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Quanex Announces Fiscal Second Quarter 2004 Results

Reports Record Second Quarter Net Sales and Earnings; Acquisitions Enhance the Company's Earnings Outlook; Closed Its $125 Million 2.5% Convertible Debenture Offering on May 5, 2004

HOUSTON, Jun 3, 2004 /PRNewswire-FirstCall via COMTEX/ -- Quanex Corporation (NYSE: NX) announced fiscal second quarter results for the period ending April 30, 2004, which included three months results from the Company's acquisitions of MACSTEEL Monroe and TruSeal Technologies. Net sales were a record $406.0 million in the quarter, up 60% over a year ago, with net sales from the two acquisitions totaling $100.6 million. Demand at the Company's Vehicular Products and Building Products segments was very strong and backlogs for the third quarter remain at high levels. Record net income of $11.5 million was up 22% compared to last year's second quarter. Diluted earnings per share were $.69, the Company's best-ever second quarter figure. MACSTEEL Monroe and TruSeal contributed about $.21 (after interest expense) to diluted earnings per share in the second quarter.

Net sales for the second quarter 2003 were $254.6 million. Net income and diluted earnings per share for the second quarter 2003 were $9.4 million and $.58, respectively.

Highlights

Raymond A. Jean, chairman and chief executive officer stated, "We delivered to our investors record second quarter earnings resulting from: (1) very strong customer demand, (2) accretive acquisitions, (3) overhead reductions and (4) ongoing company-wide lean initiatives. Runaway steel scrap costs finally abated in April, when we experienced a $45 per ton drop in MACSTEEL's overall raw material costs compared to March. Margins, however, were significantly compressed during February and March. North American light vehicle builds in the Company's second quarter were up about 5% over the year ago period. Heavy duty truck builds continued to gain momentum during our quarter, with builds up some 50% over a year ago. Both housing starts and remodeling activity remained remarkably strong through the period, which allowed the Building Products segment to post excellent results," Jean said.

"During the quarter, we made excellent progress with the integration of MACSTEEL Monroe and TruSeal Technologies. Both businesses are exceeding expectations and their long term earnings potential remains excellent. A key metric we use in our acquisition screen is the ability of the acquired company to exceed our weighted average cost of capital by the end of its third year. On an annualized basis, TruSeal already crossed that threshold, and we expect MACSTEEL Monroe to hit that target by year-end. Our previous 2004 earnings guidance for the two acquisitions, based on 10 months expected results, was $.40 to $.50 per diluted share. However, with the ongoing strength we see in our two target markets, we believe a range of $.60 to $.70 per diluted share for the two acquisitions is now more appropriate for 2004," continued Jean.

"We continue to make excellent progress in managing our working capital. A metric we use to track our progress is the conversion cycle, which is the sum of inventory days, plus receivable days, less days payable, all based on average daily sales. For the second quarter, the conversion cycle improved to 45 days from 55 days in the year ago quarter, an 18% improvement," 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 our first two quarters this year, our scrap costs, particularly steel scrap, have risen dramatically, impacting our inventory valuation based on the LIFO method. Accordingly, for the second quarter, we booked a $2.0 million charge to operating income on the assumption that year-end 2004 inventories will have a higher valuation compared to year-end 2003," said Jean.


     Quarterly Financials  ($ in millions, except per share data)
                         2nd qtr 2004    2nd qtr 2003    Inc/dcr

     Net Sales                 $406.0           254.6        60%
     Operating Income            19.8            14.9        33%
     Net Income                  11.5             9.4        22%

     EPS: Basic                 $ .70           $ .58        21%
     EPS: Diluted                 .69             .58        19%


    Segment Commentary

     VEHICULAR PRODUCTS  ($ in millions)
                                 2nd qtr 2004     2nd qtr 2003
     Net Sales                         $225.3           $118.0
     Operating Income                    13.5             14.3

The Vehicular Products segment is comprised of MACSTEEL, including the recently acquired MACSTEEL Monroe operation, 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 very robust levels during the quarter and MACSTEEL's operations ran close to their rated capacity. Backlogs in the third quarter remain healthy, although light vehicle inventories at the retail level are a concern. Our Vehicular Products segment also benefited from excellent heavy duty truck production during the second quarter, which continues to outpace year ago figures by nearly 50%.

Excluding Monroe's results, MACSTEEL's shipments were up about 14% for the quarter over the year ago quarter, while operating income was down some 34% because of lower operating margins. Rapidly increasing steel scrap costs were a major issue during the second quarter as average raw material costs were up about 25% for the January to March period compared to December.

However, several favorable developments occurred late in our second quarter. MACSTEEL experienced a significant drop in raw material costs in April, down some $45 per ton from March levels. MACSTEEL also adjusted the quarterly formula-based steel scrap surcharge, effective April 1, to more accurately reflect the higher costs we experienced in the January through March period. These two actions, along with productivity gains and high value added product sales, enabled us to recover some margin during April," Jean said.

"While Piper Impact continued to struggle with the reduction of base business during the quarter, we did benefit from both lower manufacturing costs and new business opportunities, which allowed us to report positive operating earnings for the quarter. Although air bag component sales fell again in the quarter, Piper continued to experience improvement in other markets. Earlier this quarter, we announced both a restructuring plan for Piper, which is now being executed, as well as our intention to sell the business," said Jean.


     BUILDING PRODUCTS  ($ in millions)
                                 2nd qtr 2004     2nd qtr 2003
     Net Sales                         $180.7           $136.6
     Operating Income                    12.1              4.2

The Building Products segment is comprised of 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 results, reported very strong sales for the quarter, in part due to the relatively mild winter season experienced by our customers, which in turn allowed for an early start to the Spring building season," said Jean. "Housing starts and remodeling activity remained higher than expected throughout the quarter and customer demand is expected to again be strong in our third quarter."

"Nichols Aluminum continues to improve with both sales and operating income up markedly from the year ago quarter. Shipments remained strong to our building and construction customers and demand in our other aluminum markets continued to pick up momentum. The Golden facility, which supplies food packaging and container products, also reported good customer activity in key market niches. Nichols has an excellent backlog of business and customer demand in the capital equipment, service center, and transportation markets continues to improve. The division successfully pushed through higher prices to help offset increases in material costs, while production efficiency gains continued to benefit the bottom line significantly," said Jean.

Outlook

Demand in the Company's two target markets, vehicular products and building products, remains strong. With an improving economy and still very favorable interest rates, Quanex expects robust business activity in its two business segments through the remainder of the fiscal year.

In the Company's Vehicular Products segment, overall business activity from now through year-end appears excellent. 2004 North American light vehicle builds are expected to remain flat to last year's 16+ million builds, and a healthy increase in heavy truck builds, now estimated to be up 35% to 40% over last year's builds, will serve to fill any gaps in the segment's robust demand outlook. Excluding Monroe's results, MACSTEEL expects to deliver significantly higher third quarter earnings compared to third quarter 2003 and second quarter 2004 results due to lower material costs and a higher April 1 steel scrap surcharge, which remains in effect until July 1.

In the Company's Building Products segment, the market drivers remain positive and order activity remains brisk. Housing starts for 2004 are expected to moderate slightly from last year's record 1.86 million units, while remodeling expenditures, which the Company believes account for about one half of the segment's sales, are also expected to remain at healthy levels. Quanex expects its Engineered Products division to deliver excellent operating results in the third quarter. At Nichols Aluminum, London Metal Exchange ingot prices and scrap prices are expected to remain flat to down slightly for the third quarter, a positive for Nichols, while selling prices continue to improve.

Taken together, Quanex's sales and earnings outlook for the remainder of the year remains very favorable. Accordingly, for its fiscal third quarter and fiscal year 2004, the Company expects to report diluted earnings per share within a range of $1.00 to $1.20 and $3.25 to $3.75 respectively.

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 in the second fiscal quarter 2004 would have reduced net income by about $543,000 and diluted earnings per share by $.03.

On March 31, 2004, Quanex announced its plans for restructuring Piper Impact and for the sale of the business. The Company stated that while Piper Impact continued to generate positive cash flow, it became necessary to idle one of the division's two facilities because of an ongoing drop in its traditional business. Piper's market focus is no longer aligned with Quanex's strategic direction of serving the vehicular products and building products markets, and for that reason, will be sold.

On May 11, 2004, the Company announced it sold $125 million 2.5% convertible senior debentures. Proceeds from the sale of debentures were used to repay a portion of the amounts outstanding under its revolving credit agreement and for general corporate purposes.

Dividend Declared

The Board of Directors declared the Company's quarterly cash dividend of $.17 per share on the Company's common stock, payable June 30, 2004 to shareholders of record on June 15, 2004.

Corporate Profile

Quanex is a $1.4 billion industry-leading manufacturer of value-added engineered materials and components serving the Vehicular Products and Building Products markets.

Financial Statistics as of 4/30/04

Book value per common share: $28.28; Total debt to capitalization: 32.08%; Return on invested capital: 8.31%; Return on common equity: 10.07%; Actual number of common shares outstanding: 16,438,490

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                                  Six months ended
            April 30,                                           April 30,
        2004        2003                                    2004        2003

     $405,993    $254,610  Net sales                     $687,149    $484,119
      354,222     213,773  Cost of sales                  599,308     407,898
       17,578      14,340  Selling, general and            30,686      27,595
                            administrative expense
       14,419      12,027  Depreciation and amortization   27,149      24,041
          ---        (405) Gain on sale of land              (454)       (405)

       19,774      14,875  Operating income                30,460      24,990
       (1,831)       (674) Interest expense                (2,756)     (1,724)
          382         431  Other, net                         822       1,965

       18,325      14,632  Income before income taxes      28,526      25,231
       (6,781)     (5,267) Income tax expense             (10,555)     (9,083)

     $ 11,544    $  9,365  Net income                    $ 17,971    $ 16,148

                           Weighted average common
                            shares outstanding:
       16,423      16,064  Basic                           16,370      16,238
       16,690      16,286  Diluted                         16,639      16,470

                           Earnings per common share:
     $   0.70    $   0.58  Basic                         $   1.10    $   0.99
     $   0.69    $   0.58  Diluted                       $   1.08    $   0.98

     $   0.17    $   0.17  Cash dividends per share      $   0.34    $   0.34


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

       Three months ended                                  Six months ended
            April 30,                                           April 30,
        2004        2003                                    2004        2003
                           Net sales:
     $225,254    $118,018     Vehicular Products         $366,233    $226,950
      180,739     136,592     Building Products           320,916     257,169
     $405,993    $254,610        Net sales               $687,149    $484,119

                           Operating income:
     $ 13,506    $ 14,336     Vehicular Products         $ 22,186    $ 24,223
       12,071       4,218     Building Products            17,582       8,385
       (5,803)     (3,679)    Corporate and Other          (9,308)     (7,618)
     $ 19,774    $ 14,875        Operating Income        $ 30,460    $ 24,990


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

            April 30,                                          October 31,
        2004        2003                                    2003        2002
                           Assets
     $  5,290    $    806  Cash and equivalents          $ 22,108    $ 18,283
      195,813     125,917  Accounts and notes             123,185     116,122
                            receivable, net
      139,683     105,991  Inventories                     79,322      90,756
       13,791      12,398  Other current assets             8,116      10,640

      354,577     245,112     Total current assets        232,731     235,801
      398,573     343,980  Property, plant and            335,904     353,132
                            equipment, net
      137,756      66,436  Goodwill, net                   66,436      66,436
       28,718       2,813  Intangibles, net                 2,755       2,870
       30,990      32,113  Other assets                    28,037      30,901

     $950,614    $690,454  Total assets                  $665,863    $689,140

                           Liabilities and stockholders'
                            equity
     $143,226    $ 83,763  Accounts payable              $ 89,435    $ 76,588
       46,460      38,800  Accrued liabilities             39,209      48,973
        6,400       1,311  Income taxes payable             7,381       4,839
           16       1,375  Other current liabilities           46       3,970
        3,751         424  Current portion of long-term     3,877         434
                            debt

      199,853     125,673     Total current liabilities   139,948     134,804
      215,817      81,694  Long-term debt                  15,893      75,131
        2,299       7,048  Deferred pension credits         8,323       4,960
        7,782       8,182  Deferred postretirement
                            welfare benefits                7,845       7,928
       44,005      33,064  Deferred income taxes           34,895      29,210
       15,938      13,997  Other liabilities               13,800      15,712

      485,694     269,658     Total liabilities           220,704     267,745
      464,920     420,796     Total stockholders' equity  445,159     421,395

     $950,614    $690,454  Total liabilities and         $665,863    $689,140
                            stockholders' equity


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

       Three months ended                                  Six months ended
            April 30,                                           April 30,
        2004        2003                                    2004        2003
                           Operating activities:
     $ 11,544    $  9,365     Net income                 $ 17,971    $ 16,148
                              Adjustments to reconcile
                               net income to cash
                               provided by operating
                               activities:
          ---        (405)       Gain on sale of land        (454)       (405)
       14,564      12,114        Depreciation and          27,402      24,221
                                  amortization
        3,059       2,601        Deferred income taxes      4,560       3,855
        1,312       4,902        Deferred pension and
                                  postretirement benefits  (6,087)      2,342

       30,479      28,577                                  43,392      46,161
                              Changes in assets and
                               liabilities, net of
                               effects from acquisitions
                               and dispositions:
      (47,802)    (22,207)       Increase in accounts and (49,592)     (9,795)
                                  notes receivable
      (14,263)     (5,194)       Increase in inventory    (20,679)    (15,235)
       25,500       4,544        Increase in accounts      31,870       7,175
                                  payable
       (1,180)       (712)       Increase (Decrease) in     1,200     (10,173)
                                  accrued liabilities
         (640)     (5,869)      Decrease in income         (1,127)     (3,528)
                                 taxes payable
        2,309      (1,315)       Other, net                   231      (4,791)

       (5,597)     (2,176) Cash provided by (used for)
                            operating activities            5,295       9,814
                           Investment activities:
       17,340         ---        Acquisitions , net of   (214,573)        ---
                                  cash acquired
          ---       2,832        Proceeds from sale           637       2,832
                                  of land
       (4,099)     (6,292)       Capital expenditures,     (8,265)    (14,812)
                                  net of retirements
           44      (1,857)       Other, net                  (558)     (3,004)

       13,285      (5,317) Cash provided by (used for)   (222,759)    (14,984)
                            investment activities

                           Financing activities:
      (10,000)     11,700        Bank revolver and        200,000       6,700
                                  note repayments, net
          ---      (6,804)       Purchases of Quanex          ---     (13,515)
                                  common stock
       (2,802)     (2,741)       Common dividends paid     (5,591)     (5,379)
          508         764        Issuance of common         7,223       1,574
                                  stock, net
         (302)        (45)       Other, net                (1,011)     (1,687)

      (12,596)      2,874  Cash provided by (used for)    200,621     (12,307)
                            financing activities
           16                    Effect of exchange rate       25
                                  changes on cash
                                  and equivalents

       (4,892)     (4,619) Decrease in cash               (16,818)    (17,477)

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

     $  5,290    $    806  End of period cash            $  5,290    $    806
                            and equivalents

SOURCE Quanex Corporation

Financial, Jeff Galow, 1-713-877-5327
Media, Valerie Calvert, 1-713-877-5305
both of Quanex Corporation

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