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Quanex Announces Fiscal First Quarter 2004 Results

Engineered Products Reports Record First Quarter Operating Income; Integration of MACSTEEL Monroe and TruSeal Technologies Proceeding Well

HOUSTON, Feb. 26 /PRNewswire-FirstCall/ -- Quanex Corporation (NYSE: NX) announced fiscal first quarter results for the period ending January 31, 2004. Net sales for the quarter were $281.2 million, 23% higher than a year ago. Net sales included one month's results from the Company's acquisitions of MACSTEEL Monroe and TruSeal Technologies of $27.4 million. The Company commented that first quarter demand at its Vehicular Products and Building Products segments was very strong and that backlogs for the second quarter remained at high levels. Net income for Quanex was $6.4 million, down 6% compared to last year's record first quarter. Diluted earnings per share were $.39, the Company's second best first quarter. Monroe and TruSeal contributed about $.05 (after interest expense) to the diluted earnings per share figure in January and the first quarter.

Net sales for the first quarter 2003 were $229.5 million. Net income and diluted earnings per share for the first quarter 2003 were $6.8 million and $.41, respectively.

Highlights

Regarding the Company's results, Raymond A. Jean, chairman and chief executive officer stated, "We delivered near record first quarter results, driven by very strong customer demand across most product lines. During the quarter, we continued to be challenged by runaway steel scrap costs and the severe impact those costs had on the otherwise solid operating results at MACSTEEL. North American light vehicle builds were about flat compared to a year ago. Heavy duty truck builds continue to post gains, with builds up some 25% during the quarter versus a year ago. Housing activity remained brisk through calendar year-end, which allowed Engineered Products, excluding TruSeal, to post record first quarter operating income," Jean said.

"We have made excellent progress to date integrating Monroe and TruSeal into Quanex. We are very impressed by the quality of the management teams and are excited by the long term earnings potential of both businesses. We are comfortable with our previous guidance that the two acquisitions will contribute $.40 to $.50 to our fiscal 2004 diluted earnings per share."

     Quarterly Financials  ($ in millions, except per share data)
                                1st qtr 2004    1st qtr 2003    inc/dcr
    Net Sales                      $281.2          $229.5         23%
    Operating Income                 10.7            10.1          6%
    Net Income                        6.4             6.8         -6%

    EPS: Basic                     $  .39          $  .41         -5%
    EPS: Diluted                      .39             .41         -5%

    Segment Commentary

     VEHICULAR PRODUCTS  ($ in millions)
                                1st qtr 2004      1st qtr 2003
    Net Sales                      $141.0            $108.9
    Operating Income                  8.7               9.9

The Vehicular Products segment includes MACSTEEL, along with the newly acquired North Star Steel Monroe facility, Piper Impact and Temroc Metals. The segment's main drivers are North American light vehicle builds and heavy duty truck builds.

"North American light vehicle builds remained at healthy levels during the quarter, and MACSTEEL benefited from improving heavy duty truck production. Excluding Monroe, MACSTEEL shipments were up about 10% for the quarter, while operating income was down some 20%. Skyrocketing steel scrap costs were an issue during the quarter as MACSTEEL's scrap costs were up some $65 per ton over a year ago. Offsetting part of this cost increase was MACSTEEL's higher scrap surcharge effective January 1, 2004, productivity gains from lean initiatives and higher value added product sales. Further bolstering demand has been a strengthening of the secondary markets from the oil patch to defense. We see real strength in MACSTEEL's business going forward with our backlog some 50% higher than a year ago," Jean said.

"Piper Impact continues to struggle with the reduction of their base business. They narrowed the loss during the quarter versus the year ago period, and we are getting closer to finalizing a review of our strategic options," said Jean.

     BUILDING PRODUCTS  ($ in millions)
                            1st qtr 2004    1st qtr 2003
    Net Sales                 $140.2           $120.6
    Operating Income             5.5              4.2

The Building Products segment includes Engineered Products, including the recent acquisition of TruSeal Technologies, and Nichols Aluminum. The main drivers of the segment are residential housing starts and remodeling expenditures.

"Engineered Products, excluding TruSeal's excellent first month results, reported record income in our first quarter even though January's inclement winter did begin to slow the business," continued Jean. "Housing starts and remodeling activity ended the calendar year at very high levels and the momentum has clearly carried over into 2004. This level of activity is an excellent indicator of the underlying strength in this business segment."

"Nichols Aluminum had a good sales quarter and operating income was slightly improved from a year ago. Shipments remained strong to our traditional building and construction markets and our higher margin coated sheet was sold out in the quarter. The Golden facility, which supplies food packaging and container products, also reported good customer activity. As with Engineered Products, Nichols' first quarter is seasonally their slowest sales period. Currently, we have a good backlog of business and customer activity in the secondary markets is improving," said Jean.

Outlook

Demand in the Company's two target markets, vehicular products and building products, continues to be bolstered by a rebounding economy and favorable interest rates. Business conditions and the economy are expected to continue to gain strength throughout 2004.

In Quanex's Vehicular Products segment, business activity looks very promising going forward; however, the unprecedented sharp spikes in scrap prices remain an ongoing concern at MACSTEEL. The January and February cost increases have been particularly painful because of their sheer magnitude, and are well in excess of our current scrap surcharge. This situation will result in a temporary, yet significant reduction in margins at MACSTEEL in the second quarter.

In the Building Products segment, order activity remains strong, and while weather sensitive, the Company expects better second quarter results, excluding TruSeal, compared to a year ago. At Nichols Aluminum, both rising London Metal Exchange (LME) ingot prices and scrap prices remain an issue, however, sales prices have also increased, mitigating part of an expected second quarter margin squeeze. Housing starts for 2004 are expected to moderate only slightly from last year's record 1.85 million units. Building Products' other driver, remodeling expenditures, is also expected to remain at healthy levels.

Taken together, the sales outlook remains positive. However, uncertainties surrounding the cost of steel and aluminum scrap in the second quarter and their eventual recovery complicates the Company's ability to accurately forecast its earnings for both the second quarter and the year. At this time, Quanex expects its fiscal second quarter 2004 diluted earnings per share to be down significantly from the year ago period. The Company will publish second quarter diluted earnings per share guidance when it releases its second quarter update in April. Guidance for the year will be provided once the Company has a better sense of its annualized cost of steel scrap.

Other

The Company continues to account for stock options using the current transition provisions of SFAS No. 123. Accordingly, Quanex does not reflect the option expense in its income statement or diluted earnings per share. However, the Company does disclose the impact on net income and diluted earnings per share in the footnotes to its SEC financial statements. Expensing stock options would have reduced net income by about $563,000 and $357,000 for the first quarter of 2004 and 2003 respectively, and would have reduced diluted earnings per share by $.03 and $.02, respectively.

Dividend Declared

The Board of Directors declared the Company's quarterly cash dividend of $.17 per share on the Company's common stock, payable March 31, 2004 to shareholders of record on March 15, 2004.

Corporate Profile

Quanex is a $1.3 billion industry-leading manufacturer of value-added engineered materials and components serving the Vehicular Products and Building Products markets.

Financial Statistics as of 1/31/04

Book value per common share: $27.74; Total debt to capitalization: 33.51%; Return on invested capital: 8.32%; Return on common equity: 9.78%; Actual number of common shares outstanding: 16,421,724

    Definitions
    Book value per common share -- calculated as total stockholders' equity as
    of balance sheet date divided by actual number of common shares
    outstanding;
    Total debt to capitalization -- calculated as the sum of both the current
    and long term portion of debt, as of balance sheet date, divided by the
    sum of both the current and long term portion of debt plus total
    stockholders' equity as of balance sheet date;
    Return on invested capital -- calculated as the total of the prior 12
    months net income plus prior 12 months after-tax interest expense and
    capitalized interest, the sum of which is divided by the trailing five
    quarters average total debt (current and long term) and total
    stockholders' equity;
    Return on common equity -- calculated as the prior 12 months net income,
    divided by the trailing five quarters average common stockholders' equity.

Statements that use the words "expect," "should," "will," "might," or similar words reflecting future expectations or beliefs are forward-looking statements. The statements found above are based on current expectations. Actual results or events may differ materially from this release. Factors that could impact future results may include, without limitation, the effect of both domestic and global economic conditions, the impact of competitive products and pricing, and the availability and cost of raw materials. For a more complete discussion of factors that may affect the Company's future performance, please refer to the Company's most recent 10-K filing (December 29, 2003) under the Securities Exchange Act of 1934, in particular the sections titled, "Private Securities Litigation Reform Act" contained therein.

    For further information, visit the Company's website at www.quanex.com .

     Financial Contact:  Jeff Galow, 713/877-5327
     Media Contact:  Valerie Calvert, 713/877-5305

     QUANEX CORPORATION
     CONSOLIDATED STATEMENTS OF INCOME
     (In thousands, except per share data)
     (Unaudited)

                                                      Three months ended
                                                          January 31,
                                                    2004              2003

    Net sales                                     $281,156          $229,509
    Cost of sales                                  245,086           194,525
    Selling, general and administrative expense     13,108            12,855
    Depreciation and amortization                   12,730            12,014
    Gain on sale of land                              (454)              ---
    Operating income                                10,686            10,115
    Interest expense                                  (820)             (975)
    Other, net                                         335             1,459
    Income before income taxes                      10,201            10,599
    Income tax expense                              (3,774)           (3,816)
    Net income                                      $6,427            $6,783

    Weighted average common shares outstanding:
    Basic                                           16,318            16,406
    Diluted                                         16,589            16,648

    Earnings per common share:
    Basic                                            $0.39             $0.41
    Diluted                                          $0.39             $0.41

    Cash dividends per share                         $0.17             $0.17


     QUANEX CORPORATION
     INDUSTRY SEGMENT INFORMATION
     (In thousands)
     (Unaudited)

                                                      Three months ended
                                                          January 31,
                                                    2004               2003
    Net sales:
           Vehicular Products                     $140,979           $108,932
           Building Products                       140,177            120,577
               Net sales                          $281,156           $229,509

     Operating income:
           Vehicular Products                       $8,680             $9,887
           Building Products                         5,511              4,167
           Corporate and Other                      (3,505)            (3,939)
               Operating income                    $10,686            $10,115


     QUANEX CORPORATION
     CONSOLIDATED BALANCE SHEETS
     (In thousands)
     (Unaudited)

           January 31,                                          October 31,
        2004        2003                                      2003      2002
                          Assets
      $10,182      $5,425 Cash and equivalents              $22,108   $18,283
                          Accounts and notes receivable,
      165,393     103,710  net                              123,185   116,122
      125,436     100,797 Inventories                        79,322    90,756
       16,609      12,600 Other current assets                8,116    10,640
      317,620     222,532    Total current assets           232,731   235,801

                          Property, plant and equipment,
      408,315     349,674  net                              335,904   353,132
      137,730      66,436 Goodwill, net                      66,436    66,436
       60,121      35,604 Other assets                       30,792    33,771
     $923,786    $674,246 Total assets                     $665,863  $689,140

                          Liabilities and stockholders'
                           equity
     $117,728     $79,219 Accounts payable                  $89,435   $76,588
       47,647      39,512 Accrued liabilities                39,209    48,973
        7,043       7,180 Income taxes payable                7,381     4,839
          ---       2,746 Other current liabilities              46     3,970
        3,727         445 Current portion of long-term debt   3,877       434
      176,145     129,102    Total current liabilities      139,948   134,804

      225,902      70,051 Long-term debt                     15,893    75,131
          945       2,176 Deferred pension credits            8,323     4,960
                          Deferred postretirement welfare
        7,824       8,152  benefits                           7,845     7,928
       41,446      30,464 Deferred income taxes              34,895    29,210
       15,962      14,196 Other liabilities                  13,800    15,712
      468,224     254,141    Total liabilities              220,704   267,745

      455,562     420,105    Total stockholders' equity     445,159   421,395

                          Total liabilities and
     $923,786    $674,246  stockholders' equity            $665,863  $689,140


     QUANEX CORPORATION
     CONSOLIDATED STATEMENTS OF CASH FLOW
     (In thousands)
     (Unaudited)
                                                        Three months ended
                                                            January 31,
                                                      2004              2003
    Operating activities:
        Net income                                   $6,427            $6,783
        Adjustments to reconcile net
         income to cash provided by
         operating activities:
           Gain on sale of land                        (454)              ---
           Depreciation and amortization             12,838            12,107
           Deferred income taxes                      1,501             1,254
           Deferred pension and
            postretirement benefits                  (7,399)           (2,560)
                                                     12,913            17,584
        Changes in assets and liabilities, net
         of effects from acquisitions and
         dispositions:
           Decrease (Increase) in accounts and
            notes receivable                         (1,790)           12,412
           Increase in inventory                     (6,416)          (10,041)
           Increase in accounts payable               6,370             2,631
           Increase (Decrease) in accrued liabilities 2,380            (9,461)
           Increase (Decrease) in income taxes payable (487)            2,341
           Other, net                                (2,078)           (3,476)
    Cash provided by operating activities            10,892            11,990

    Investment activities:
        Acquisitions, net of cash acquired         (231,913)              ---
        Proceeds from sale of land                      637               ---
        Capital expenditures, net of retirements     (4,166)           (8,520)
        Other, net                                     (602)           (1,147)
    Cash used for investment activities            (236,044)           (9,667)

    Financing activities:
        Bank revolver and note
         repayments, net                            210,000            (5,000)
        Purchases of Quanex common stock                ---            (6,711)
        Common dividends paid                        (2,789)           (2,638)
        Issuance of common stock, net                 6,715               810
        Other, net                                     (709)           (1,642)
    Cash used for financing activities              213,217           (15,181)
        Effect of exchange rate changes
         on cash and equivalents                          9               ---
    Decrease in cash                                (11,926)          (12,858)

    Beginning of period cash and
     equivalents                                     22,108            18,283
    End of period cash and equivalents              $10,182            $5,425

SOURCE Quanex Corporation

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