Quanex Building Products Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended October 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; Q4 figures are noted separately below. Quanex makes components primarily for the window and door industry, including insulating-glass spacers, vinyl profiles, screens, and metal and wood components.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $645.5 million | $595.4 million |
| Operating income | $24.7 million | $14.3 million |
| Operating margin | 3.8% | 2.4% |
| Continuing-operations income | $15.6 million | $8.3 million |
| Net income | $16.1 million | $29.2 million |
| Diluted EPS | $0.47 | $0.78 |
| Cash from operating activities | $67.1 million | $20.8 million |
| Capital expenditures | $30.0 million | $33.8 million |
| Cash and equivalents at year-end | $23.1 million | $120.4 million |
| Total debt at year-end | $57.4 million | $0.8 million |
FY2015 sales rose 8%; cost of sales grew 7%, and SG&A grew 5%. Gross margin was approximately 22.7%, compared with 22.0% in FY2014. Net income declined because FY2014 included a $24.1 million after-tax gain from the sale of Nichols Aluminum; continuing-operations income improved year over year.
In Q4 FY2015, sales were $195.5 million versus $163.8 million a year earlier; operating income was $16.8 million versus $5.3 million, and continuing-operations income was $9.9 million versus $3.0 million.
Cash from operations increased substantially, with working capital of $84.0 million at year-end. Investing activities used $160.1 million, primarily reflecting the HLP acquisition; financing activities used $4.6 million. The company paid $0.16 per share in dividends during FY2015 and completed its $75 million repurchase authorization.
Business changes and comparisons
- Quanex acquired UK-based Flamstead Holdings (HLP) on June 15, 2015, for $131.7 million cash, net of acquired cash, and assumed $7.7 million of debt; contingent consideration was estimated at $10.3 million. HLP contributed $42.2 million in sales and $1.5 million in net income from acquisition through year-end. Its purchase-price allocation remained preliminary.
- Excluding HLP, management reported sales of $603.3 million and operating income of $23.3 million. Comparable sales growth was 0.8%, which management said trailed the 6.5% growth in window shipments. Foreign exchange reduced sales by $7.8 million; lower oil surcharges reduced revenue by $3.2 million, with lower related input costs partially offsetting the margin effect.
- Engineered Products reported $603.3 million in sales and $52.9 million in operating income; International Extrusion, consisting of HLP, reported $42.2 million in sales and $1.4 million in operating income. Corporate and other costs produced a $29.6 million operating loss.
- On November 2, 2015, after fiscal year-end, Quanex acquired Woodcraft, a cabinet-door and components maker, for $245.9 million cash, net of acquired cash. This was a material subsequent event and is not included in FY2015 operating results.
Liquidity, debt, outlook and risks
At October 31, 2015, Quanex had $50.0 million outstanding on its former revolver, $6.9 million in capital leases and other debt, and $86.6 million of availability under that facility. It reported compliance with its then-current covenants. To fund Woodcraft and refinance the former facility, Quanex entered new senior secured facilities on November 2, 2015: a $310 million term loan and a $100 million asset-based revolver. The term loan matures in 2022 and carries a 5.25% LIBOR margin, subject to a 1% LIBOR floor; the new facilities include leverage and fixed-charge coverage covenants and an $8 million annual dividend limit. Management expected operating cash flow and facility borrowings to support operations, capital spending, dividends and debt service.
Management was optimistic about near-term growth and expected Quanex’s comparable growth rates to converge with market growth in FY2016, while describing its outlook as more conservative than industry forecasts. It cited the continuing U.S. housing recovery, UK growth opportunities, European energy-efficiency standards, acquisitions, and manufacturing efficiency and customer service initiatives. No formal quantified company earnings or revenue guidance is provided in the filing.
- Results are exposed to housing and remodeling cycles, seasonality, customer concentration and customer pricing leverage; two customers each represented more than 10% of FY2015 sales (14% and 11%).
- Raw-material prices, pass-through timing and surcharges can affect margins. Currency movements also affected FY2015 results; the company noted an unhedged foreign-currency exposure associated with HLP financing.
- Quanex recorded a $1.1 million year-end accrual for spacer-migration claims involving certain German products manufactured before March 2014. It said it could not estimate potential liability for unasserted claims.
- Acquisition integration, goodwill and intangible-asset valuation, warranty claims, environmental compliance, manufacturing interruptions and credit-facility covenants are additional risks. Management reported no current environmental remediation activities and did not expect current litigation to have a material adverse effect.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. HLP was excluded from the internal-control assessment; Quanex expected to implement controls there during FY2016.
Important facts for investors to verify
- Woodcraft’s integration, final purchase-price allocation, contribution to earnings and cash flow, and realized seasonality benefits.
- Post-acquisition debt levels, interest expense, borrowing-base availability, covenant headroom and capacity to meet required repayments.
- Whether core sales growth and margins improve, including the effects of foreign exchange, raw-material pass-throughs and customer pricing.
- Potential additional spacer-migration claims and any change to the $1.1 million accrual.
- HLP earn-out exposure and the completion of HLP purchase accounting and internal-control remediation.