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Quanex Announces Fiscal Second Quarter 2003 Results; Best-Ever Second Quarter Sales From Continuing Operations; Company Buys Back 221,100 Common Shares

HOUSTON, May 29 /PRNewswire-FirstCall/ -- Quanex Corporation (NYSE: NX) announced fiscal second quarter results for the period ending April 30, 2003. Net sales were a record for the quarter at $254.6 million, 2% higher than a year ago and primarily attributable to slightly higher volumes and moderate price increases at MACSTEEL and Nichols Aluminum. Income from continuing operations was down 12% to $9.4 million compared to last year's record second quarter and resulted from decreased margins and profits in Quanex's non-core businesses. The Company commented that MACSTEEL reported good results for the quarter, but that demand was much softer than expected at its Engineered Products business due to a harsh winter season, which slowed its customers' activities in key market regions. Diluted earnings per share for the quarter were $.58. Income from continuing operations for the first six months of 2003 was $16.1 million, equal to the record set a year ago.

Net sales for the fiscal 2002 second quarter were $249.5 million. Net income and diluted earnings per share a year ago were $10.6 million and $.70, respectively.

Highlights

Regarding the Company's results, Raymond A. Jean, chairman and chief executive officer stated, "Second quarter results fell short of our expectations, and while we had a good quarter at MACSTEEL, severe winter weather in the Northeast and Midwest slowed construction activity and significantly impacted our door and window customers. Normally, we are ramping up our Engineered Products business early in the second quarter, but this year the spring thaw came much later and stronger order rates did not kick-in until recently.

"During the quarter, we also experienced production and quality problems at our Nichols Aluminum Alabama facility associated with the upgrade of our coating system, where painted coil was produced and shipped that did not fully meet our high quality standards," continued Jean. "Fortunately, production issues were resolved during the second quarter, painted coil demand is good and we expect painted sales for the third quarter at Alabama to exceed year ago levels.

"During the quarter, we purchased 221,100 shares of our outstanding common stock. With our positive long term outlook for our core businesses, look for us to continue buying back shares at today's prices," said Jean.

    Quarterly Financials  ($ in millions, except per share data)
                                    2nd qtr 2003   2nd qtr 2002
    Net Sales                         $ 254.6        $ 249.5
    Operating Income                     14.9           20.0
    Net Income                            9.4           10.6
    EPS: Basic                           $.58           $.77
    EPS: Diluted                         $.58           $.70

    Segment Commentary
    VEHICULAR PRODUCTS  ($ in millions)
                                    2nd qtr 2003   2nd qtr 2002
    Net sales:                        $ 118.0        $ 117.6
    Operating income:                    14.3           16.4

The Vehicular Products segment includes MACSTEEL, Piper Impact and Temroc Metals. The segment's main driver is North American light vehicle builds.

"Despite the fact that North American builds were down 4% for the fiscal second quarter versus a year ago, MACSTEEL experienced a good quarter with higher sales and operating income, clearly outperforming their market. Both sales and income were up over last year while operating margins remained the same. Solid operating performance, a richer mix and some price relief enabled MACSTEEL to overcome significant year-over-year scrap and energy cost increases. Toward the end of the second quarter, MACSTEEL's backlog dropped and we entered the third quarter with softer releases compared to last quarter and a year ago, consistent with reductions in the OEMs' recent build rates. Nevertheless, Phase VI, our value-added MACPLUS program, is essentially sold out and management is exploring opportunities to incrementally increase capacity," Jean said.

"Offsetting MACSTEEL's earnings improvement were operating losses at both Piper Impact and Temroc. Piper results were negatively affected from the demand erosion of its aluminum airbag components. The business, while posting a loss for the quarter, did report improved results over the prior two quarters, even with lower sales. Piper has made good progress in lowering the breakeven point over the last 12 months. While sales will be down significantly from 2002, Piper is on track to add about $10 million of new programs on an annualized basis. We also look forward to other programs now in the pipeline to begin kicking in later this year," said Jean.

     BUILDING PRODUCTS  ($ in millions)
                                    2nd qtr 2003   2nd qtr 2002
     Net sales:                       $ 136.6         $ 131.9
     Operating income:                    4.2             7.6

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

"Engineered Products results for the quarter were well below our expectations. Many of our larger door and window customers have strong positions in the Midwest and Northeast markets which were severely impacted by a long, wet and cold winter season. Our customers simply couldn't get any traction during this period, and in fact, business conditions remained slow until recently," said Jean.

"Nichols Aluminum results for the quarter had the benefit of strong volume, higher selling prices and improved spread versus a year ago, which was more than offset by the poor operating performance at the Alabama (NAA) finishing facility, which in turn negatively impacted margins for our Building Products segment. A capital project of about $2 million was approved last year to allow NAA to ramp up the capacity of its existing paint line. However, due to a number of unexpected problems, low quality painted coil was produced and shipped. During the second quarter, management changes were made, quality was restored, and we are currently working closely with customers sorting out remaining issues. We do not expect these production issues at NAA to impact third quarter results in a material way," continued Jean.

Outlook

The Company's two target markets are vehicular products and building products. North American light vehicle builds year-to-date are below year-ago levels, and the OEMs' calendar second quarter build rates are now projected to be 10% below last year. As a result, for the third quarter, the Company expects MACSTEEL to report slightly lower results compared to a year ago. Share gains, higher prices and scrap surcharges will be a plus in the third quarter compared to last year, but will be offset by lower volume and higher scrap costs. Demand is projected to rebound slightly later in the quarter.

Within the Building Products segment, the Company now expects Nichols to post flat sales and lower operating earnings for the third quarter. Rising scrap prices, with little change in mill finish selling prices, will negatively impact their results. Business activity at Engineered Products has returned to the healthy levels expected for this time of year and management anticipates third quarter results to be in line with a year ago. New housing starts for 2003 are expected to be down about 5% from last year while remodeling expenditures are expected to be in line with 2002.

Because of the current uncertainty in the economy, near term results cannot be easily forecasted. At this point, it is difficult to predict what North American light vehicle build rates will be for the remainder of 2003. In addition, the Company also experienced further tightening in spread due to tight scrap supplies, particularly for its aluminum scrap. Based on the factors discussed above, a broader earnings range is prudent. Therefore, the Company now expects its third quarter diluted earnings per share to be in the range of $.65 to $.80. For fiscal 2003, the Company now expects diluted earnings per share to be in the range of $2.65 to $2.90.

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. Expensing stock options would have reduced net income by about $378,000 and $325,000 for the second quarter of 2003 and 2002 respectively, and would have reduced diluted earnings per share by $.02 for both periods.

In December, 2002, the Company's Board of Directors approved a program to purchase up to one million shares (6%) of its outstanding common stock. During the second quarter, the Company purchased 221,100 shares at an average price of $30.72, and year-to-date, the Company has purchased 438,600 shares at an average price of $30.76.

Dividend Declared

The Board of Directors declared a quarterly cash dividend of $.17 per share on the Company's common stock, payable June 30, 2003 to shareholders of record on June 16, 2003.

Corporate Profile

Quanex is an industry-leading manufacturer of engineered materials and components for the vehicular products and building products markets.

Financial Statistics as of 04/30/03

Book value per common share: $26.25; Total debt to capitalization: 16.33%; Return on invested capital: 12.25%; Return on common equity: 14.01%; Actual number of common shares outstanding: 16,031,494

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 5 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 5 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 and below 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 website at www.quanex.com .


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

      Three months ended                                  Six months ended
          April 30,                                          April 30,
       2003        2002                                   2003        2002

      $254,610  $249,500      Net sales                 $484,119   $453,743
       213,368   204,371      Cost of sales              407,493    375,413
                              Selling, general and
        14,340    13,697       administrative expense     27,595     25,861
                              Depreciation and
        12,027    11,399       amortization               24,041     22,592
        14,875    20,033      Operating income            24,990     29,877
          (596)   (4,668)     Interest expense            (1,571)    (8,109)
           ---       803      Capitalized interest           ---      1,533
           353       446      Other, net                   1,812      1,844
        14,632    16,614      Income before income taxes  25,231     25,145
        (5,267)   (5,982)     Income tax expense          (9,083)    (9,053)
        $9,365   $10,632      Net income                 $16,148    $16,092

                              Weighted average common
                               shares outstanding:
        16,064    13,881        Basic                     16,238     13,665
        16,286    16,107        Diluted                   16,470     15,848

                              Earnings per common share:
         $0.58     $0.77      Basic                        $0.99      $1.18
         $0.58     $0.70      Diluted                      $0.98      $1.10
         $0.17     $0.16      Cash dividends per share     $0.34      $0.32


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

       Three months ended                                 Six months ended
          April 30,                                          April 30,
      2003         2002                                   2003        2002
                              Vehicular Products:
      $118,018  $117,640        Net sales               $226,950   $220,073
       $14,336   $16,356        Operating income         $24,223    $27,098

                              Building Products:
      $136,592  $131,860        Net sales               $257,169   $233,670
        $4,218    $7,643        Operating income          $8,385    $10,017

                              Corporate and Other:
                                Intercompany sales
          $---      $---         elimination                $---       $---
       $(3,679)  $(3,966)       Corporate charges        $(7,618)   $(7,238)

                              Total:
      $254,610  $249,500        Net sales               $484,119   $453,743
       $14,875   $20,033        Operating income         $24,990    $29,877


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

          April 30,                                          October 31,
       2003        2002                                   2002        2001
                              Assets
          $806    $3,898      Cash and equivalents       $18,283    $29,573
                              Accounts and notes
       125,917   113,290      receivable, net            116,122    109,706
       105,991    87,394      Inventories                 90,756     83,109
        12,398    14,636      Other current assets        10,640     14,490
       245,112   219,218        Total current assets     235,801    236,878

                              Property, plant and
       343,980   360,019       equipment, net            353,132    357,635
        66,436    66,726      Goodwill, net               66,436     59,226
        34,926    47,228      Other assets                33,771     43,892
      $690,454  $693,191      Total assets              $689,140   $697,631

                              Liabilities and
                               stockholders' equity
       $83,763   $87,051      Accounts payable           $76,588    $76,831
        38,800    49,735      Accrued expenses            48,973     50,659
         1,311     2,686      Income taxes payable         4,839      1,087
         1,375     4,035      Other current liabilities    3,970      5,593
                              Current portion of
           424       434       long-term debt                434        420
       125,673   143,941      Total current liabilities  134,804    134,590
        81,694   171,037      Long-term debt              75,131    219,608
         7,048     6,434      Deferred pension credits     4,960      7,962
                              Deferred postretirement
         8,182     7,811       welfare benefits            7,928      7,777
        33,064    31,761      Deferred income taxes       29,210     29,282
        13,997    17,277      Other liabilities           15,712     18,435
       269,658   378,261        Total liabilities        267,745    417,654
                                Total stockholders'
       420,796   314,930         equity                  421,395    279,977
                              Total liabilities and
      $690,454  $693,191       stockholders' equity     $689,140   $697,631


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

      Three months ended                                  Six months ended
           April 30,                                         April 30,
       2003        2002                                   2003        2002
                              Operating activities:
        $9,365   $10,632        Net income               $16,148    $16,092
                                Gain on sale of Piper
          (405)      ---         Utah property              (405)       ---
                                Depreciation and
        12,114    11,486         amortization             24,221     22,765
         2,601     1,071        Deferred income taxes      3,855      2,480
                                Deferred pension and
         4,902        59         postretirement benefits   2,342     (1,494)
        28,577    23,248                                  46,161     39,843
                                Increase in accounts and
       (22,207)  (20,414)        notes receivable         (9,795)    (1,715)
                                Decrease (Increase) in
        (5,194)      564         inventory               (15,235)    (1,887)
                                Increase in accounts
         4,544    21,411         payable                   7,175      9,556
                                Increase (Decrease) in
          (712)    5,139         accrued expenses        (10,173)    (1,922)
                                Increase (Decrease) in
        (5,869)      161         income taxes payable     (3,528)     1,599
        (1,315)    2,473        Other, net                (4,791)      (424)
                              Cash provided (used) by
        (2,176)   32,582       operating activities        9,814     45,050
                              Investment activities:
                                Acquisition of Colonial
                                 Craft, net of cash
           ---   (17,365)        acquired                    ---    (17,365)
                                Proceeds from sale of
         2,832       ---         Piper Utah property       2,832        ---
                                Capital expenditures,
        (6,292)   (8,819)        net of retirements      (14,812)   (20,109)
                                Cash used by other
        (1,857)     (171)        investment activities    (3,004)      (646)
                              Cash used by investment
        (5,317)  (26,355)      activities                (14,984)   (38,120)

                              Financing activities:
                                Bank borrowings
        11,700   (35,000)        (repayments), net         6,700    (40,000)
           ---    (7,029)       Prepayment of note payable   ---     (7,029)
                                Purchases of Quanex
        (6,804)      ---         common stock            (13,515)       ---
        (2,741)   (2,253)       Common dividends paid     (5,379)    (4,412)
                                Issuance of common
           764    18,093         stock, net                1,574     20,453
                                Cash used by other
           (45)   (1,318)        financing activities     (1,687)    (1,617)
                              Cash provided (used)
         2,874   (27,507)      by financing activities   (12,307)   (32,605)
        (4,619)  (21,280)     Decrease in cash           (17,477)   (25,675)
                              Beginning of period cash
         5,425    25,178       and equivalents            18,283     29,573
                              End of period cash and
          $806    $3,898       equivalents                  $806     $3,898

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

SOURCE Quanex Corporation

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