Quanex Building Products Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended October 31, 2013. The filing also reports the fourth quarter ended October 31, 2013; it is an annual report, not a standalone quarterly filing.
Business context
Quanex supplies components and materials for residential windows and doors, plus mill-finished and coated aluminum sheet. Its two segments are Engineered Products and Aluminum Sheet Products. Results depend substantially on housing starts, remodeling and replacement activity, aluminum and other input prices, and customer demand. In December 2012, Quanex acquired Alumco, a window-screen manufacturer, for approximately $22.1 million net of acquired cash.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $952.6 million | $829.0 million |
| Gross profit / margin | $153.6 million / 16.1% | $125.1 million / 15.1% |
| Operating income (loss) / margin | $(17.7) million / (1.9)% | $(25.0) million / (3.0)% |
| Net income (loss) | $(11.7) million | $(16.5) million |
| Diluted EPS | $(0.32) | $(0.45) |
| Cash from operations | $43.5 million | $26.5 million |
- Sales increased 15%, reflecting 17% growth in Aluminum Sheet Products shipments, Alumco sales of $49.1 million after acquisition, and growth in several Engineered Products lines.
- Engineered Products operating income rose to $45.3 million from $28.5 million; margin improved to about 8% from 6%. Aluminum Sheet Products narrowed its operating loss to $1.0 million from $17.1 million, while shipments rose to 296 million pounds from 253 million.
- Cash used in investing activities was $59.7 million, including the Alumco acquisition and $37.9 million of capital expenditures. Cash used in financing activities was $4.9 million. Cash declined $21.5 million to $49.7 million.
- At year-end, current assets were $236.3 million and current liabilities $121.9 million (current ratio approximately 1.9). Total debt was $0.9 million; no revolving-credit borrowings were outstanding. The $150 million credit facility had $139.0 million available, with $6.2 million of letters of credit outstanding.
- Annual dividends were $0.16 per share. No shares were repurchased in FY2013.
Fourth-quarter results
For the quarter ended October 31, 2013, sales were $275.3 million, operating loss was $1.8 million, net loss was $1.2 million, and diluted loss per share was $0.03. In the comparable FY2012 quarter, sales were $235.0 million, operating income was $1.0 million, net income was $1.0 million, and diluted EPS was $0.03.
Changes, outlook, risks and unusual items
- ERP project stopped: In August 2013, the board ended the enterprise resource planning implementation and shifted operating units back to legacy systems. The decision resulted in $15.3 million of accelerated depreciation and $1.2 million of expensed construction in progress; management said the depreciation change increased FY2013 net loss by $9.8 million, or $0.27 per share. Approximately $0.5 million of additional depreciation was expected in FY2014.
- Market outlook: Management expected U.S. housing construction and remodeling activity to grow into 2014 and anticipated housing starts to rise. It cautioned that remodeling was recovering more slowly, growth in multifamily and large-builder construction could limit demand for higher-end products, and near-term pricing pressure was likely. Management did not expect average aluminum prices to vary significantly from FY2013 to FY2014, while noting substantial commodity-price uncertainty.
- Aluminum segment: Higher shipment volumes and the absence of FY2012 strike-related costs improved results, but lower LME prices and a shift toward lower-margin mill-finished products remained challenges. A new paint oven at the Alabama finishing facility was completed in 2013; management said a greater share of painted-sheet shipments would support profitability.
- Environmental contingency: The Decatur, Alabama remediation reserve was $10.8 million, with an expected recovery of $10.6 million from former owners under an indemnity. Recovery depends on the indemnitors’ performance; remediation costs and timing remain uncertain, with payments expected through 2035.
- Subsequent event: A fire damaged the Decatur facility’s cold mill in early November 2013. Preliminary estimated losses and business interruption were $4.0 million; an insurance claim was filed, and the facility remained operating during repairs.
- Other risks include housing-market cyclicality, commodity and raw-material volatility, customer concentration and pricing leverage, labor and supply interruptions, acquisition integration, product warranties, environmental regulation, and credit-facility covenants. One customer accounted for 10% of FY2013 sales.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. The audit and management assessment excluded Alumco from internal-control testing; its reported amounts included 5.2% of consolidated revenue.
Most important facts for investors to verify
- Whether operating performance improves without the large ERP-related depreciation charge, and how the discontinued implementation affects future operating costs and systems.
- Whether housing and remodeling demand, particularly for higher-margin products, develops as management expected—and whether pricing pressure offsets volume growth.
- Whether Aluminum Sheet Products can improve margins through painted-sheet sales, operating efficiencies, and stable aluminum scrap/LME spreads.
- Whether the Decatur remediation recovery is collected as expected and whether the post-year-end fire losses are substantially covered by insurance without disrupting production.
- Whether the company sustains adequate liquidity and remains within its credit-facility covenants while funding capital spending, dividends, pension contributions, and other commitments.