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Quanex Announces Fiscal Fourth Quarter and Fiscal 2003 Results

Record $1.03 Billion Net Sales for the Year; Best Ever Cash Provided by Operating Activities for the Quarter and Year; Engineered Products Posts Record Sales and Operating Income for the Year

HOUSTON, Dec. 4 /PRNewswire-FirstCall/ -- Quanex Corporation (NYSE: NX) announced its fiscal 2003 fourth quarter and annual results for the period ending October 31, 2003.

Net sales for the quarter were $286.8 million, up 5% from $273.8 million reported in the fourth quarter last year. Customer demand was strong during the quarter. North American light vehicle builds remained above 16 million units annualized, which allowed MACSTEEL to run at a high utilization rate during the period. At Engineered Products and Nichols Aluminum, sales were excellent due to the combination of strong housing starts and remodeling activity. Net sales for the year were a record $1,031.2 million compared to $994.4 million last year.

Net income and diluted earnings per share were $13.1 million and $0.80, respectively for the fourth quarter. The Company stated that results in the quarter included a non-cash charge to operating income of $4.6 million to account for changes in its year-end inventories using the Last In-First Out (LIFO) method of accounting. For the year, net income and diluted earnings per share were $42.9 million and $2.62, respectively. The Company reported that its annual results included a non-cash LIFO charge of $6.1 million (pre- tax) and a tax-free executive life insurance benefit of $2.2 million.

During the quarter, Quanex announced a definitive agreement to purchase the North Star Steel - Monroe facility from Cargill, Inc. Monroe produces special-bar-quality steel bars and primarily serves the vehicular products market. The acquisition is expected to close around the end of calendar year 2003. The Company also announced a definitive agreement to purchase TruSeal Technologies from Kirtland Capital Partners. TruSeal produces flexible, insulating glass spacer systems and sealants for wood, vinyl and aluminum windows. The acquisition is expected to close on or about January 2, 2004.

Net income for the fourth quarter 2002 was $15.1 million and $55.5 million for the year. Diluted earnings per share were $.97 for the quarter and $3.52 for the year. The Company said the $3.52 figure included a tax-free executive life insurance benefit of $9.0 million.

Highlights

Regarding the Company's results, Raymond A. Jean, chairman and chief executive officer, stated "We experienced robust demand for our products throughout the quarter and, with strong operational performance, allowed us to report solid fourth quarter results. Automotive builds stayed above 16 million annualized units, and while the pace was not record setting, it increased MACSTEEL's operating rates above the third quarter. Home building activity, combined with remodeling expenditures, remained brisk, and allowed both Engineered Products and Nichols Aluminum to post excellent results.

"During the quarter, all of our businesses did a great job of reducing working capital, and taken together, showed an 8% improvement over last year. Cash provided by operating activities and free cash flow provided by operating activities for the quarter were $60.9 million and $54.8 million, respectively, compared to $15.6 million and $9.3 million, respectively, for the fourth quarter a year ago. For the full year, cash provided by operating activities and free cash flow provided by operating activities were $102.8 million and $73.9 million, respectively, compared to $81.1 million and $48.5 million, respectively, a year ago. As a result, balance sheet fundamentals remained outstanding, and we finished the year with a total debt to capitalization ratio of 4.25%," said Jean.

"Quanex uses the LIFO method of accounting which requires us to revalue our inventories at the end of each year. As we have reported for much of the year, both steel and aluminum scrap costs have been rising. When this situation occurs, the LIFO calculation produces a non-cash charge to earnings," Jean said.

     Quarterly Financials  ($ in millions, except per share data)
                     4th qtr   4th qtr   inc/dcr   FY 2003   FY 2002   inc/dcr
                       2003      2002
     Net Sales        $286.8    $273.8       5%    $1,031.2    $994.4      4%
     Operating Income   20.7      28.4     -27%        63.8      83.3    -23%
     Net Income         13.1      15.1     -13%        42.9      55.5    -23%

     EPS: Basic        $ .82     $ .92     -11%       $2.65     $3.74    -29%
     EPS: Diluted        .80       .97     -18%        2.62      3.52    -26%


    Segment Commentary

     VEHICULAR PRODUCTS  ($ in millions)

                               4th qtr 2003   4th qtr 2002   FY 2003   FY 2002
     Net Sales                       $130.4         $122.0    $468.5    $459.5
     Operating Income                  14.5           15.8      48.2      57.6


The Vehicular Products segment includes MACSTEEL, Piper Impact and Temroc Metals. The segment's main drivers are North American light vehicle builds, and to a lesser extent, heavy duty truck builds.

"Total North American light vehicle builds in our fourth quarter were about 4% higher than a year ago; however, builds at the "Big 3" were down about 10%. Heavy duty truck builds were off about 15% from last year's fourth quarter. Truck builds were particularly strong a year ago because heavy truck customers were buying ahead of an EPA driven change to the emission systems of large diesel engines effective October 2003. Low inventory in the pipeline at MACSTEEL's Tier one and Tier two customers, along with higher content, allowed us to increase volumes about 6% from a year ago, clearly outperforming our served market," continued Jean.

"Operating income at MACSTEEL was down about 10% from a year ago, in part due to higher energy and scrap costs. We experienced another spike in scrap costs during the quarter, with steel scrap costs up some $40 per ton over last year's fourth quarter, and $20 per ton higher than just last quarter. We do have scrap surcharges in place with customers but the surcharge lags actual scrap costs by at least three months, and with scrap up sharply over the last six months, margins at MACSTEEL continue to be squeezed. However, offsetting part of this margin compression was our ability to further reduce conversion costs, which were down some 3% in the quarter, including the benefit of further reductions in outside processing costs," said Jean.

"At Piper Impact sales were off about 15% compared to the fourth quarter last year, with the largest drop in business coming from the ongoing reduction in aluminum airbag component sales. Piper did, however, reduce the size of its operating loss this quarter compared to both last quarter and the year ago quarter. Nonetheless, Piper continues to lose money on much of our traditional product lines. We continue to review our strategic options for this business," Jean said.

     BUILDING PRODUCTS  ($ in millions)

                               4th qtr 2003   4th qtr 2002   FY 2003   FY 2002
     Net Sales                       $156.4         $151.7    $562.7    $534.9
     Operating Income                  15.0           13.6      35.6      38.0

The Building Products segment includes Engineered Products and Nichols Aluminum. The main drivers of this segment are residential housing starts and remodeling expenditures.

"We continue to see strong demand for our door and window components, which allowed Engineered Products to report another excellent quarter with record operating results. Housing starts for the fourth quarter exceeded 1.8 million units on an annualized basis. For the month of October, annualized starts were nearly 2 million units. With demand for new residential homes at record levels, we look for customer activity to remain at high levels until inclement winter weather conditions arrive," said Jean.

"Nichols Aluminum reported higher volumes for the quarter compared to last year as our primary building and construction customers were at high operating rates. Sales to our other markets remained lackluster. Like MACSTEEL, Nichols experienced rising scrap prices this year. Scrap prices were up about $.03 per pound this quarter over a year ago, although it was essentially flat to last quarter. Even with these higher costs, Nichols posted improved operating income compared to last year's quarter, in part because of the excellent operating performance at our Golden facility. Nichols also did an outstanding job of holding the line on conversion costs, which were flat versus a year ago, despite the fact that energy costs were up," Jean said.

Outlook

Operating results for the Vehicular Products segment are tied to North American light vehicle builds and heavy duty truck builds. For calendar 2004, the Company expects light vehicle builds to be about 16 million units, essentially flat to 2003's expected build rate of 15.8 million units. Loss of market share by the "Big 3" to the automotive transplant companies, or NAMs, remains a concern. While MACSTEEL sells steel bar products to the NAMs and continues to make excellent inroads, MACSTEEL remains closely linked to the "Big 3". Heavy duty truck builds, which have been at cyclical lows for several years, are expected to recover in calendar 2004 and exceed 200,000 units, up from 175,000 units estimated to be built in 2003.

Operating results for the Building Products segment are tied to U.S. housing starts and remodeling activity. For calendar 2004, the Company expects housing starts to drop 5% from 2003's very strong level. Remodeling expenditures are expected to remain at robust levels in 2004.

The Company's primary raw materials are steel and aluminum scrap, which supplies MACSTEEL and Nichols Aluminum. The price of these commodities rose steadily throughout the year, with a significant surge in ferrous scrap prices during the Company's fourth quarter, continuing in November and December. Over time, MACSTEEL recovers the majority of these cost increases through its use of scrap surcharges. However, it does experience substantial margin compression when scrap prices surge as the surcharge is based on a three month trailing index. Nichols Aluminum has no such surcharge, and it attempts to recover rising scrap costs through a higher selling price.

Quanex expects to post improved results in 2004 compared to 2003. This expectation is based on a growing economy, market share gains by MACSTEEL and Engineered Products, improved product mix at Nichols Aluminum and the considerable earnings benefit that will accrue from its acquisitions of North Star Steel Monroe and TruSeal Technologies.

The first quarter (November, December and January) is historically the Company's least profitable as there are fewer production days due to the holidays, customers closely manage year-end inventories and reduced building activity during the winter. Quanex expects its first quarter diluted earnings per share to be down compared to the same period a year ago. First quarter volumes at MACSTEEL are expected to be flat to the year ago quarter, but operating income is expected to be off as steel scrap costs are anticipated to be some 35% higher than in the year ago quarter. Operating income at Engineered Products is expected to be flat compared to excellent year ago results. Volume at Nichols Aluminum should be up from a year ago, however, operating income is expected to be flat as they absorb higher raw material costs in the absence of sales price relief.

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 financial statements. For the fourth quarter and fiscal year, expensing stock options would have reduced net income by $0.4 million and $1.7 million, respectively, and would have reduced diluted earnings per share by $0.02 and $0.10, respectively.

Non-GAAP Financial Measures

Free cash flow from operating activities -- The Company utilizes this non- GAAP financial measure to gauge its quarterly and annual performance considering its short-term investment in working capital and its long-term investment in Plant, Property and Equipment (PP&E). Following is the reconciliation:

      Three months ended                                 Twelve months ended
          October 31,                                          October 31,
       2003        2002                                      2003      2002
       60,903      15,576  Cash provided by operating       102,840    81,111
                            activities (GAAP)
       (6,129)    (6,316)     Less: Capital expenditures    (28,899)  (32,639)
       54,774      9,260   Free cash flow from operating     73,941    48,472
                            activities (Non-GAAP)

    Dividend Declared

The Board of Directors declared a quarterly cash dividend of $0.17 per share on the Company's common stock, payable December 30, 2003 to shareholders of record on December 19, 2003.

Corporate Profile

Quanex is a $1 billion industry-leading manufacturer of engineered materials and components for the vehicular products and building products markets.

Financial Statistics as of 10/31/03

Book value per common share: $27.52; Total debt to capitalization: 4.25%; Return on invested capital: 9.05%; Return on common equity: 10.02%; Actual number of common shares outstanding: 16,173,961

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.

Free cash flow from operating activities -- calculated as the sum of cash provided by operating activities less capital expenditures.

Statements that use the words "expect," "should," "will," "might," "gauge" 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 20, 2002) 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 .


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

      Three months ended                                 Twelve months ended
          October 31,                                         October 31,
       2003        2002                                      2003      2002

     $286,819    $273,753  Net sales                     $1,031,215  $994,387

      242,451     221,067  Cost of sales                    867,782   812,949
       13,334      14,448  Selling, general and
                            administrative expense           53,572    54,408
       10,297       9,846  Depreciation and amortization     46,066    43,730

       20,737      28,392  Operating income                  63,795    83,300

         (404)     (5,633) Interest expense                  (2,517)  (14,812)
          ---         ---  Capitalized interest                 ---     1,879
          ---         ---  Retired executive life
                            insurance benefit                 2,152     9,020
          182         758  Other, net                         2,393     2,227
       20,515      23,517  Income before income taxes        65,823    81,614
       (7,399)     (8,464) Income tax expense               (22,936)  (26,132)
      $13,116     $15,053  Net income                       $42,887   $55,482

                           Weighted average common shares
                            outstanding:
       16,088      16,364  Basic                             16,154    14,823
       16,337      16,660  Diluted                           16,384    16,237

                           Earnings per common share:
        $0.82       $0.92  Basic                              $2.65     $3.74
        $0.80       $0.97  Diluted                            $2.62     $3.52

        $0.17       $0.16  Cash dividends per share           $0.68     $0.64


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

       Three months ended                             Twelve months ended
          October 31,                                      October 31,
       2003          2002                              2003           2002
                             Net sales:
     $130,403      $122,042    Vehicular Products    $468,506       $459,531

      156,416       151,711    Building Products      562,709        534,856

     $286,819      $273,753      Net sales         $1,031,215       $994,387


                             Operating income:

      $14,526       $15,799    Vehicular Products     $48,208        $57,606

       14,965        13,638    Building Products       35,648         37,985

       (8,754) (A)   (1,045)   Corporate and Other    (20,061) (A)   (12,291)

      $20,737       $28,392      Operating Income     $63,795         $83,300

     (A) - Increase is primarily due to LIFO charges.


     QUANEX CORPORATION
     CONSOLIDATED BALANCE SHEETS
     (In thousands)
     (Unaudited)
                                                          October 31,
                                                    2003              2002
    ASSETS

      Cash and equivalents                         $22,108           $18,283

      Accounts and notes receivable, net           123,185           116,122

      Inventories                                   79,322            90,756

      Other current assets                           8,116            10,640

         Total current assets                      232,731           235,801

      Property, plant and equipment, net           335,904           353,132

      Goodwill, net                                 66,436            66,436

      Other assets                                  30,792            33,771

      Total assets                                $665,863          $689,140

    LIABILITIES AND STOCKHOLDERS' EQUITY

      Accounts payable                             $89,435           $76,588

      Accrued liabilities                           39,209            48,973

      Income taxes payable                           7,381             4,839

      Other current liabilities                         46             3,970

      Current portion of long-term debt              3,877               434

         Total current liabilities                 139,948           134,804

      Long-term debt                                15,893            75,131

      Deferred pension credits                       8,323             4,960

      Deferred postretirement welfare benefits       7,845             7,928

      Deferred income taxes                         34,895            29,210

      Other liabilities                             13,800            15,712

         Total liabilities                         220,704           267,745

         Total stockholders' equity                445,159           421,395

      Total liabilities and stockholders'
       equity                                     $665,863          $689,140


     QUANEX CORPORATION
     CONSOLIDATED STATEMENTS OF CASH FLOW
     (In thousands)
     (Unaudited)

     Three months ended                                  Twelve months ended
        October 31,                                          October 31,
      2003      2002                                       2003       2002
                          Operating activities:
     $13,116   $15,053      Net income                    $42,887   $55,482
                            Adjustments to reconcile
                             net income to cash
                             provided by operating
                             activities:
         ---       ---      Gain on sale of Piper
                             Utah property                   (405)      ---
         ---       ---      Loss on early extinguishment
                             of debt                          ---       922
         ---       ---      Retired executive life
                             insurance benefit             (2,152)   (9,020)
      10,383     9,880      Depreciation and amortization  46,415    43,987
       1,229      (107)     Deferred income taxes           8,992     2,330
         868    (3,124)     Deferred pension and
                             postretirement benefits        2,034    (4,734)
      25,596    21,702                                     97,771    88,967

                          Changes in assets and
                           liabilities, net of effects
                           from acquisitions and
                           dispositions:
      (6,114)   (5,437)     Increase in accounts and notes
                             receivable                    (7,063)   (5,144)
      21,022     2,473      Decrease (Increase) in
                             inventory                     11,434    (5,249)
      13,363    (4,535)     Increase (Decrease) in
                             accounts payable              12,847      (857)
       1,323    (2,958)     Increase (Decrease) in
                             accrued liabilities           (9,764)   (3,655)
       5,779     1,295      Increase in income taxes
                             payable                        2,542     3,752
         (66)    3,036      Other, net                     (4,927)    3,297
      60,903    15,576      Cash provided by operating
                             activities                   102,840    81,111

                          Investment activities:
         ---       ---      Acquisition of Colonial
                             Craft, net of cash acquired      ---   (17,283)
         ---       ---      Proceeds from sale of Piper
                             Utah property                  2,832       ---
      (5,941)   (6,171)     Capital expenditures, net
                             of retirements               (28,693)  (34,271)
       6,442    26,111      Retired executive life
                             insurance proceeds             6,442    26,111
         302    (3,222)     Other, net                     (3,081)   (4,365)
         803    16,718    Cash used for investment
                           activities                     (22,500)  (29,808)

                          Financing activities:
     (50,000)  (16,000)     Bank revolver and note
                             repayments, net              (55,000)  (82,029)
         ---       ---      Redemption and purchase of
                             subordinated debentures          ---    (1,314)
         ---       ---      Purchases of Quanex common
                             stock                        (13,515)      ---
      (2,745)   (2,625)     Common dividends paid         (10,865)   (9,637)
       2,354     3,232      Issuance of common stock, net   5,163    33,948
         (38)       42      Other, net                     (2,298)   (3,561)
     (50,429)  (15,351)   Cash used for financing
                           activities                     (76,515)  (62,593)

      11,277    16,943    Increase (decrease) in cash       3,825   (11,290)

      10,831     1,340    Beginning of period cash and
                           equivalents                     18,283    29,573

     $22,108   $18,283    End of period cash and
                           equivalents                    $22,108   $18,283


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

SOURCE Quanex Corporation

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