Quanex Corporation - Company Profile, Information, Business Description, History, Background Information on Quanex Corporation

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History of Quanex Corporation

Quanex Corporation is a leading U.S. manufacturer of specialized metal products made from carbon and alloy steel and aluminum. Quanex operated through four primary divisions going into the mid-1990s: hot-rolled steel bars; cold-finished steel bars; aluminum products; and steel tubing. Its products were purchased by markets ranging from transportation and defense to energy and construction. After faltering through the early 1980s, Quanex regrouped and established itself as a leader in steelmaking technology and efficiency.

Quanex was incorporated in 1927 in South Lyon, Michigan, as the Michigan Seamless Tube Company. Under the leadership of William N. McMunn, the fledgling start-up profited by reworking used boiler and condenser tubes for resale. Success in that business prompted the company to build a processing mill in 1929 that could produce seamless tubing from solid steel billets. Michigan Seamless managed to survive the 1929 stock market crash and even managed to increase its business during the Great Depression. Indeed, the enterprise began producing tubing made from steel alloys in 1933 and by 1935 was generating more than $1 million in annual sales.

After the Depression, Michigan Seamless enjoyed a sales boom as a result of U.S. government purchases during World War II. Founder McMunn died in 1941 and was replaced by board member W. A. McHattie, who oversaw the company's war effort and would lead the enterprise into the 1970s. Michigan Seamless was a major supplier to the armed forces during the war, and was distinguished as the only company in the nation to be awarded five Army-Navy "E" awards for production and quality of aircraft tubing. Demand for the company's steel products temporarily declined immediately after the war. But the postwar economic boom soon supplanted that market and Michigan Seamless resumed its hearty growth. In 1946, in fact, the company installed a new furnace and processing mill in anticipation of demand growth.

Throughout the 1950s and 1960s Michigan Seamless enjoyed steady gains. Besides expanding its original South Lyon facilities, it also branched out into other regions and markets. In 1956, for example, Gulf States Tube Corporation, an affiliate of Michigan Seamless, was started in Rosenberg, Texas. That division would give Michigan Seamless an important foothold in the oil and gas tubing market. Importantly, Michigan Seamless acquired Standard Tube in 1965, an acquisition that gave Michigan Seamless new operations in Detroit and Shelby, Ohio. Shortly after the purchase, the company was listed on the New York stock exchange. Other acquisitions followed, including the purchase of U.S. Broach and Machine Company in 1968. By that time, Michigan Seamless was making and processing steel in several states and had diversified into a number of different industries.

During the early 1970s Michigan Seamless began developing plans to build a state-of-the-art steel mill in Jackson, Michigan. The MacSteel mill, as it was called, would eventually become a model for other U.S. producers of high-grade engineered steel--such steel was purchased by manufacturers for use in demanding applications like producing ball bearings and camshafts. MacSteel would also form the basis of what would become the company's primary operating division. Shortly after announcing construction of the MacSteel plant, McHattie died in 1972. He was replaced by Carl E. Pfeiffer, a Detroit native and a graduate of Michigan State University. An engineer by training, Pfeiffer joined Michigan Tubeless in 1953 and quickly worked his way to president of the company in 1971 before assuming the chief executive role in 1972.

Pfeiffer oversaw the opening of the MacSteel plant in 1974 and also helped to engineer the acquisition of Viking Metallurgical in 1976. Reflecting the company's growing market and product diversity, Pfeiffer changed the name of the company in 1977 from Michigan Seamless Tube Company to Quanex Corporation. Also in 1977, Quanex moved its headquarters from Michigan to Houston, Texas. Both the name change and the move mirrored the company's growing emphasis on the bustling oil and gas industry, which was demanding large amounts of tubing and other steel goods to build wells and other infrastructure. Indeed, during the energy crises of the late 1970s and early 1980s, consumption of steel by the energy industry boomed and producers like Quanex scrambled to keep pace with spiraling demand.

Encouraged by booming sales to the energy sector, Quanex set its sites on that market in the late 1970s. It purchased the operations of Acquired Pipe Specialties, Inc., of Houston in 1978, for example, before acquiring Leland Tube Company of New Jersey in 1979. At the same time, Quanex jettisoned its comparatively sluggish Standard Tube Division and the U.S. Broach and Machine Company, both of which did not complement the company's energy industry focus. As sales surged, Quanex expanded. It invested heavily to upgrade its MacSteel plant in Michigan, and even constructed a new welded-oil-tubing manufacturing facility in 1980 in Bellmont, Texas--closer to its primary customer base. In 1981, Quanex completed construction of a heat treating facility in Indiana, and announced an ambitious plan to build a second MacSteel plant in Arkansas. The MacSteel plant would be the centerpiece of Quanex's thriving energy-related steel business, which was accounting for about 50 percent of the company's total revenues by 1981.

Quanex rode into the 1980s on a wave of success that had buoyed the company for more than a decade. Indeed, during the 1970s Quanex achieved average annual sales gains of nearly 22 percent while earnings grew at a compounded rate of nearly 30 percent. Satisfied investors enjoyed fat stock price gains and hefty dividends, and it looked as though the expanding Quanex would continue to excel into the mid-1980s. In 1981, in fact, Quanex posted a record $31.4 million profit. Some of that excess cash was used in 1982 to purchase LaSalle Steel Company, an addition to the company's Indiana-based holdings. Meanwhile, plant expansions and construction of the new MacSteel plant continued.

To the surprise of executives at Quanex and many other companies, the energy industry collapsed in 1982. And it brought down with it several other steel-consuming industries including capital equipment and automotive businesses. Quanex managers were stunned. The company's total order backlog plunged from a whopping $139 million going into 1982 to about $60 million by the year's end. Surplus steel lay rusting on Quanex's lots, forcing Quanex to eventually take a $65 million write-off related to its oil-tubing inventories. The company finished the year with a depressing $34.5 million loss. Flustered Quanex executives quickly exited the depressed market for what is known as end-finished oil tubular goods, and postponed construction on the new MacSteel plant for one year.

Quanex was faced with increasingly intimidating debt obligations as its profits plummeted. Under pressure from investors, the company reorganized and initiated an aggressive campaign to cut costs and reduce its dependency on gasping energy markets. Toward that end, Quanex halted operation at its Oil Country Tubular division late in 1984 and sold a fabricating unit, among other moves. Quanex did, however, resume construction of the Arkansas MacSteel plant in 1984 using funds gleaned from a February 1984 bond offering--Quanex floated $125 million worth of junk bonds in an effort to scale back its massive $176-million debt load. The MacSteel plant opened in 1985, but would operate in the red for a few years and drag down the company's bottom line.

As Quanex sold off divisions, revenues dropped&mdashø about $400 million in 1984 and then to a low of $297 million in 1985. Despite major hurdles, however, the company continued to post profits during the mid-1980s, with the exception of 1986. It used the surplus to pay off its long-term debt, which shrank to about $40 million in 1988. Meanwhile, Pfeiffer and company slashed costs, reorganized to concentrate on specialty and high-margin steel products, and worked to diversify away from the oil business. The number of employees at the company's headquarters was cut from about 100 in the early 1980s to about 30 by the end of the decade, and the percentage of Quanex's sales attributable to the energy industry shrank from half to about seven percent. Quanex made up for that lost market share by entering markets including construction, defense, agriculture, transportation, and others.

Besides expanding into new end markets, Quanex also diversified geographically with sales in Europe and Japan. Furthermore, to divert another inventory disaster such as that suffered in 1982, the company adopted a policy of holding almost no inventory; instead, almost every batch of steel was made to order and was even barcoded with the owner's name and address prior to delivery. Importantly, Quanex began to concentrate on efficiency and customer service as a means of capturing market share and increasing its competitiveness in the increasingly global steel industry. It installed state-of-the-art equipment in its processing mills and shaped its compensation system to promote quality and productivity; workers were paid a bonus according to how much steel they shipped out, less any defective steel that was returned.

Quanex's impressive productivity gains during the 1980s and early 1990s were made possible by its integration of mini-mill technology. During the 1980s, mini-mill steelmaking factories, which use scrap and such techniques as continuous casting, emerged as stellar performers in the steel industry. Indeed, the mini-mill process was used by industry powerhouses such as Nucor to undercut traditional steel manufacturers in commodity steel markets. Quanex added a twist to the mini-mill revolution when it utilized mini-mill techniques to create high-grade, engineered steel. The result was that Quanex was able to produce high-profit steel at a very low cost. By the early 1990s, in fact, Quanex was churning out nearly defect-free steel that required only 1.9 man-hours of labor per ton to produce, as compared to about four man-hours required to create a ton of steel in a traditional, or integrated, steel mill.

As Quanex implemented its unique new strategy, its financial performance rebounded. Sales shot up from $345 million in 1987 to $463 million in 1988, and then to $502 million in 1989. In 1990, moreover, Quanex generated $650 million in sales and nearly $30 million in net income. By that time, Quanex's debt burden had eased and several banks had even approached CEO Pfeiffer about the possibility of a leveraged buyout. Instead, Pfeiffer elected to pour the money back into the company to increase its diversity and to improve productivity. To that end, in 1989 Quanex purchased Nichols-Homeshield for $105 million. Nichols manufactured aluminum sheet for gutters, downspouts, and windows. Quanex invested $60 million to build a new plant for the company and expected to use the new division to penetrate the market for aluminum.

After elevating Quanex to a member of the Fortune 500 in 1991, Pfeiffer relinquished his chief executive duties in 1992 to Robert C. Snyder, an engineer. The 53-year-old Snyder had been serving as president of Leland Tube Co. when it was acquired by Quanex in 1979. After filling key executive slots at several Quanex subsidiaries, he was tapped as Pfeiffer's successor. Snyder came into the job with goals similar to those established by his predecessor. Unfortunately, he also assumed the helm during an economic downturn that was suppressing the overall steel market. Quanex's sales slipped to $572 million in 1992, although the company continued to post relatively strong operating profits. Sales began to pick up the following year, however, and in 1994 reached the record level of $699 million. 1994 earnings reflected big gains in the new Nicols-Homeshield division, as well as recovering steel prices.

Going into the mid-1990s, Quanex was serving four major markets: industrial machinery and capital equipment (32 percent of sales); transportation (29 percent); aluminum products (29 percent); and energy (nine percent). And it was operating its subsidiaries through four major divisions: hot-rolled steel bars; cold-finished steel bars; aluminum products; and steel tubing. Rising steel prices and increased market share in 1995 boded well for Quanex in the short term. Likewise, low debt, ongoing investments in productivity and quality initiatives, and geographic and product diversity suggested long-term growth and stability for the enterprise.

Principal Subsidiaries: MACSTEEL; LaSalle Steel Company; Nichols-Homeshield; Quanex Tube Group.

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Further Reference

Byrne, Harlan S., "A Specialty Rebound: Quanex Emerges from Steel Slump," Barron's, June 6, 1988, pp. 38--40.Cleary, W. F., "Quanex Announces Management Changes," Business Wire, September 2, 1992.Cleary, W. F., and C. A. Meador, "Quanex Corp. Announces Financial Results," Business Wire, May 30, 1990.Galow, Jeff, "Quanex Sells Bellville Tube Plant," PR Newswire, April 15, 1993.Jacobs, Bill, "Quanex Profits Get Boost from Q-C," Quad-City Times, December 10, 1994, p. M5.Nulty, Peter, "The Less-Is-More Strategy," Fortune, December 2, 1991, p. 102.

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