitional impairment test within six months of adoption of SFAS No. 142 and to complete the final step of the transitional impairment test by the end of the fiscal year, if necessary. Any impairment loss resulting from the transitional impairment test would be recorded as a cumulative effect of a change in accounting principle for the quarter ended January 31, 2002. Subsequent impairment losses will be reflected in operating income or loss in the consolidated statements of operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred by capitalizing it as part of the carrying amount of the long-lived assets. The provisions of this statement are required to be applied starting with fiscal years beginning after June 15, 2002 (Quanex's fiscal year beginning November 1, 2002). The Company is currently evaluating the effects of adopting this pronouncement. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement establishes a single accounting model for the impairment or disposal of long-lived assets. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001 (Quanex's fiscal year beginning November 1, 2002). The Company is currently evaluating the effects of adopting this pronouncement. 30 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 2. ACQUISITIONS On January 25, 2000, the Company completed the purchase from Alcoa, Inc. of the Golden Aluminum production facility based in Fort Lupton, Colorado. Quanex acquired the assets of the facility for $9 million plus working capital valued at approximately $13 million. The newly acquired facility has become part of Quanex's flat-rolled aluminum sheet business - Nichols Aluminum (the aluminum mill sheet products segment). It has been renamed Nichols Aluminum-Golden, Inc., ("Nichols Aluminum-Golden"), a wholly owned subsidiary of Quanex. Operations at Nichols Aluminum-Golden include melting and casting aluminum into sheet made from a blend of primary P1020 ingot and selected grades of scrap metal, cold rolling it to specific gauge, annealing, leveling, custom coating and slitting to width. Nichols Aluminum-Golden can produce more than 50 million pounds annually of high quality metal for engineered applications in niche markets, such as end and tab stock for food and beverage packaging, metal components for computer disks, and home accessory products. On April 3, 2000, the Company acquired the stock of Imperial Products, Inc., a leading manufacturer of value-added exterior door components based in Richmond, Indiana, for approximately $15 million. Imperial Products, Inc., now doing business as Imperial Fabricated Products ("Imperial"), operates as a wholly owned subsidiary of Quanex. This acquisition expands the specialized design and manufacturing operations of Quanex's Engineered Products Group. Goodwill associated with Imperial is approximately $11 million. On November 30, 2000, Quanex completed the purchase of all of the capital stock of Temroc Metals, Inc., ("Temroc"), a Minnesota corporation, for approximately $22 million in cash. Temroc, as a surviving corporation, became a wholly owned subsidiary of the Company. Goodwill associated with Temroc is approximately $14 million. Temroc is a leading aluminum extrusion and fabrication company based in Hamel, Minnesota where it manufactures customized aluminum extrusions and fabricated metal products for recreational vehicles, architectural products, electronics and other markets. Temroc has become part of the Company's Engineered Products Group and will continue to operate as a manufacturer of aluminum extrusions and fabricated metal products. To finance the acquisition, the Company borrowed against its existing $250 million unsecured revolving credit and term loan facility with a group of six banks. 3. DISPOSED OPERATIONS On July 19, 2000, the Company sold Piper Impact Europe, an impact-extrusion facility based in The Netherlands, to the plant's existing management group for a nominal amount. The transaction was structured as a sale of stock. As a result of this transaction, the Company recorded a pretax charge of $14.3 million for the fiscal third quarter ending July 31, 2000. In connection with the sale, the Company's range forward foreign currency agreement with a notional amount of 30 million Guilders was cashed in. This agreement was entered into to protect the Company's investment in Piper Impact Europe from foreign currency fluctuations. The settlement of this agreement resulted in a gain, which was offset against the loss on the sale of Piper Impact Europe. 4. PIPER IMPACT IMPAIRMENT DISCLOSURE Under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", companies must review the carrying amount of long-lived assets and certain intangibles, including related goodwill, whenever events or changes in circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable. Fiscal 1998 During the year ended October 31, 1998, the Company recorded an asset impairment/restructuring charge of $58.5 million related to Piper Impact. Components of this special charge included $51.2 million for goodwill impairment; $6.7 million for impairment of property, plant and equipment; and $600 thousand for severance benefits to be paid to employees of the Park City, Utah plant. The charge resulted in an after-tax impact on net income of $38.0 million or $2.68 per share. 31 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 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 Quanex Corporation facility and move its production to the New Albany, Mississippi facility. Production ceased at the Utah facility and its operations were consolidated in Mississippi by May 1999. Due to the significance of the changes discussed above and the decision to close one of the acquired production facilities, management performed an evaluation of the recoverability of all of the assets of Piper Impact, excluding the steel plant which was new at the time, as described in SFAS No. 121. Management concluded from the results of this evaluation that a significant impairment of intangible as well as long-lived assets had occurred. An impairment charge was required because the estimated fair value was less than the carrying value of the assets. Fair value of Piper Impact's net assets was determined by discounting estimated future cashflows using a discount rate commensurate with the risks involved. Considerable management judgment is necessary to estimate fair value. Accordingly, actual results may vary significantly from management's estimates. Fiscal 2000 An asset impairment charge in the amount of $56.3 million was recorded in the fourth quarter of fiscal 2000 related to the property, plant and equipment of Piper Impact. The impairment charge resulted in an after-tax impact on net income of $36.6 million or $2.67 per share. Piper Impact experienced declines in sales and operating cash flow during fiscal 1999 and fiscal 2000. The declining results were primarily due to decreased demand for aluminum airbag components from Piper Impact's most significant customer. Although the management of Piper Impact conducted negotiations with this customer in an attempt to obtain a price increase and a commitment for future sourcing of impacted aluminum and steel airbag components, management became less optimistic about any near-term prospects for price increase without losing a significant amount of business from this customer. Additionally, opportunities for new products did not materialize at a rate necessary to offset the continued declining volume of airbag components. Consequently, in the fourth quarter of fiscal 2000, it became necessary to once again assess Piper Impact for asset impairment as required under SFAS No. 121. Management again performed an evaluation of the recoverability of all of the assets of Piper Impact, this time including the steel plant, as described in SFAS No. 121. Management concluded from the results of this evaluation that a significant impairment of long-lived assets had occurred. An impairment charge was required because the estimated fair value was less than the carrying value of the assets. Fair value of Piper Impact's net assets was determined by discounting estimated future cashflows using a discount rate commensurate with the risks involved. Considerable management judgment is necessary to estimate fair value. Accordingly, actual results may vary significantly from management's estimates. 5. EXTRAORDINARY ITEM During the twelve months ended October 31, 2001, the Company accepted unsolicited block offers to buy back $4.6 million principal amount of the 6.88% Convertible Subordinated Debentures for $3.9 million in cash. An after tax extraordinary gain of $372 thousand was recorded on this transaction. The principal amount of the convertible subordinated debentures outstanding as of October 31, 2001 was $58,727,300. During fiscal 2000, the Company accepted unsolicited block offers to buy back $10.4 million principal amount of the 6.88% Convertible Subordinated Debentures for $9.6 million in cash. An after-tax extraordinary gain of $358 thousand was recorded on these transactions. During fiscal 1999, the Company accepted unsolicited block offers to buy back $9.7 million principal amount of the 6.88% Convertible Subordinated Debentures for $8.8 million in cash. An after-tax extraordinary gain of $415 thousand was recorded on these transactions in the second fiscal quarter of 1999. 32 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 6. EARNINGS PER SHARE The computational components of basic and diluted earnings (loss) per share are as follows (shares and dollars in thousands except per share amounts):
For the Year Ended October 31, 2001 Numerator Denominator Per Share (Income) (Shares) Amount BASIC EPS Income before extraordinary gain ......................... $28,822 13,399 $ 2.15 Extraordinary gain on early extinguishment of debt ....... 372 0.03 ------- ------- Total basic net income ................................. $29,194 $ 2.18 ======= ======= EFFECT OF DILUTIVE SECURITIES Effect of common stock equivalents arising from stock options .................................................. -- 58 Effect of common stock held by rabbi trust ............... -- 74 Effect of conversion of subordinated debentures .......... 2,810 1,895 ------- ------- DILUTED EPS Income before extraordinary gain ......................... 31,632 15,426 $ 2.05 ======= Extraordinary gain on early extinguishment of debt ....... 372 0.02 ------- ------- Total diluted net income ............................... $32,004 $ 2.07 ======= =======
For the Year Ended October 31, 2000 Numerator Denominator Per Share (Loss) (Shares) Amount BASIC AND DILUTED(1) EPS Loss before extraordinary gain ........................... $(10,023) 13,727 $ (0.73) Extraordinary gain on early extinguishment of debt ....... 358 0.03 -------- -------- Total basic and diluted net loss ....................... $ (9,665) $ (0.70) ======== ========
For the Year Ended October 31, 1999 Numerator Denominator Per Share (Income) (Shares) Amount BASIC EPS Income before extraordinary gain ......................... $ 39,301 14,234 $ 2.76 Extraordinary gain on early extinguishment of debt ....... 415 0.03 -------- -------- Total basic net income ................................. $ 39,716 $ 2.79 ======== ======== EFFECT OF DILUTIVE SECURITIES Effect of common stock equivalents arising from stock options .................................................. -- 56 Effect of common stock held by rabbi trust ............... -- 16 Effect of conversion of subordinated debentures .......... 3,663 2,470 -------- -------- DILUTED EPS Income before extraordinary gain ......................... 42,964 16,776 $ 2.56 ======== Extraordinary gain on early extinguishment of debt ....... 415 0.03 -------- Total diluted net income ............................... $ 43,379 $ 2.59 ======== ========
(1) The effect of certain securities or debentures are anti-dilutive and, therefore, not included in the diluted earnings per share calculation. As a result, diluted EPS is the same as basic EPS. 33 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 7. INCOME TAXES Income taxes are provided on taxable income at the statutory rates applicable to such income. Income tax expense (benefit) consists of the following:
Years Ended October 31, --------------------------------------- 2001 2000 1999 -------- -------- -------- (In thousands) Current: Federal .............................. $ 7,901 $ 10,890 $ 17,819 State ................................ 1,105 847 1,066 Foreign .............................. -- (1,067) (372) -------- -------- -------- 9,006 10,670 18,513 Deferred ............................... 7,222 (16,053) 2,535 -------- -------- -------- Income tax expense (benefit) ........... 16,228 (5,383) 21,048 Income taxes from extinguishment of debt 200 192 223 -------- -------- -------- Total .............................. $ 16,428 $ (5,191) $ 21,271 ======== ======== ========
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, ------------------------ 2001 2000 -------- -------- (In thousands) Deferred tax liability: Property, plant and equipment ..................... $ 40,791 $ 34,555 Other ............................................. 21,050 24,002 -------- -------- 61,841 58,557 -------- -------- Deferred tax assets: Intangibles ....................................... 13,800 15,221 Postretirement benefit obligation ................. 3,472 3,381 Other employee benefit obligations ................ 9,535 10,281 Environmental accruals ............................ 7,583 7,662 Other ............................................. 9,076 7,163 -------- -------- 43,466 43,708 -------- -------- Net deferred tax liability .......................... $ 18,375 $ 14,849 ======== ======== Deferred income tax non-current liability ........... $ 29,282 $ 27,620 Deferred tax current assets ......................... (10,907) (12,771) -------- -------- Net deferred tax liability ........................ $ 18,375 $ 14,849 ======== ========
No U.S. deferred taxes were provided on the Company's foreign subsidiary's cumulative undistributed losses of $(1,782,000). The foreign subsidiary was sold in July 2000. 34 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Income tax expense (benefit) differs from the amount computed by applying the statutory federal income tax rate to income before income taxes and extraordinary gain for the following reasons:
Years Ended October 31, ---------------------------------------- 2001 2000 1999 -------- -------- -------- (In thousands) Income tax expense (benefit) at statutory tax rate .... $ 15,768 $ (5,392) $ 21,123 Increase (decrease) in taxes resulting from: State income taxes, net of federal effect ........... 772 (148) 1,118 Goodwill ............................................ 664 420 334 Other items, net .................................... (976) (263) (1,527) -------- -------- -------- $ 16,228 $ (5,383) $ 21,048 ======== ======== ========
The Company reached a settlement with the Internal Revenue Service with respect to the tax audits of fiscal year 1996 and certain portions of fiscal year 1997. The Company has filed a petition in Tax Court regarding the disallowance of a capital loss generated in 1997. During 2001, the Company made tax and interest payments of $1,745,000. Adequate provision had been made in prior years and the settlement did not have a material effect on earnings. 8. INVENTORIES Inventories consist of the following:
October 31, ----------------------- 2001 2000 -------- -------- (In thousands) Raw materials .................................... $ 20,097 $ 26,473 Finished goods and work in process ............... 55,757 67,981 -------- -------- 75,854 94,454 Other .......................................... 7,255 6,820 -------- -------- Total ........................................ $ 83,109 $101,274 ======== ======== The values of inventories in the consolidated balance sheets are based on the following accounting methods: LIFO.............................................. $ 56,691 $ 69,028 FIFO.............................................. 26,418 32,246 -------- -------- Total......................................... $ 83,109 $101,274 ======== ========
With respect to inventories valued using the LIFO method, replacement cost exceeded the LIFO value by approximately $5,400,000 and $10,000,000 at October 31, 2001 and 2000, respectively. 35 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 9. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
October 31, -------------------------- 2001 2000 --------- --------- (In thousands) Land and land improvements ................... $ 20,389 $ 19,435 Buildings .................................... 106,876 98,031 Machinery and equipment ...................... 564,300 535,841 Construction in progress ..................... 45,387 28,685 --------- --------- 736,952 681,992 Less accumulated depreciation and amortization (379,317) (343,744) --------- --------- $ 357,635 $ 338,248 ========= =========
The Company had commitments for the purchase or construction of capital assets amounting to approximately $15 million at October 31, 2001. 10. ACCRUED EXPENSES Accrued expenses consist of the following:
October 31, --------------------- 2001 2000 ------- ------- (In thousands) Accrued contribution to pension funds .............. $ 1,760 $ 1,492 Interest ........................................... 1,653 2,314 Payroll, payroll taxes and employee benefits ....... 28,609 28,298 State and local taxes .............................. 3,892 2,910 Other .............................................. 14,745 15,175 ------- ------- $50,659 $50,189 ======= =======
11. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Long-term debt consists of the following:
October 31, ----------------------- 2001 2000 -------- -------- (In thousands) "Bank Agreement" Revolver ...................................... $140,000 $110,000 Convertible subordinated debentures ............................ 58,727 63,337 Industrial Revenue and Economic Development Bonds, unsecured, principle due in the years 2005 and 2010, bearing interest ranging from 6.50% to 8.375% ................................. 3,275 3,275 State of Alabama Industrial Development Bonds .................. 4,500 4,755 Scott County, Iowa Industrial Waste Recycling Revenue Bonds .... 2,600 2,800 Temroc Industrial Development Revenue Bonds .................... 2,608 -- Other .......................................................... 8,318 7,746 -------- -------- $220,028 $191,913 Less maturities due within one year included in current liabilities .................................................. 420 256 -------- -------- $219,608 $191,657 ======== ========
In July 1996, the Company entered into an unsecured $250 million Revolving Credit and Term Loan Agreement ("Bank Agreement"). The Bank Agreement consists of a revolving line of credit ("Revolver"). In July 1997, the term loan provisions of the Bank Agreement expired. The Bank Agreement expires July 23, 2003, and provides for up to $25 million for standby letters of credit, limited to the undrawn amount available under the Revolver. All borrowings under the Revolver bear 36 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 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, 2001 and 2000, the Company had $140 and $110 million, respectively, outstanding under the Revolver. The weighted average interest rates on borrowings under the Revolver were 6.03%, 7.0%, and 5.7%, in 2001, 2000 and 1999, respectively. As of October 31, 2001, the Company was in compliance with all Bank Agreement covenants. Under the Company's most restrictive loan covenants, retained earnings of approximately $26 million at October 31, 2001 were available for dividends and other restricted payments. On June 30, 1995, the Company exercised its right under the terms of its Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for an aggregate of $84,920,000 of its 6.88% Convertible Subordinated Debentures due June 30, 2007 ("Debentures"). Interest is payable semi-annually on June 30 and December 31 of each year. The Debentures are subject to mandatory annual sinking fund payments sufficient to redeem 25% of the Debentures issued on each of June 30, 2005 and June 30, 2006, to retire a total of 50% of the Debentures before maturity. The Debentures are subordinate to all senior indebtedness of the Company and are convertible, at the option of the holder, into shares of the Company's common stock at a conversion price of $31.50 per share. During fiscal 2001, 2000 and 1999, respectively, the Company accepted unsolicited block offers to buy back $4.6, $10.4 and $9.7 million, respectively, principal amount of its Convertible Subordinated Debentures. The outstanding balance as of October 31, 2001 is $58,727,300. The State of Alabama Industrial Development bonds were assumed as part of the Nichols Aluminum Alabama acquisition (see Note 2). These bonds mature August 1, 2004 with interest payable monthly. The bonds bear interest at the weekly interest rate as determined by the remarketing agent under then prevailing market conditions to be the minimum interest rate, which, if borne by the bonds on the effective date of such rate, would enable the remarketing agent to sell the bonds on such business day at a price (without regard to accrued interest) equal to the principal amount of the bonds. The interest rate, however, may not exceed 13% per annum. The weekly interest rate during the year ended October 31, 2001 ranged from 2.05% to 5.15%. These bonds are secured by a Letter of Credit. On June 1, 1999, the Company borrowed $3 million through unsecured Scott County, Iowa Variable Rate Demand Industrial Waste Recycling Revenue Bonds Series 1999. The bonds require 15 annual principal payments of $200 thousand beginning on July 1, 2000. The variable interest rate is established by the remarketing agent based on the lowest weekly rate of interest that would permit the sale of the bonds at par, on the basis of prevailing financial market conditions. Interest is payable on the first business day of each calendar month. Interest rates on these bonds during fiscal 2001 have ranged from 2.05% to 5.1%. The Temroc Industrial Development Revenue Bonds were obtained as part of the acquisition of Temroc. These bonds are due in annual installments through October 2012. Interest is payable semi-annually at fixed rates from 4.5% to 5.6% depending on maturity (average rate of 5.1% over the term of the bonds). These bonds are secured by a mortgage on Temroc's land and building. During the year ended October 31, 2001, the Company borrowed on the Revolver to pay back $17.3 million of loans taken against the cash surrender value of various officer life insurance policies. These loans had previously been netted as an offset to the cash surrender value and classified as "Other assets" on the balance sheet. Aggregate maturities of long-term debt at October 31, 2001, are as follows (in thousands): 2002 ............................. $ 420 2003 ............................. 140,444 2004 ............................. 12,922 2005 ............................. 428 2006 ............................. 17,690 Thereafter ....................... 48,124 -------- $220,028 ========
37 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS The Company has a number of retirement plans covering substantially all employees. The Company provides both defined benefit and defined contribution plans. In general, the plant or location of his/her employment determines an employee's coverage for retirement benefits. The single employer defined benefit pension plans pay benefits to employees at retirement using formulas based upon years of service and compensation rates near retirement. The Company's funding policy is generally to make the minimum annual contributions required by applicable regulations. The plans invest primarily in marketable equity and debt securities. The Company also provides certain healthcare and life insurance benefits for certain eligible retired employees employed prior to January 1, 1993. Certain employees may become eligible for those benefits if they reach normal retirement age while working for the Company. The Company continues to fund benefit costs on a pay-as-you-go basis. For fiscal year 2001, the Company made benefit payments totaling $411,000, compared to $422,000 and $348,000 in fiscal 2000 and 1999, respectively. A reconciliation of the beginning benefit obligation to the ending benefit obligation follows:
Pension Postretirement Benefits Benefits October 31, -------------------------------------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (In thousands) Benefit obligation at beginning of year $ 31,900 $ 30,564 $ 7,098 $ 7,731 Service cost ......................... 1,976 2,000 100 108 Interest cost ........................ 2,450 2,215 521 516 Amendments ........................... -- 323 (2) (735) Actuarial loss (gain) ................ 1,653 (1,432) 15 (100) Benefits paid from plan assets ....... (533) (442) (411) (422) Administrative expenses .............. (295) (279) -- -- Piper Impact Europe benefit obligation -- (1,049) -- -- -------- -------- -------- -------- Benefit obligation at end of year ...... $ 37,151 $ 31,900 $ 7,321 $ 7,098 ======== ======== ======== ========
A reconciliation of the beginning fair value of plan assets to the ending fair value of plan assets follows:
Pension Benefits October 31, ------------------------ 2001 2000 -------- -------- (In thousands) Fair value of plan assets at beginning of year ...... $ 23,996 $ 22,205 Actual return on plan assets ...................... (3,517) 1,343 Employer contributions ............................ 3,109 1,865 Benefits paid ..................................... (533) (442) Administrative expenses ........................... (295) (279) Piper Impact Europe fair value of plan assets ..... -- (696) -------- -------- Fair value of plan assets at end of year ............ $ 22,760 $ 23,996 ======== ========
38 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ A reconciliation of the funded status of the plans with the amounts recognized in the accompanying balance sheets is set forth below:
Pension Postretirement Benefits Benefits October 31, -------------------------------------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (In thousands) Funded status .......................... $(14,391) $ (7,904) $ (7,321) $ (7,098) Unrecognized transition asset .......... (379) (490) -- -- Unrecognized prior service cost ........ 1,450 1,559 (628) (680) Unrecognized net loss .................. 8,032 440 200 142 Other .................................. -- -- (28) 2 -------- -------- -------- -------- Accrued benefit cost ................. $ (5,288) $ (6,395) $ (7,777) $ (7,634) Amounts recognized in the Balance Sheet: Deferred benefit credit ................ $ (7,962) $ (7,026) $ (7,777) $ (7,634) Accrued contribution to pension ........ (1,760) (1,492) -- -- Intangible asset ....................... 1,467 1,631 -- -- Accumulated other comprehensive income . 2,967 492 -- -- -------- -------- -------- -------- Accrued benefit cost ................. $ (5,288) $ (6,395) $ (7,777) $ (7,634)
Below is data related to pension plans in which the accumulated benefit obligation exceeds plan assets.
Pension Postretirement Benefits Benefits October 31, ------------------------------------------------- 2001 2000 2001 2000 ------- ------- ------- ------- (In thousands) Accumulated benefit obligation .... $29,699 $ 7,392 $ 7,321 $ 7,098 Fair value of plan assets ......... 22,760 6,194 -- --
Below are the assumptions used.
Pension Postretirement Benefits Benefits October 31, ---------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 ------ ------- ------ ----- ---- ----- (In thousands) Discount rate ..................... 7.25% 7.75% 7.50% 7.25% 7.75% 7.50% Expected return on plan assets .... 10.00% 10.00% 10.00% -- -- -- Rate of compensation increase ..... 4.00% 4.50% 4.50% -- -- --
The assumed health care cost trend rate was 7.69% in 2001, decreasing uniformly to 5.25% in the year 2008 and remaining level thereafter. If the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of October 31, 2001 would be increased by 1.41%. The effect of this change on the sum of the service cost and interest cost would be an increase of 1.31%. If the health care cost trend rate assumptions were decreased by 1%, the accumulated postretirement benefit obligation as of October 31, 2001 would be decreased by 1.28%. The effect of this change on the sum of the service cost and interest cost would be a decrease of 1.17%. 39 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Net pension costs for the single employer defined benefit pension plans were as follows:
Years Ended October 31, ------------------------------------- 2001 2000 1999 ------- ------- ------- (In thousands) Service Cost ..................................... $ 1,976 $ 2,000 $ 2,092 Interest cost .................................... 2,450 2,215 1,978 Expected return on plan assets ................... (2,421) (2,228) (1,978) Amortization of unrecognized transition asset .... (111) (111) (111) Amortization of unrecognized prior service cost .. 109 109 63 Amortization of unrecognized net loss ............ -- -- 119 Other ............................................ -- 104 (63) ------- ------- ------- Net periodic pension cost ..................... $ 2,003 $ 2,089 $ 2,100 ======= ======= =======
Net periodic costs for the postretirement benefit plans other than pensions were as follows:
Years Ended October 31, ------------------------------- 2001 2000 1999 ----- ----- ----- (In thousands) Net periodic postretirement benefit cost: Service cost ................................ $ 100 $ 109 $ 187 Interest cost ............................... 521 516 541 Net amortization and deferral ............... (65) (60) 17 Other ....................................... -- -- 2 ----- ----- ----- Net periodic postretirement benefit cost .... $ 556 $ 565 $ 747 ===== ===== =====
One of the Company's subsidiaries, Piper Impact Europe, which was sold in July of 2000, participated in two multi-employer plans. The plans provided defined benefits to substantially all of Piper Impact Europe's employees. Amounts charged to pension cost and contributed to the plans as of October 31, 2000, and 1999, totaled approximately NLG 1,302,000 and NLG 2,021,000 or approximately $575,000 and $1,000,000, respectively. The Company has various defined contribution plans in effect for certain eligible employees. The Company makes contributions to the plans subject to certain limitations outlined in the plans. Contributions to these plans were approximately $4,696,000, $3,978,000, and $3,366,000, during fiscal 2001, 2000, and 1999, respectively. The Company has a Supplemental Benefit Plan covering certain key officers of the Company. Earned vested benefits under the Supplemental Benefit Plan were approximately $5,456,000, $5,923,000, $4,829,000, at October 31, 2001, 2000 and 1999, respectively. These benefits are funded with life insurance policies purchased by the Company. 40 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 13. INDUSTRY SEGMENT INFORMATION The Company reports segment information in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 requires that the Company disclose certain information about its operating segments where operating segments are defined as "components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance". Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. As such, the Company had four reportable segments for the year ended October 31, 2001: engineered steel bars, aluminum mill sheet products, engineered products and Piper Impact. The engineered steel bar segment consists of engineered steel bars manufacturing, steel bar and tube heat treating services, as well as steel bar and tube wear and corrosion resistant finishing services. The aluminum mill sheet segment manufactures mill finished and coated aluminum sheet. The engineered products segment manufactures aluminum window and patio door screens, window frames, exterior door components and other roll-formed products and stamped shapes. The Piper Impact segment manufactures impact-extruded aluminum and steel parts. The Company's reportable segments through the fiscal year ended October 31, 2001 were strategic business divisions that offer different products and services using different processes. These groups were managed separately because each business requires different expertise to manage its process oriented strategy. The Company evaluated performance based on operating income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies, with the exception of the inventory valuation method. Quanex measures its inventory at the segment level on a FIFO basis, however at the consolidated Quanex level, the majority of the inventory is measured on a LIFO basis. See Note 8 to the financial statements for more information. The Company accounts for intersegment sales and transfers as though the sales or transfers were to third parties, that is, at current market prices. For the years ended October 31, 2001 and 2000, no one customer represented 10% or more of the consolidated net sales of the Company. For the year ended October 31, 1999, 12% of the Company's consolidated net sales were made to one customer. These sales are included in the Piper Impact segment. 41 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================
FOR THE YEARS ENDED OCTOBER 31, ------------------------------------------- 2001 2000 1999 --------- --------- --------- NET SALES(2) Engineered Steel Bars (Unaffiliated) $ 330,692 $ 355,540 $ 306,058 Engineered Steel Bars (Intersegment) 5,626 4,897 5,284 --------- --------- --------- ENGINEERED STEEL BARS (TOTAL) 336,318 360,437 311,342 Aluminum Mill Sheet Products (Unaffiliated) $ 361,660 395,697 299,168 Aluminum Mill Sheet Products (Intersegment) 18,408 20,080 21,115 --------- --------- --------- ALUMINUM MILL SHEET PRODUCTS (TOTAL)(5) 380,068 415,777 320,283 Engineered Products (Unaffiliated) 146,487 106,865 94,475 Engineered Products (Intersegment) -- -- 1 --------- --------- --------- ENGINEERED PRODUCTS (TOTAL)(4)(6) 146,487 106,865 94,476 Piper Impact (Unaffiliated) 85,514 106,416 135,201 Piper Impact (Intersegment) -- -- -- --------- --------- --------- PIPER IMPACT (TOTAL) 85,514 106,416 135,201 Corporate and Other (Intersegment elimination)(1) (24,034) (24,977) (26,400) --------- --------- --------- CONSOLIDATED $ 924,353 $ 964,518 $ 834,902 ========= ========= ========= OPERATING INCOME (LOSS): Engineered Steel Bars $ 41,955 $ 57,702 $ 60,446 Aluminum Mill Sheet Products(5) 5,934 21,529 15,306 Engineered Products(4)(6) 19,983 14,301 13,006 Piper Impact(7) 3,256 (82,470) (853) Corporate & Other(1) (13,812) (15,024) (16,148) --------- --------- --------- CONSOLIDATED $ 57,316 $ (3,962) $ 71,757 ========= ========= ========= DEPRECIATION AND AMORTIZATION: Engineered Steel Bars $ 21,017 $ 18,775 $ 16,293 Aluminum Mill Sheet Products(5) 13,193 12,965 12,334 Engineered Products(4)(6) 5,070 3,443 3,349 Piper Impact 3,686 12,362 12,836 Corporate & Other(1) 944 900 1,071 --------- --------- --------- CONSOLIDATED $ 43,910 $ 48,445 $ 45,883 ========= ========= ========= CAPITAL EXPENDITURES:(3) Engineered Steel Bars $ 45,585 $ 27,374 $ 37,750 Aluminum Mill Sheet Products(5) 4,904 4,709 9,873 Engineered Products(4)(6) 4,040 3,586 1,680 Piper Impact 946 5,290 10,948 Corporate & Other(1) 165 1,396 683 --------- --------- --------- CONSOLIDATED $ 55,640 $ 42,355 $ 60,934 ========= ========= ========= IDENTIFIABLE ASSETS: Engineered Steel Bars $ 291,220 $ 267,476 $ 241,783 Aluminum Mill Sheet Products(5) 207,104 227,365 200,733 Engineered Products(4)(6) 88,424 65,527 46,977 Piper Impact 47,490 54,518 162,176 Corporate & Other(1) 63,393 30,973 38,777 --------- --------- --------- CONSOLIDATED $ 697,631 $ 645,859 $ 690,446 ========= ========= =========
(1) Included in "Corporate and Other" are intersegment eliminations and corporate expenses. (2) Intersegment sales are conducted on an arm's length basis. (3) Includes capitalized interest. (4) Fiscal 2001 results include Temroc operations since the acquisition date of November 30, 2000. See Note 2 to the financial statements. (5) Fiscal 2000 results include Nichols Aluminum-Golden operations since the acquisition date of January 25, 2000. See Note 2 to the financial statements. (6) Fiscal 2000 results include Imperial Fabricated Products operations since the acquisition date of April 3, 2000. See Note 2 to the financial statements. (7) Fiscal 2000 results include the $14.3 million pretax loss on the sale of Piper Impact Europe and the $56.3 million pretax asset impairment charge on Piper Impact. See Notes 3 and 4 to the financial statements. 42 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ INTRODUCTION OF NEW COMPANY STRATEGY AND SEGMENT REPORTING During the latter portion of the fiscal year ending October 31, 2001, the Company completed a strategic review of its business, which resulted in a shift of strategy away from primarily a "process" oriented enterprise to a more "market focused" enterprise. The new chief operating decision maker of Quanex believes the focus on customers will provide a more effective corporate strategy to drive growth and unlock shareholder value. The review underscored a high concentration of sales in two market segments - vehicular products and building products. The Company has made organizational and reporting changes aligned to this new strategy beginning in fiscal 2002. The chief operating decision maker has started evaluating performance and allocating the Company's resources under this new segment structure. Beginning with the first fiscal quarter of 2002, Quanex will report under these two market focused segments. The vehicular products segment is comprised of the former "engineered steel bar" segment (MACSTEEL), Piper Impact (US operations only) and Temroc. The new building products segment is comprised of the former aluminum mill sheet products segment (Nichols Aluminum) as well as the divisions comprising the former engineered products segment, excluding Temroc. Corporate and other will include corporate office charges and intersegment eliminations as well as Piper Impact Europe, which was sold in the fiscal year ended October 31, 2000. Below is a presentation of segment disclosure information under the new corporate organizational structure:
FOR THE YEARS ENDED OCTOBER 31, ------------------------------------------- 2001 2000 1999 --------- --------- --------- NET SALES Vehicular Products(3) $ 439,307 $ 444,124 $ 408,210 Building Products(4)(5) 485,046 502,562 393,643 Corporate and Other(1) -- 17,832 33,049 --------- --------- --------- CONSOLIDATED $ 924,353 $ 964,518 $ 834,902 ========= ========= ========= OPERATING INCOME (LOSS): Vehicular Products(3)(7) $ 47,466 $ (8,052) $ 59,610 Building Products(4)(5) 23,662 35,830 28,312 Corporate & Other(1)(6) (13,812) (31,740) (16,165) --------- --------- --------- CONSOLIDATED $ 57,316 $ (3,962) $ 71,757 ========= ========= ========= DEPRECIATION AND AMORTIZATION: Vehicular Products(3) $ 25,905 $ 28,769 $ 25,286 Building Products(4)(5) 17,061 16,408 15,683 Corporate & Other(1) 944 3,268 4,914 --------- --------- --------- CONSOLIDATED $ 43,910 $ 48,445 $ 45,883 ========= ========= ========= CAPITAL EXPENDITURES:(2) Vehicular Products(3) $ 47,234 $ 31,196 $ 44,171 Building Products(4)(5) 8,241 8,295 11,553 Corporate & Other(1) 165 2,864 5,210 --------- --------- --------- CONSOLIDATED $ 55,640 $ 42,355 $ 60,934 ========= ========= ========= IDENTIFIABLE ASSETS: Vehicular Products(3) $ 362,442 $ 321,204 $ 360,867 Building Products(4)(5) 269,387 291,164 245,872 Corporate & Other(1) 65,802 33,491 83,707 --------- --------- --------- CONSOLIDATED $ 697,631 $ 645,859 $ 690,446 ========= ========= =========
(1) Included in "Corporate and Other" are intersegment eliminations, corporate expenses and Piper Impact Europe's results until its sale in fiscal 2000. (2) Includes capitalized interest. (3) Fiscal 2001 results include Temroc operations since the acquisition date of November 30, 2000. See Note 2 to the financial statements. (4) Fiscal 2000 results include Nichols Aluminum-Golden operations since the acquisition date of January 25, 2000. See Note 2 to the financial statements. (5) Fiscal 2000 results include Imperial Fabricated Products operations since the acquisition date of April 3, 2000. See Note 2 to the financial statements. (6) Fiscal 2000 results include the $14.3 million pretax loss on the sale of Piper Impact Europe. See Note 3 to the financial statements. (7) Fiscal 2000 results include the $56.3 million pretax asset impairment charge on Piper Impact. See Notes 4 to the financial statements. 43 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ GEOGRAPHIC INFORMATION
YEAR ENDED OCTOBER 31, -------------------------------------- NET SALES(1) 2001 2000 1999 -------- -------- -------- United States ................... $870,163 $895,702 $768,087 Mexico .......................... 16,148 24,336 17,709 Canada .......................... 26,176 18,712 18,371 European countries .............. 4,315 20,423 25,231 Other foreign countries ......... 7,551 5,345 5,504 -------- -------- -------- Total ......................... $924,353 $964,518 $834,902 ======== ======== ========
YEAR ENDED OCTOBER 31, -------------------------------------- NET SALES(2) 2001 2000 1999 -------- -------- -------- United States ................... $924,353 $946,686 $801,853 The Netherlands ................. -- 17,832 33,049 -------- -------- -------- $924,353 $964,518 $834,902 ======== ======== ========
YEAR ENDED OCTOBER 31, ------------------------------------------- OPERATING INCOME (LOSS)(4) 2001 2000 1999 -------- -------- -------- United States ................... $ 57,316 $ 12,754 (3) $ 71,774 The Netherlands ................. -- (16,716)(5) (17) -------- -------- -------- $ 57,316 $ (3,962) $ 71,757 ======== ======== ========
YEAR ENDED OCTOBER 31, ----------------------- IDENTIFIABLE ASSETS(6) 2001 2000 -------- -------- United States ................... $697,631 $645,859 The Netherlands ................. - -- -------- -------- Total ......................... $697,631 $645,859 ======== ========
(1) Net Sales are attributed to countries based on location of customer. (2) Net sales are attributed to countries based on location of operations. (3) Including the asset impairment charge of $56.3 million in FY 2000. See Note 4. (4) Operating income (loss) is attributed to countries based on location of operations. (5) Including the loss on sale of Piper Impact Europe. See Note 3. (6) 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. On April 15, 1999, the Second Amended and Restated Rights Agreement went into effect. Each Right, when exercisable, entitles the holder to purchase 1/100th of a share of the Company's Series A Junior Participating Preferred Stock at an exercise price of $90. Each 1/100th of a share of Series A Junior Participating Preferred Stock will be entitled to a dividend equal to the greater of $.01 or the dividend declared on each share of common stock, and will be entitled to 1/100th of a vote, voting together with the shares of common stock. The Rights will be exercisable only if, without the Company's prior consent, a person or group of persons acquires or announces the intention to acquire 20% or more of the Company's common stock. If the Company is acquired through a merger or other business combination transaction, each Right will entitle the holder to purchase $120 worth of the surviving company's common stock for $90. Additionally, if someone acquires 20% or more of the Company's common stock, each Right, not owned by the 20% or greater shareholder, would permit the holder to purchase $120 worth of the Company's common stock for $90. The Rights are redeemable, at the option of the Company, at $.02 per Right at any time until ten days after someone acquires 20% or more of the common stock. The Rights expire April 15, 2009. As a result of the Rights distribution, 150,000 of the 1,000,000 shares of authorized Preferred Stock were reserved for issuance as Series A Junior Participating Preferred Stock. 44 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 15. STOCK REPURCHASE PROGRAM In December 1999, Quanex announced that its Board of Directors approved a program to repurchase up to 2 million shares of the Company's common stock in the open market or in privately negotiated transactions. During the fiscal year ended October 31, 2001, the Company repurchased 119,000 shares at a cost of $2.2 million. During the fiscal year ended October 31, 2000, the Company repurchased 834,300 shares at a cost of $17.2 million. The Company retired 156,700 of these shares purchased at a cost of approximately $3.8 million. For shares purchased by the Company and retired: 1) Common stock is charged for the par value of the shares, 2) additional paid in capital is charged for the pro-rata portion associated with those shares and 3) retained earnings is charged for the remainder of the cost of the retired shares. For the shares purchased and retired in the year ended October 31, 2000, the equity was reduced as shown below:
Repurchase Common Additional Retained Cost Stock Paid in Capital Earnings --------------------------------------------------------------------------- (In thousands) $3,785 $78 $1,222 $2,485
The Company accounted for the remaining shares purchased as treasury stock. The cost of such shares of $12.7 million at October 31, 2001 is reflected as a reduction of stockholders' equity in the balance sheet. 16. RESTRICTED STOCK AND STOCK OPTION PLANS Key Employee Plans: The Company has restricted stock and stock option plans which provide for the granting of common shares or stock options to key employees. Under the Company's restricted stock plan, common stock may be awarded to key employees. The recipient is entitled to all of the rights of a shareholder, except that during the forfeiture period the shares are nontransferable. The awards vest over a specified time period. Upon issuance of stock under the plan, unearned compensation equal to the market value at the date of grant is charged to stockholders' equity and subsequently amortized to expense over the restricted period. There were 44,000, 22,750 and 6,000 restricted shares granted in 2001, 2000 and 1999, respectively. The amount charged to compensation expense in 2001 and 2000 was $368,436 and $57,000, respectively, relating to restricted stocks granted in 2001, 2000 and 1999. No compensation expense was charged in 1999 related to the restricted stock. Under the Company's option plans, options are granted at prices determined by the Board of Directors which may not be less than the fair market value of the shares at the time the options are granted. Unless otherwise provided by the Board at the time of grant, options become exercisable in 33 1/3% increments maturing cumulatively on each of the first through third anniversaries of the date of grant and must be exercised no later than ten years from the date of grant. There were 388,145, 650,194, and 276,776 shares available for granting of options at October 31, 2001, 2000, and 1999, respectively. Stock option transactions for the three years ended October 31, 2001, were as follows:
Shares Shares Under Average Price Exercisable Option Per Share ----------- ------------ ------------- Balance at October 31, 1998 ... 770,075 1,219,871 $ 23 ========= Granted ..................... 240,700 21 Exercised ................... (9,000) 15 Cancelled ................... (30,300) 24 --------- Balance at October 31, 1999 ... 966,391 1,421,271 23 ========= Granted ..................... 244,250 18 Exercised ................... (3,000) 9 Cancelled ................... (40,418) 26 --------- Balance at October 31, 2000 ... 1,139,546 1,622,103 22 ========= Granted ..................... 382,000 24 Exercised ................... (70,048) 20 Cancelled / Lapsed .......... (23,751) 21 --------- Balance at October 31, 2001 ... 1,291,129 1,910,304 $ 23 ========= =========
45 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 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, 2001, 2000, or 1999. Stock option transactions for the three years ended October 31, 2001, were as follows:
Shares Average Shares Under Price Exercisable Option Per Share ----------- ------ --------- Balance at October 31, 1998 ............. 13,332 20,000 $ 20 ====== Granted ............................... -- -- Exercised ............................. -- -- Cancelled ............................. -- -- ------ Balance at October 31, 1999 ............. 20,000 20,000 20 ====== Granted ............................... -- -- Exercised ............................. -- -- Cancelled ............................. -- -- ------ Balance at October 31, 2000 ............. 20,000 20,000 20 ====== Granted ............................... -- -- Exercised ............................. -- -- Cancelled ............................. -- -- ------ Balance at October 31, 2001 ............. 20,000 20,000 $ 20 ====== ======
46 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 1989 Non-Employee Directors Plan: The Company's 1989 Non-employee Directors stock option plan provides for the granting of stock options to non-employee Directors to purchase up to an aggregate of 210,000 shares of common stock. Each non-employee Director as of December 6, 1989 was granted an option to purchase 3,000 shares of common stock at a price per share of common stock equal to the fair market value of the common stock as of the date of grant. Also, each non-employee Director who is a director of the Company on any subsequent October 31, while the plan is in effect and shares are available for the granting of options hereunder, shall be granted on such October 31, an option to purchase 3,000 shares of common stock at a price equal to the fair market value of the common stock as of such October 31. During 1998, the Board of Directors passed a resolution, which decreased the number of options to be granted annually as prescribed above from 3,000 to 2,000. Options become exercisable at any time commencing six months after the grant and must be exercised no later than 10 years from the date of grant. No option may be granted under the plan after December 5, 1999. There were no shares available for granting of options at October 31, 2001, 2000 or 1999. Stock option transactions for the three years ended October 31, 2001, were as follows:
Shares Average Shares Under Price Exercisable Option Per Share ----------- -------- --------------- Balance at October 31, 1998 ....... 111,000 129,000 $ 23 ======= Granted ......................... 12,000 22 Exercised ....................... (5,000) 16 Cancelled ....................... -- -- ------- Balance at October 31, 1999 ....... 124,000 136,000 23 ======= Granted ......................... -- -- Exercised ....................... (1,000) 17 Cancelled ....................... -- -- ------- Balance at October 31, 2000 ....... 135,000 135,000 23 ======= Granted ......................... -- -- Exercised ....................... (14,000) 20 Cancelled ....................... (6,000) 22 ------- Balance at October 31, 2001 ....... 115,000 115,000 $ 24 ======= =======
1997 Non-Employee Directors plan: The Company's 1997 Non-Employee Directors stock option plan provides for the granting of stock options to non-employee Directors to purchase up to an aggregate of 400,000 shares of common stock. There are two types of grants under this plan which are described below: Automatic Annual Grants While this plan is in effect and shares are available for the granting of options hereunder, each non-employee Director who is a director of the Company on October 31 and who has not received options under the 1989 Non-Employee Director plan shall be granted on such October 31, an option to purchase such number of shares of common stock as is determined by the Board of Directors at a price equal to the fair market value of the common stock as of such October 31. These options are exercisable in full immediately upon the date of grant. New Director Grants While this plan is in effect and shares are available for the granting of options hereunder, there shall be granted to each non-employee Director who was not granted an option under the 1987 Non-Employee Director Stock Option Plan as of the date upon which such director shall have continuously served as a director of the Company for a period of one year an option to purchase such number of Quanex Corporation shares of stock as is determined by the Board of Directors. These Plan options 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. 47 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ There were 350,000, 364,000 and 382,000 shares available for granting of options at October 31, 2001, 2000 and 1999, respectively. Stock option transactions for the three years ended October 31, 2001, were as follows:
Shares Average Shares Under Price Exercisable Option Per Share -------- ------ --------- Balance at October 31, 1998 ............. -- -- -- Granted ............................. 18,000 $ 21 Exercised ........................... -- -- Cancelled ........................... -- -- ------ Balance at October 31, 1999 ............. 2,000 18,000 21 ====== Granted ............................. 18,000 20 Exercised ........................... -- -- Cancelled ........................... -- -- ------ Balance at October 31, 2000 ............. 25,333 36,000 21 ====== Granted ............................. 14,000 26 Exercised ........................... -- -- Cancelled ........................... -- -- ------ Balance at October 31, 2001 ............. 44,666 50,000 $ 22 ====== ======
Stock Based Compensation In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", the Company continues to apply the rules for stock-based compensation contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and discloses the required pro forma effect on net income and earnings per share of the fair value based method of accounting for stock-based compensation as required by SFAS No. 123. The following pro forma summary of the Company's consolidated results of operations have been prepared as if the fair value based method of accounting for stock based compensation as required by SFAS No. 123 had been applied:
Years Ended October 31, ---------------------------------------------- 2001 2000 1999 ---------- ---------- ---------- (In thousands) Net income (loss) attributable to common stockholders ................ $ 29,194 $ (9,665) $ 39,716 SFAS No. 123 adjustment .............................................. (1,829) (1,619) (1,764) ---------- ---------- ---------- Pro forma net income (loss) attributable to common stockholders ...... $ 27,365 $ (11,284) $ 37,952 ========== ========== ========== Earnings (loss) per common share: Basic as reported ................................................ $ 2.18 $ (0.70) $ 2.79 Basic pro forma .................................................. $ 2.04 $ (0.82) $ 2.67 Diluted as reported .............................................. $ 2.07 $ (0.70) $ 2.59 Diluted pro forma ................................................ $ 1.96 $ (0.82) $ 2.48
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.
--------------------------------- 2001 2000 1999 ------- ------- ------- Risk-free interest rate ................. 4.28% 5.75% 5.93% Dividend yield .......................... 3.10% 3.33% 2.80% Volatility factor ....................... 42.87% 42.89% 40.21% Weighted average expected life .......... 5 years 5 years 5 years
17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Effective November 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, which requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or 48 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ liability, depending on the Company's rights or obligations under the applicable derivative contract. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Metal Exchange Forward Contracts The Company's aluminum mill sheet products segment, Nichols Aluminum, uses various grades of aluminum scrap as well as prime aluminum ingot as a raw material for its manufacturing process. The price of this aluminum raw material is subject to fluctuations due to many factors in the aluminum market. In the normal course of business, Nichols Aluminum enters into firm price sales commitments with its customers. In an effort to reduce the risk of fluctuating raw material prices, the Company enters into firm price raw material purchase commitments (which are designated as "normal purchases" under SFAS No. 133) as well as forward contracts on the London Metal Exchange ("LME"). The Company's risk management policy as it relates to these LME contracts is to enter into contracts to cover the raw material needs of the Company's committed sales orders as well as a certain level of forecasted aluminum sales, net of fixed price purchase commitments. With the use of firm price raw material purchase commitments and LME contracts, the Company aims to protect the gross margins from the effects of changing prices of aluminum. To the extent that the raw material costs factored into the firm price sales commitments are matched with firm price raw material purchase commitments, changes in aluminum prices should have no effect on the Company. Where firm price sales commitments are matched with LME contracts, the Company is subject to the ineffectiveness of LME contracts to perfectly hedge raw material prices. The Company has grouped the LME contracts into two types: customer specific and non-customer specific. The customer specific contracts have been designated as cash flow hedges of forecasted aluminum raw material purchases in accordance with SFAS No. 133. The non-customer specific LME contracts that are used to manage or balance the raw material needs have not been designated as hedges and, therefore, do not receive hedge accounting under SFAS No. 133. Both types of contracts are measured at fair market value on the balance sheet. Accounting before adoption of SFAS No. 133: At October 31, 2000, open LME forward contracts covered notional volumes of 25,738,940 pounds and had fair values of a loss of $372 thousand. As the Company did not adopt SFAS No. 133 until November 1, 2000, the fair value of the contracts as of October 31, 2000 was not reflected on the balance sheet, and hedging gains and losses were included in "Cost of sales" in the income statement concurrently with the related sales of inventory. Accounting after adoption of SFAS No. 133: On November 1, 2000, when the Company adopted SFAS 133, it recorded a derivative liability of $372 thousand representing the fair value of these contracts as of that date. A corresponding amount, net of taxes of $145 thousand, was recorded to other comprehensive income. As of October 31, 2001, open LME forward contracts have maturity dates extending through October 2003. At October 31, 2001, these contracts covered notional volumes of 45,415,185 pounds and had a fair value net loss of approximately $1.8 million, which is recorded as part of other current and non-current assets and liabilities in the financial statements. The effective portion of the gains and losses related to the customer specific forward LME contracts designated as hedges are reported in other comprehensive income. These gains and losses are reclassified into earnings in the periods in which the related inventory is sold. As of October 31, 2001, losses of approximately $1.6 million ($992 thousand net of taxes) are expected to be reclassified from other comprehensive income into earnings over the next twelve months. Gains and losses on these customer specific hedge contracts, including amounts related to hedge ineffectiveness, are reflected in "Cost of sales" in the income statement. For the year ended October 31, 2001, a net loss of $283 thousand was recognized in "Cost of sales" representing the amount of the hedges' ineffectiveness. (No components of these gains and losses were excluded from the assessment of hedge effectiveness. Additionally, no hedge contracts were discontinued due to the determination that the original forecasted transaction would not occur. Therefore, there was no income statement impact related to that action.) 49 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The entire amount of gains and losses of the non-customer specific forward LME contracts not designated as hedges are reflected in "Cost of sales" in the income statement in the period in which they occur. These gains and losses include the changes in fair market value during the period for all open and closed contracts. Interest Rate Swap Agreements In fiscal 1996, the Company entered into interest rate swap agreements, which effectively converted $100 million of its variable rate debt under the Bank Agreement Revolver to fixed rate. The Company's risk management policy related to these swap agreements is to hedge the exposure to interest rate movements on a portion of its long-term debt. Under the swap agreements, payments are made based on a fixed rate ($50 million at 7.025% and $50 million at 6.755%) and received on a LIBOR based variable rate (2.31% at October 31, 2001). Differentials to be paid or received under the agreements are recognized as interest expense. The agreements mature in 2003. The Company has designated the interest rate swap agreements as cash flow hedges of future interest payments on its variable rate long-term debt. Accounting before adoption of SFAS No. 133: The fair value of the swaps as of October 31, 2000 was a loss of $918 thousand. As the Company did not adopt SFAS No. 133 until November 1, 2000, the fair value of the swap agreements as of October 31, 2000 was not reflected on the balance sheet. Hedging gains and losses were included in "Interest Expense" in the income statement based on the quarterly swap settlement. Accounting after adoption of SFAS No. 133: On November 1, 2000, the Company recorded a derivative liability of $918 thousand, representing the fair value of the swaps as of that date. A corresponding amount, net of income taxes of $358 thousand, was recorded to other comprehensive income. The fair value of the swaps as of October 31, 2001 was a loss of $7.3 million, which is recorded as part of other current and non-current liabilities. Gains and losses related to the swap agreements will be reclassified into earnings in the periods in which the related hedged interest payments are made. As of October 31, 2001, losses of approximately $3.8 million ($2.3 million net of taxes) are expected to be reclassified into earnings over the next twelve months. Gains and losses on these agreements, including amounts recorded related to hedge ineffectiveness, are reflected in "Interest expense" in the income statement. A net loss of $730 thousand was recorded in interest expense in the year ended October 31, 2001 representing the amount of the hedge's ineffectiveness. (No components of the swap instruments' losses were excluded from the assessment of hedge effectiveness. Additionally, none of the swap agreements were discontinued due to the determination that the original forecasted transaction would not occur. Therefore, there was no income statement impact related to that action.) If the floating rates were to change by 10% from October 31, 2001 levels, the fair market value of these swaps would change by approximately $411 thousand. In terms of the impact on cash flow to the Company, as floating interest rates decline, the market value of the swap agreement rises, thus increasing the quarterly cash settlement of the swaps paid by the Company. However, the interest paid on the floating rate debt balance decreases. The inverse situation occurs with rising interest rates. Foreign Currency Contracts In December 1997, the Company entered into a zero-cost range forward (foreign currency swap) agreement on a notional value of 30 million Guilders with a major financial institution to hedge its initial equity investment in its Netherlands subsidiary, Piper Impact Europe. This agreement limited the Company's exposure to large fluctuations in the US Dollar/Dutch Guilder exchange rate. Under the terms of the agreement, Quanex had the option to let the agreement expire at no cost if the exchange rate remained within an established range on the expiration date of October 25, 2000. At October 31, 1999, the Company booked a $378 thousand gain to the stockholders' equity cumulative foreign currency translation adjustment. During the third quarter ended July 31, 2000, the Company sold the Piper Impact Europe subsidiary. As such, this range forward agreement was closed, realizing a gain of approximately $1.7 million. This gain was offset against the loss on the sale of Piper Impact Europe as the investment in Piper Impact Europe was the underlying hedged item. See the Statement of Stockholder's Equity for components of comprehensive income and the disclosure of accumulated other comprehensive income related to hedging transactions. 50 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Other Financial Assets and Liabilities 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 $220.0 million and $184.3 million, as of October 31, 2001 and 2000, respectively, as compared to carrying values at October 31, 2001 and 2000 of $220.0 million and $191.9 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. 18. CONTINGENCIES Quanex is subject to loss contingencies arising from federal, state, and local environmental laws. Environmental expenditures are expensed or capitalized depending on their future economic benefit. The Company accrues its best estimates of its remediation obligations and adjusts such accruals as further information and circumstances develop. Those estimates may change substantially depending on information about the nature and extent of contamination, appropriate remediation technologies, and regulatory approvals. Costs of future expenditures for environmental remediation are not discounted to their present value. When environmental laws might be deemed to impose joint and several liability for the costs of responding to contamination, the Company accrues its allocable share of liability taking into account the number of companies participating, their ability to pay their shares, the volumes and nature of the wastes involved, the nature of anticipated response actions, and the nature of the Company's alleged connections. It is management's opinion that the Company has established appropriate reserves for environmental remediation obligations at various of its plant sites and disposal facilities. Those amounts are not expected to have a material adverse effect on the Company's financial condition. Total remediation reserves, at October 31, 2001, were approximately $18 million. These reserves include, without limitation, the Company's best estimate of liabilities related to costs for further investigations, environmental remediation, and corrective actions related to the acquisition of Piper Impact, the acquisition of Nichols Aluminum Alabama and a facility previously part of the former Tubing Operations. Actual cleanup costs at the Company's current plant sites, former plants, and disposal facilities could be more or less than the amounts accrued for remediation obligations. It is not possible at this point to reasonably estimate the amount of any obligation for remediation in excess of current accruals that would be material to Quanex's financial statements because of uncertainties as to the extent of environmental impact and concurrence of governmental authorities. During the second quarter of fiscal 2001, Nichols Aluminum Casting had some of its aluminum reroll product damaged in a fire at a third-party offsite warehouse storage facility. The product was covered under the Company's casualty insurance policies. To date, only the Company's cost in the material has been recovered. The Company has also filed a claim under its business interruption insurance policy, to recover lost profit on the use of this damaged material, but at this time has neither collected this portion of the claim nor reached an agreement with its insurance carrier as to the amount of such claims and therefore has not recorded any potential income associated with it. 51 Quanex Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following sets forth the selected quarterly information for the years ended October 31, 2001 and 2000.
First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- (In thousands except per share amounts) 2001: Net sales ........................................ $ 199,942 $ 220,257 $ 248,121 $ 256,033 Gross profit ..................................... 20,845 23,762 32,761 37,958 Income before extraordinary item ................. 3,685 4,289 9,608 11,240 Extraordinary gain ............................... 372 -- -- -- Net income ....................................... 4,057 4,289 9,608 11,240 Earnings per share: Basic: Income before extraordinary item ............... 0.27 0.32 0.72 0.84 Extraordinary gain ............................. 0.03 -- -- -- --------- --------- --------- --------- Net earnings ................................... 0.30 0.32 0.72 0.84 Diluted .......................................... $ 0.30 $ 0.32 $ 0.67 $ 0.77 2000: Net sales ........................................ $ 205,903 $ 251,053 $ 262,644 $ 244,918 Gross profit ..................................... 22,236 30,565 19,598 (19,508) Income (loss) before extraordinary item(1) ....... 4,175 9,029 715 (23,942) Extraordinary gain ............................... -- 358 -- -- Net income (loss)(1) ............................. 4,175 9,387 715 (23,942) Earnings per share: Basic: Income (loss) before extraordinary item ........ 0.29 0.66 0.05 (1.78) Extraordinary gain ............................. -- 0.02 -- -- --------- --------- --------- --------- Net earnings (loss) ............................ 0.29 0.68 0.05 (1.78) Diluted .......................................... $ 0.29 $ 0.63 $ 0.05 $ (1.78)
(1) Includes an after-tax loss on the sale of Piper Impact Europe in the amount of $9,282 in the third fiscal quarter of 2000 and an after tax asset impairment charge of $36,595 in the fourth fiscal quarter of 2000. 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, 2001 ....... $11,240 $ 868 $(3,213) $ 58 $ 8,953 Year ended October 31, 2000 ....... $12,154 $ 738 $(1,284) $ (368) $11,240 Year ended October 31, 1999 ....... $11,752 $ 921 $ (188) $ (331) $12,154
52 QUARTERLY FINANCIAL RESULTS (from continuing operations)
2001 2000 1999 -------- -------- -------- NET SALES (millions) January ....................................................... 199.94 205.90 188.56 April ......................................................... 220.26 251.05 209.23 July .......................................................... 248.12 262.65 212.82 October ....................................................... 256.03 244.92 224.29 -------- -------- -------- Total ............................................... 924.35 964.52 834.90 GROSS PROFIT (LOSS) (millions) January ....................................................... 20.85 22.24 23.54 April ......................................................... 23.76 30.57 32.05 July .......................................................... 32.76 19.60 35.05 October ....................................................... 37.96 (19.51) 37.66 -------- -------- -------- Total ............................................... 115.33 52.90 128.30 INCOME (LOSS) FROM CONTINUING OPERATIONS (millions) January ....................................................... 3.68 4.18 3.87 April ......................................................... 4.29 9.03 9.78 July(1) ....................................................... 9.61 0.71 12.33 October(2) .................................................... 11.24 (23.94) 13.32 -------- -------- -------- Total ............................................... 28.82 (10.02) 39.30 INCOME (LOSS) FROM CONTINUING OPERATIONS PER BASIC COMMON SHARE January ....................................................... .27 .29 .27 April ......................................................... .32 .66 .69 July(1) ....................................................... .72 .05 .86 October(2) .................................................... .84 (1.78) .94 -------- -------- -------- Year ................................................ 2.15 (0.73) 2.76 QUARTERLY COMMON STOCK DIVIDENDS January ....................................................... .16 .16 .16 April ......................................................... .16 .16 .16 July .......................................................... .16 .16 .16 October ....................................................... .16 .16 .16 -------- -------- -------- Total ............................................... .64 .64 .64 COMMON STOCK SALES PRICE (High & Low) January ....................................................... 21 26.5625 23.875 16.375 19.0625 16.8125 April ......................................................... 21.15 23.6875 26.25 17.35 16.125 15.375 July .......................................................... 27.55 18.625 29 20.70 14.375 25.125 October ....................................................... 27.48 20.6875 27.375 20.75 17.0625 20.125
(1) Fiscal 2000 third quarter income from continuing operations includes an after-tax loss of $9.3 million on the sale of Piper Impact Europe. (2) Fiscal 2000 fourth quarter loss from continuing operations includes an after-tax asset impairment charge of $36.6 million or $2.67 per share. 53 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, 2001. 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, 2001. 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, 2001. 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, 2001. 54 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements
PAGE ---- Independent Auditors' Report........................................... 21 Consolidated Balance Sheet............................................. 23 Consolidated Statements of Income...................................... 24 Consolidated Statements of Stockholders' Equity........................ 25-26 Consolidated Statements of Cash Flow................................... 27 Notes to Consolidated Financial Statements............................. 28 2. Financial Statement Schedule Schedule II - Valuation and qualifying accounts........................ 52 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................................................................. 56
55 EXHIBIT NUMBER DESCRIPTION OF EXHIBITS 3.1 Restated Certificate of Incorporation of the Registrant dated as of November 10, 1995, filed as Exhibit 3.1 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1995 and incorporated herein by reference. 3.2 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant dated as of February 27, 1997, filed as Exhibit 3.2 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. 3.3 Amendment to Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant dated as of April 15, 1999, filed as Exhibit 3.3 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. 3.4 Certificate of Correction of Amendment to Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock dated as of April 16, 1999, filed as Exhibit 3.4 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. 3.5 Amended and Restated Bylaws of the Registrant, as amended through August 26, 1999 filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the fiscal quarter ended July 31, 1999, and incorporated herein by reference. 4.1 Form of Registrant's Common Stock certificate, filed as Exhibit 4.1 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter ended April 30, 1987, and incorporated herein by reference. 4.2 Second Amended and Restated Rights agreement dated as of April 15, 1999, between the Registrant and American Stock Transfer & Trust Co. as Rights Agent, filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K (Reg. No. 001-05725) dated April 15, 1999, and incorporated herein by reference. 4.3 Form of Indenture relating to the Registrant's 6.88% Convertible Subordinated Exhibit Debentures due 2007 between the Registrant and Chemical Bank, as Trustee, filed as 19.2 to the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter ended April 30, 1992, and incorporated herein by reference. 4.4 $250,000,000 Revolving Credit and Term Loan Agreement dated as of July 23, 1996, among the Company, Comerica Bank, as Agent, and Harris Trust and Savings Bank and Wells Fargo Bank (Texas), NA as Co-Agents, filed as Exhibit 4.1 of the Company's Report on Form 8- K, (Reg. No. 001-05725) dated August 9, 1996, and incorporated herein by reference. +10.1 Quanex Corporation 1988 Stock Option Plan, as amended, and form of Stock Option year Agreement filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended October 31, 1988, together with the amendment filed as Exhibit 10.17 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter ended January 31, 1995, and incorporated herein by reference. +10.2 Amendment to the Quanex Corporation 1988 Stock Option Plan, dated as of December 1997, filed as Exhibit 10.2 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.3 Amendment to the Quanex Corporation 1988 Stock Option Plan, dated as of December 9, 1999, filed as Exhibit 10.3 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. 56 +10.4 Quanex Corporation Deferred Compensation Plan, as amended and restated, dated September 29, 1999, filed as Exhibit 10.4 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.5 First Amendment to Quanex Corporation Deferred Compensation Plan, dated December 7, 1999, filed as Exhibit 10.5 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.6 Quanex Corporation Executive Incentive Compensation Plan, as amended and restated, dated October 12, 1995, filed as Exhibit 10.8 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.7 Quanex Corporation Supplemental Benefit Plan, as amended and restated effective June 1, 1999, filed as Exhibit 10.9 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference +10.8 Form of Change in Control Agreement, between the Registrant and each executive officer of the Registrant, filed as Exhibit 10.10 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.9 Quanex Corporation 1987 Non-Employee Director Stock Option Plan, as amended, and the related form of Stock Option Agreement, filed as Exhibit 10.14 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1988, together with the amendment filed as Exhibit 10.14 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter ended January 31, 1995, and incorporated herein by reference. +10.10 Amendment to the Quanex Corporation 1987 Non-Employee Director Stock Option Plan, dated December 1997, filed as Exhibit 10.13 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.11 Amendment to the Quanex Corporation 1987 Non-Employee Director Stock Option Plan, dated December 9, 1999, filed as Exhibit 10.14 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.12 Quanex Corporation 1989 Non-Employee Director Stock Option Plan, as amended, filed as Exhibit 4.4 of the Registrant's Form S-8, Registration No. 33-35128, together with the amendment filed as Exhibit 10.15 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter ended January 31, 1995, and incorporated herein by reference. +10.13 Amendment to the Quanex Corporation 1989 Non-Employee Director Stock Option Plan, dated December 1997, filed as Exhibit 10.16 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.14 Amendment to the Quanex Corporation 1989 Non-Employee Director Stock Option Plan, dated December 9, 1999, filed as Exhibit 10.17 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.15 Quanex Corporation Employee Stock Option and Restricted Stock Plan, as amended, filed as Exhibit 10.14 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1994, and incorporated herein by reference. +10.16 Amendment to the Quanex Corporation Employee Stock Option and Restricted Stock Plan, dated December 1997, filed as Exhibit 10.19 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. 57 +10.17 Amendment to the Quanex Corporation Employee Stock Option and Restricted Stock Plan, dated December 9, 1999, filed as Exhibit 10.20 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.18 Amendment to the Quanex Corporation Employee Stock Option and Restricted Stock Plan, effective July 1, 2000 filed as Exhibit 10.18 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 2000 and incorporated herein by reference. +10.19 Retirement Agreement dated as of September 1, 1992, between the Registrant and Carl E. Pfeiffer, filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1992, and incorporated herein by reference. +10.20 Stock Option Agreement dated as of October 1, 1992, between the Registrant and Carl E. Pfeiffer, filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1992, and incorporated herein by reference. +10.21 Deferred Compensation Agreement dated as of July 31, 1992, between the Registrant and Carl E. Pfeiffer, filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10- K (Reg. No. 001-05725) for the year ended October 31, 1992, and incorporated herein by reference. +10.22 Quanex Corporation Non-Employee Director Retirement Plan, filed as Exhibit 10.18 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31,1994, and incorporated herein by reference. +10.23 Amendment to Quanex Corporation Non-Employee Director Retirement Plan dated May 25, 1995, filed as Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the fiscal quarter ended January 31, 2000 and incorporated herein by reference. +10.24 Quanex Corporation 1996 Employee Stock Option and Restricted Stock Plan, filed as Exhibit 10.19 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1996, and incorporated herein by reference. +10.25 Amendment to Quanex Corporation 1996 Employee Stock Option and Restricted Stock Plan, dated December 1997, filed as Exhibit 10.26 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.26 Amendment to Quanex Corporation 1996 Employee Stock Option and Restricted Stock Plan, dated December 9, 1999, filed as Exhibit 10.27 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.27 Amendment to Quanex Corporation 1996 Employee Stock Option and Restricted Stock Plan, effective February 23, 2000, filed as Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the fiscal quarter ended January 31, 2000 and incorporated herein by reference. +10.28 Amendment to Quanex Corporation 1996 Employee Stock Option and Restricted Stock Plan, effective July 1, 2000 filed as Exhibit 10.28 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 2000 and incorporated herein by reference. +10.29 Quanex Corporation Deferred Compensation Trust filed as Exhibit 4.8 of the Registrant's Registration Statement on Form S-3, Registration No. 333-36635, and incorporated herein by reference. +10.30 Amendment to Quanex Corporation Deferred Compensation Trust, dated December 9, 1999, filed as Exhibit 10.29 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. 58 +10.31 Quanex Corporation 1997 Non-Employee Director Stock Option Plan filed as Exhibit 10.21 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1997 and incorporated herein by reference. +10.32 Amendment to Quanex Corporation 1997 Non-Employee Director Stock Option Plan, dated December 9, 1999, filed as Exhibit 10.31 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.33 Quanex Corporation 1997 Key Employee Stock Plan,(formerly known as the Quanex Corporation 1997 Key Employee Stock Option Plan) as amended and restated, dated October 20, 1999, filed as Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725), dated June 11, 2001. +10.34 Amendment to Quanex Corporation 1997 Key Employee Stock Plan,(formerly known as the Quanex Corporation 1997 Key Employee Stock Option Plan) dated December 9, 1999, filed as Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725), dated June 11, 2001 and incorporated herein by reference. +10.35 Amendment to Quanex Corporation 1997 Key Employee Stock Plan,(formerly known as the Quanex Corporation 1997 Key Employee Stock Option Plan) effective July 1, 2000, filed as Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725), dated June 11, 2001 and incorporated herein by reference. *+10.36 Amendment to the Quanex Corporation 1997 Key Employee Stock Option Plan effective October 25, 2001. *+10.37 Quanex Corporation Long-Term Incentive Plan effective November 1, 2001. *+10.38 Agreement for Adoption and Merger of the Temroc Metals, Inc. Bargaining Unit Employees 401(k) Plan into the Nichols 401 (k) Savings Plan for Hourly Employees, effective July 1, 2001. *+10.39 Agreement for Adoption and Merger of the Temroc Metals, Inc. Non-Bargaining Unit Employees 401(k) Plan into the Nichols 401(k) Savings Plan, effective July 1, 2001. *+10.40 Quanex Corporation Employee Savings Plan - Amendment and Restatement effective January 1, 1998. 10.41 Asset Purchase Agreement dated July 31, 1996, among the Company, Piper Impact, Inc., a Delaware corporation, Piper Impact, Inc., a Tennessee corporation, B. F. Sammons and M. W. Robbins, filed as Exhibit 2.1 of the Company's Report on Form 8-K (Reg. No. 001-05725), dated August 9, 1996, and incorporated herein by reference. 10.42 Stock Purchase Agreement dated April 18, 1997, by and among Niagara Corporation, Niagara Cold Drawn Corp., and Quanex Corporation filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (Reg. No. 001-05725), dated May 5, 1997, and incorporated herein by reference. 10.43 Purchase Agreement dated December 3, 1997, among Quanex Corporation, Vision Metals Holdings, Inc., and Vision Metals, Inc., filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (Reg. No. 001-05725), dated December 3, 1997, and incorporated herein by reference. 10.44 Acquisition Agreement and Plan of Merger, dated October 23, 2000, between Quanex Corporation ("Company"), Quanex Five, Inc., a Delaware corporation and wholly owned subsidiary of the Company, and Temroc Metals, Inc., a Minnesota corporation, filed as Exhibit 2.1 to the Company's Report on Form 8-K (Reg. No. 001-05725), dated November 30, 2000, and incorporated herein by reference. 10.45 First Amendment to Agreement and Plan of Merger dated November 15, 2000 between Quanex Corporation ("Company"), Quanex Five, Inc., a Delaware corporation and wholly owned subsidiary of the Company, and Temroc Metals, Inc., a Minnesota corporation, filed as Exhibit 3.1 to the Company's Report on Form 8-K (Reg. No. 001-05725), dated November 30, 2000 and incorporated herein by reference. 59 10.46 Lease Agreement between The Industrial Development Board of the City of Decatur and Fruehauf Trailer Company dated May 1, 1963, filed as Exhibit 10.22 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. 10.47 Lease Agreement between The Industrial Development Board of the City of Decatur and Fruehauf Corporation dated May 1, 1964, filed as Exhibit 10.23 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. 10.48 Lease Agreement between The Industrial Development Board of the City of Decatur and Fruehauf Corporation dated October 1, 1965, filed as Exhibit 10.24 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. 10.49 Lease Agreement between The Industrial Development Board of the City of Decatur (Alabama) and Fruehauf Corporation dated December 1, 1978, filed as Exhibit 10.25 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. 10.50 Assignment and Assumption Agreement between Fruehauf Trailer Corporation and Decatur Aluminum Corp. (subsequently renamed Nichols Aluminum-Alabama, Inc.) dated October 9, 1998, filed as Exhibit 10.26 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. 10.51 Agreement between The Industrial Development Board of the City of Decatur and Decatur Aluminum Corp. (subsequently renamed Nichols Aluminum-Alabama, Inc.) dated September 23, 1998, filed as Exhibit 10.27 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. *21 Subsidiaries of the Registrant. *23 Consent of Deloitte & Touche LLP.
---------- + 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, 2001. 60 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/ RAYMOND A. JEAN January 4, 2002 --------------------------------------- RAYMOND A. JEAN Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ RAYMOND A. JEAN January 4, 2002 --------------------------------------- RAYMOND A. JEAN Chairman of the Board, President and Chief Executive Officer By: /s/ CARL E. PFEIFFER January 4, 2002 --------------------------------------- CARL E. PFEIFFER Director By: /s/ DONALD G. BARGER, JR. January 4, 2002 --------------------------------------- DONALD G. BARGER, JR. Director By: /s/ VINCENT R. SCORSONE January 4, 2002 --------------------------------------- VINCENT R. SCORSONE Director By: /s/ MICHAEL J. SEBASTIAN January 4, 2002 --------------------------------------- MICHAEL J. SEBASTIAN Director By: /s/ RUSSELL M. FLAUM January 4, 2002 --------------------------------------- RUSSELL M. FLAUM Director 61 By: /s/ SUSAN F. DAVIS January 4, 2002 --------------------------------------- SUSAN F. DAVIS Director By: /s/ JOSEPH J. ROSS January 4, 2002 --------------------------------------- JOSEPH J. ROSS Director By: /s/ TERRY M. MURPHY January 4, 2002 --------------------------------------- TERRY M. MURPHY Vice President-Finance and Chief Financial Officer (Principal Financial Officer) By: /s/ VIREN M. PARIKH January 4, 2002 --------------------------------------- VIREN M. PARIKH Controller (Principal Accounting Officer) 62 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 3.1 Restated Certificate of Incorporation of the Registrant dated as of November 10, 1995, filed as Exhibit 3.1 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1995 and incorporated herein by reference. 3.2 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant dated as of February 27, 1997, filed as Exhibit 3.2 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. 3.3 Amendment to Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant dated as of April 15, 1999, filed as Exhibit 3.3 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. 3.4 Certificate of Correction of Amendment to Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock dated as of April 16, 1999, filed as Exhibit 3.4 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. 3.5 Amended and Restated Bylaws of the Registrant, as amended through August 26, 1999 filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the fiscal quarter ended July 31, 1999, and incorporated herein by reference. 4.1 Form of Registrant's Common Stock certificate, filed as Exhibit 4.1 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter ended April 30, 1987, and incorporated herein by reference. 4.2 Second Amended and Restated Rights agreement dated as of April 15, 1999, between the Registrant and American Stock Transfer & Trust Co. as Rights Agent, filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K (Reg. No. 001-05725) dated April 15, 1999, and incorporated herein by reference. 4.3 Form of Indenture relating to the Registrant's 6.88% Convertible Subordinated Exhibit Debentures due 2007 between the Registrant and Chemical Bank, as Trustee, filed as 19.2 to the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter ended April 30, 1992, and incorporated herein by reference. 4.4 $250,000,000 Revolving Credit and Term Loan Agreement dated as of July 23, 1996, among the Company, Comerica Bank, as Agent, and Harris Trust and Savings Bank and Wells Fargo Bank (Texas), NA as Co-Agents, filed as Exhibit 4.1 of the Company's Report on Form 8- K, (Reg. No. 001-05725) dated August 9, 1996, and incorporated herein by reference. +10.1 Quanex Corporation 1988 Stock Option Plan, as amended, and form of Stock Option year Agreement filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended October 31, 1988, together with the amendment filed as Exhibit 10.17 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter ended January 31, 1995, and incorporated herein by reference. +10.2 Amendment to the Quanex Corporation 1988 Stock Option Plan, dated as of December 1997, filed as Exhibit 10.2 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.3 Amendment to the Quanex Corporation 1988 Stock Option Plan, dated as of December 9, 1999, filed as Exhibit 10.3 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference.
63 +10.4 Quanex Corporation Deferred Compensation Plan, as amended and restated, dated September 29, 1999, filed as Exhibit 10.4 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.5 First Amendment to Quanex Corporation Deferred Compensation Plan, dated December 7, 1999, filed as Exhibit 10.5 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.6 Quanex Corporation Executive Incentive Compensation Plan, as amended and restated, dated October 12, 1995, filed as Exhibit 10.8 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.7 Quanex Corporation Supplemental Benefit Plan, as amended and restated effective June 1, 1999, filed as Exhibit 10.9 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference +10.8 Form of Change in Control Agreement, between the Registrant and each executive officer of the Registrant, filed as Exhibit 10.10 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.9 Quanex Corporation 1987 Non-Employee Director Stock Option Plan, as amended, and the related form of Stock Option Agreement, filed as Exhibit 10.14 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1988, together with the amendment filed as Exhibit 10.14 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter ended January 31, 1995, and incorporated herein by reference. +10.10 Amendment to the Quanex Corporation 1987 Non-Employee Director Stock Option Plan, dated December 1997, filed as Exhibit 10.13 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.11 Amendment to the Quanex Corporation 1987 Non-Employee Director Stock Option Plan, dated December 9, 1999, filed as Exhibit 10.14 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.12 Quanex Corporation 1989 Non-Employee Director Stock Option Plan, as amended, filed as Exhibit 4.4 of the Registrant's Form S-8, Registration No. 33-35128, together with the amendment filed as Exhibit 10.15 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the quarter ended January 31, 1995, and incorporated herein by reference. +10.13 Amendment to the Quanex Corporation 1989 Non-Employee Director Stock Option Plan, dated December 1997, filed as Exhibit 10.16 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.14 Amendment to the Quanex Corporation 1989 Non-Employee Director Stock Option Plan, dated December 9, 1999, filed as Exhibit 10.17 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.15 Quanex Corporation Employee Stock Option and Restricted Stock Plan, as amended, filed as Exhibit 10.14 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1994, and incorporated herein by reference. +10.16 Amendment to the Quanex Corporation Employee Stock Option and Restricted Stock Plan, dated December 1997, filed as Exhibit 10.19 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference.
64 +10.17 Amendment to the Quanex Corporation Employee Stock Option and Restricted Stock Plan, dated December 9, 1999, filed as Exhibit 10.20 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.18 Amendment to the Quanex Corporation Employee Stock Option and Restricted Stock Plan, effective July 1, 2000 filed as Exhibit 10.18 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 2000 and incorporated herein by reference. +10.19 Retirement Agreement dated as of September 1, 1992, between the Registrant and Carl E. Pfeiffer, filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1992, and incorporated herein by reference. +10.20 Stock Option Agreement dated as of October 1, 1992, between the Registrant and Carl E. Pfeiffer, filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1992, and incorporated herein by reference. +10.21 Deferred Compensation Agreement dated as of July 31, 1992, between the Registrant and Carl E. Pfeiffer, filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10- K (Reg. No. 001-05725) for the year ended October 31, 1992, and incorporated herein by reference. +10.22 Quanex Corporation Non-Employee Director Retirement Plan, filed as Exhibit 10.18 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31,1994, and incorporated herein by reference. +10.23 Amendment to Quanex Corporation Non-Employee Director Retirement Plan dated May 25, 1995, filed as Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the fiscal quarter ended January 31, 2000 and incorporated herein by reference. +10.24 Quanex Corporation 1996 Employee Stock Option and Restricted Stock Plan, filed as Exhibit 10.19 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1996, and incorporated herein by reference. +10.25 Amendment to Quanex Corporation 1996 Employee Stock Option and Restricted Stock Plan, dated December 1997, filed as Exhibit 10.26 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.26 Amendment to Quanex Corporation 1996 Employee Stock Option and Restricted Stock Plan, dated December 9, 1999, filed as Exhibit 10.27 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.27 Amendment to Quanex Corporation 1996 Employee Stock Option and Restricted Stock Plan, effective February 23, 2000, filed as Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725) for the fiscal quarter ended January 31, 2000 and incorporated herein by reference. +10.28 Amendment to Quanex Corporation 1996 Employee Stock Option and Restricted Stock Plan, effective July 1, 2000 filed as Exhibit 10.28 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 2000 and incorporated herein by reference. +10.29 Quanex Corporation Deferred Compensation Trust filed as Exhibit 4.8 of the Registrant's Registration Statement on Form S-3, Registration No. 333-36635, and incorporated herein by reference. +10.30 Amendment to Quanex Corporation Deferred Compensation Trust, dated December 9, 1999, filed as Exhibit 10.29 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference.
65 +10.31 Quanex Corporation 1997 Non-Employee Director Stock Option Plan filed as Exhibit 10.21 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1997 and incorporated herein by reference. +10.32 Amendment to Quanex Corporation 1997 Non-Employee Director Stock Option Plan, dated December 9, 1999, filed as Exhibit 10.31 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the fiscal year ended October 31, 1999 and incorporated herein by reference. +10.33 Quanex Corporation 1997 Key Employee Stock Plan,(formerly known as the Quanex Corporation 1997 Key Employee Stock Option Plan) as amended and restated, dated October 20, 1999, filed as Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725), dated June 11, 2001. +10.34 Amendment to Quanex Corporation 1997 Key Employee Stock Plan,(formerly known as the Quanex Corporation 1997 Key Employee Stock Option Plan) dated December 9, 1999, filed as Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725), dated June 11, 2001 and incorporated herein by reference. +10.35 Amendment to Quanex Corporation 1997 Key Employee Stock Plan,(formerly known as the Quanex Corporation 1997 Key Employee Stock Option Plan) effective July 1, 2000, filed as Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-05725), dated June 11, 2001 and incorporated herein by reference. *+10.36 Amendment to the Quanex Corporation 1997 Key Employee Stock Option Plan effective October 25, 2001. *+10.37 Quanex Corporation Long-Term Incentive Plan effective November 1, 2001. *+10.38 Agreement for Adoption and Merger of the Temroc Metals, Inc. Bargaining Unit Employees 401(k) Plan into the Nichols 401 (k) Savings Plan for Hourly Employees, effective July 1, 2001. *+10.39 Agreement for Adoption and Merger of the Temroc Metals, Inc. Non-Bargaining Unit Employees 401(k) Plan into the Nichols 401(k) Savings Plan, effective July 1, 2001. *+10.40 Quanex Corporation Employee Savings Plan - Amendment and Restatement effective January 1, 1998. 10.41 Asset Purchase Agreement dated July 31, 1996, among the Company, Piper Impact, Inc., a Delaware corporation, Piper Impact, Inc., a Tennessee corporation, B. F. Sammons and M. W. Robbins, filed as Exhibit 2.1 of the Company's Report on Form 8-K (Reg. No. 001-05725), dated August 9, 1996, and incorporated herein by reference. 10.42 Stock Purchase Agreement dated April 18, 1997, by and among Niagara Corporation, Niagara Cold Drawn Corp., and Quanex Corporation filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (Reg. No. 001-05725), dated May 5, 1997, and incorporated herein by reference. 10.43 Purchase Agreement dated December 3, 1997, among Quanex Corporation, Vision Metals Holdings, Inc., and Vision Metals, Inc., filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (Reg. No. 001-05725), dated December 3, 1997, and incorporated herein by reference. 10.44 Acquisition Agreement and Plan of Merger, dated October 23, 2000, between Quanex Corporation ("Company"), Quanex Five, Inc., a Delaware corporation and wholly owned subsidiary of the Company, and Temroc Metals, Inc., a Minnesota corporation, filed as Exhibit 2.1 to the Company's Report on Form 8-K (Reg. No. 001-05725), dated November 30, 2000, and incorporated herein by reference. 10.45 First Amendment to Agreement and Plan of Merger dated November 15, 2000 between Quanex Corporation ("Company"), Quanex Five, Inc., a Delaware corporation and wholly owned subsidiary of the Company, and Temroc Metals, Inc., a Minnesota corporation, filed as Exhibit 3.1 to the Company's Report on Form 8-K (Reg. No. 001-05725), dated November 30, 2000 and incorporated herein by reference.
66 10.46 Lease Agreement between The Industrial Development Board of the City of Decatur and Fruehauf Trailer Company dated May 1, 1963, filed as Exhibit 10.22 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. 10.47 Lease Agreement between The Industrial Development Board of the City of Decatur and Fruehauf Corporation dated May 1, 1964, filed as Exhibit 10.23 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. 10.48 Lease Agreement between The Industrial Development Board of the City of Decatur and Fruehauf Corporation dated October 1, 1965, filed as Exhibit 10.24 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. 10.49 Lease Agreement between The Industrial Development Board of the City of Decatur (Alabama) and Fruehauf Corporation dated December 1, 1978, filed as Exhibit 10.25 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. 10.50 Assignment and Assumption Agreement between Fruehauf Trailer Corporation and Decatur Aluminum Corp. (subsequently renamed Nichols Aluminum-Alabama, Inc.) dated October 9, 1998, filed as Exhibit 10.26 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. 10.51 Agreement between The Industrial Development Board of the City of Decatur and Decatur Aluminum Corp. (subsequently renamed Nichols Aluminum-Alabama, Inc.) dated September 23, 1998, filed as Exhibit 10.27 of the Registrant's Annual Report on Form 10-K (Reg. No. 001-05725) for the year ended October 31, 1998 and incorporated herein by reference. *21 Subsidiaries of the Registrant. *23 Consent of Deloitte & Touche LLP.
---------- + Management Compensation or Incentive Plan * Filed herewith 67