Quanex Corp.: Breaking Up Is Hard to Do

Engineered materials and components maker seeks to boost profits by splitting its core businesses.

Sometimes change is inevitable. Last year, Quanex Corp., a manufacturer of value-added engineered materials and components, knew changes would need to be made if its two core businesses continued to struggle amid slowdowns in North American car production and the U.S. housing sector. Ever since, the 2007 IW 50 Best Manufacturer has been involved in what it called a "strategic review" of its options, exploring alternatives for its building products group, and evaluating the possibility of separating the company's main businesses. Six months later, the company was ready to provide some answers.

On Nov. 19, the Houston-based manufacturer revealed plans for its building products business to be spun off to shareholders as a stand-alone company. The new entity, called Quanex Building Products, will be led by current Quanex chairman and CEO Raymond Jean, who will assume the same positions at the new company, along with Quanex's current senior leadership team. Once that is completed, Quanex has agreed to sell off its vehicular products business to Brazilian steelmaker Gerdau SA for $1.7 billion.

"Our vehicular products and building products businesses have different capital costs, processes, products and end markets, and we have concluded that these businesses will be better positioned for success as separate companies," said Jean in a Nov. 19 statement. "Gerdau will provide an excellent home for Quanex's vehicular products business as it continues to grow its steel presence in North America."

A couple weeks after the announcement, Quanex reported a 6% rise in fourth quarter net profits due in part to improving demand in the North American transportation market. It posted a net income of $41.6 million, compared with $39.2 million a year earlier, with net sales rising 5.7%. Vehicular products sales were up 14%, while sales in the building products business fell 6%. For 2008, Quanex said its Macsteel vehicular products unit expects shipped tons to be up slightly from 2007, with operating income of $140 million to $150 million. Net sales at its building products unit were expected to be down 5% compared with 2007 due to declines in new home construction.

In the midst of the monumental change for the company's infrastructure, Quanex's Nichols Aluminum plant in Davenport, Iowa, was recently honored with a "Return on Environment Award," which General Electric Water & Process Technologies presents to customers that successfully demonstrate striking a balance between environmental challenges and industrial demands of a global economy.

Quanex Corp.
At A Glance

Quanex Corp.
Houston, Texas
Primary Industry: Primary Metals
Number of Employees: 4,200
2006 In Review
Revenue: $2.03 billion
Profit Margin: 7.88%
Sales Turnover: 1.69
Inventory Turnover: 11.73
Revenue Growth: 3.23%
Return On Assets: 14.56%
Return On Equity: 24.39

"The [Nichols Aluminum Davenport] team, through collaborative efforts with GE, was able to save millions of gallons of water and $60,000 in wastewater treatment costs during the year," said Tom Brackmann, president of Nichols Aluminum, which consists of two plants in Davenport, one in Lincolnshire, Ill., and another in Decatur, Ala. "Only about 1% of GE customers qualify for the award, which speaks volumes for the environmental advances our business has made."

On Wall Street, news of the sale and the spinoff were fairly well received, driving shares of Quanex up more than 25% the day after the announcement. Quanex has traded steadily above $50 per share ever since, seemingly breaking a downward trend that began in July 2007, when shares were knocked off a 52-week high and dragged down more than 30% in a matter of four months.


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