Quanex Building Products Corporation — Form 10-Q
Reporting period: Fiscal second quarter and six months ended April 30, 2013, compared with the corresponding 2012 periods. Unaudited filing, dated June 7, 2013.
Business context
Quanex makes engineered products for the window and door industry and aluminum sheet products for building markets. Its two reporting segments are Engineered Products and Aluminum Sheet Products. Results are exposed to housing construction and repair-and-remodel demand, aluminum and scrap prices, and raw-material costs.
On December 31, 2012, Quanex acquired substantially all of Alumco’s assets, including its aluminum screen business, for approximately $22.4 million in cash. The acquisition expanded Engineered Products; its contribution was not material to consolidated results, according to the company.
Financial performance
| Metric | Three months ended Apr. 30, 2013 | Six months ended Apr. 30, 2013 | Prior-year comparison |
|---|---|---|---|
| Net sales | $232.5 million | $418.2 million | Up 19.6% and 17.5%, respectively |
| Operating loss | $9.4 million | $23.1 million | Improved $6.7 million and $4.3 million, respectively |
| Net loss | $7.3 million | $15.5 million | Improved from $12.3 million and $19.0 million |
| Diluted loss per share | $0.20 | $0.42 | Compared with $0.34 and $0.52 |
Quarterly sales growth reflected higher aluminum shipments and Alumco, along with organic growth in parts of Engineered Products. Despite year-over-year improvement, Quanex remained loss-making. The filing does not provide a clear consolidated gross-margin percentage.
- Engineered Products: Sales were $125.2 million for the quarter and $231.3 million for the six months, up 15.1% and 11.1%. Operating income was $5.9 million and $8.7 million, versus $0.1 million and $1.9 million. Prior-year facility consolidation costs did not recur; savings were partly offset by pricing discounts, higher resin costs, and insulating-glass production inefficiencies.
- Aluminum Sheet Products: Sales were $109.7 million for the quarter and $194.3 million for the six months, up 24.2% and 26.2%. Operating losses narrowed to $0.5 million and $4.7 million. Shipments rose 27.3% and 29.6%; however, lower average selling prices, product mix, and higher scrap costs constrained profitability.
- Corporate and Other: Operating loss increased to $14.8 million for the quarter and $27.1 million year to date, mainly reflecting ERP implementation and other IT costs, transaction expenses, and employee-related costs.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was a use of $20.8 million, versus a use of $11.8 million a year earlier. Quanex reported a $9.6 million operating cash inflow in Q2, following a $30.3 million outflow in Q1.
- Investing cash outflow was $47.1 million, including $22.1 million for Alumco and $25.0 million of capital expenditures. Financing provided $6.6 million, including $10.0 million of net credit-facility borrowings and $2.9 million of dividends paid.
- Cash declined to $9.6 million at April 30 from $71.3 million at October 31, 2012. Total debt was $11.4 million, including $10.0 million outstanding on the revolving facility.
- The new five-year unsecured revolving facility provides for commitments of up to $150 million. Reported availability was $59.4 million, after considering facility terms, borrowings and letters of credit. Quanex reported compliance with its financial covenants. The covenant table states minimum interest coverage of 3.00x and maximum leverage of 3.25x; actual ratios were 45.01x and 0.74x, respectively.
- Total assets were $574.7 million and stockholders’ equity was $407.1 million at April 30, 2013. Current assets were $215.2 million versus current liabilities of $117.9 million.
Outlook, commentary and risks
Management expected operating results to improve in the third and fourth quarters and operating cash flow to strengthen through the peak construction season. It expected to repay the $10.0 million of facility borrowings well before fiscal year-end, and stated that available resources should meet anticipated needs for the next 12 months. These are expectations, not quantified full-year earnings guidance.
- Management described the housing recovery as uneven. Repair-and-remodel demand had not yet followed new construction, and the company expected remodeling gains to lag by 12–24 months.
- Excess capacity and price competition in vinyl profiles, resin inflation, insulating-glass scrap and labor inefficiencies, and volatile aluminum and scrap prices could pressure margins. The company anticipated that aluminum prices would be broadly stagnant for fiscal 2013.
- The German plant’s third production line was completed; management expected it to support European demand and reduce North American-to-Europe shipments. A $9.0 million paint-oven installation was completed in May 2013.
- ERP implementation generated significant current-period costs, including non-capitalized expenditures and depreciation. Management expected ERP-related costs to be lower in Q3, while depreciation related to the system was expected to continue.
- Environmental reserves were $10.9 million, largely for remediation at the Decatur, Alabama facility; the company recorded an estimated $10.5 million recovery from sellers’ shareholders. Remediation timing and costs remain subject to regulatory decisions and changing site information. Management said it believed reserves were adequate and did not expect environmental matters to have a material adverse effect.
- Other stated risks include warranty estimates, uncertain tax positions, foreign exchange, customer concentration, energy costs, litigation, and the ability to control costs and execute acquisitions and operating plans. The company reported effective disclosure controls and no material adverse litigation outcome expected.
Important facts for investors to verify
- Whether Q2’s operating cash inflow and management’s expected seasonal cash-flow recovery continue, given the $20.8 million six-month operating cash outflow and lower cash balance.
- Whether segment operating improvements persist after prior-year consolidation and labor-strike effects, and whether pricing, scrap, resin, and product-mix pressures ease.
- Facility availability and covenant calculations: the filing’s narrative describes the interest-coverage limit inconsistently with its covenant table, which states a minimum 3.00x requirement.
- Final Alumco purchase-price allocation and earn-out outcome; the allocation was preliminary and included estimated contingent consideration.
- Environmental reserve and recovery assumptions, including the expected recovery, indemnity limits, regulatory approval, and remediation schedule.
- ERP implementation costs, capital commitments, and whether management’s expectations for lower ERP costs and debt repayment are achieved.