Quanex Corp. announced record net income of $11.5 million on record net sales of $406.0 million for the fiscal second quarter ending April 30, 2004. Results included three months results from the company's acquisitions of MacSteel Monroe and TruSeal Technologies.

Record net income of $11.5 million represents a 22% increase compared to net income of $9.4 million for last year's second quarter. Diluted earnings per share of $.69, the company's best-ever second quarter figure, compare to diluted earnings per share of $.58 for the second quarter 2003. MacSteel Monroe and TruSeal contributed about $.21 (after interest expense) to diluted earnings per share in the second quarter.

Net sales, a record $406.0 million, represent a 60% increase over net sales of $254.6 million a year ago. Net sales from the two acquisitions totaled $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.

Comments—Raymond A. Jean, Chairman and CEO 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.

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.

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