Quanex Building Products Corporation — Q2 FY2017 Form 10-Q
Reporting period: Three and six months ended April 30, 2017; comparisons are to the corresponding 2016 periods. Quanex supplies components to building-products OEMs across North American and European fenestration markets and North American cabinet components. Financial statements are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $209.1 million | $229.5 million | $404.2 million | $430.9 million |
| Operating income | $4.6 million | $10.6 million | $0.8 million | $8.4 million |
| Net income (loss) | $1.5 million | $3.9 million | $(2.3) million | $(3.3) million |
| Diluted EPS | $0.04 | $0.11 | $(0.07) | $(0.10) |
| Cash from operations | Not presented quarterly | $15.7 million | $24.6 million |
- Q2 sales declined 9% and operating income fell 57% year over year. Six-month sales fell 6%, and operating income declined 90%.
- Operating margins were approximately 2% for Q2 and less than 1% for the six-month period, versus approximately 5% and 2%, respectively, in 2016.
- Six-month investing cash outflow was $25.5 million, principally including the $8.5 million HLP earn-out and $17.6 million of capital expenditures. Financing cash outflow was $1.0 million. Cash declined to $14.5 million from $25.5 million at October 31, 2016.
- Working capital was $91.3 million. Total debt was $286.6 million, including $20.2 million classified as current. The company had $169.2 million available under its credit agreement and reported compliance with debt covenants.
- Cash dividends were $0.04 per share in Q2 and $0.08 per share for the six months.
Material changes and segment results
- North American Engineered Components: Sales declined 13% in Q2 and 11% year to date; six-month operating income fell to $5.2 million from $15.3 million. Lower U.S. vinyl volume reflected the planned exit from low-margin business.
- European Engineered Components: Sales fell 8% in Q2 and 6% year to date, primarily due to unfavorable currency translation. Six-month operating income increased to $5.1 million from $4.5 million.
- North American Cabinet Components: Q2 sales were approximately flat; six-month sales rose 4%. Six-month operating results improved from a $0.9 million loss to approximately break-even, although management cited labor inefficiency, higher benefits costs, unfavorable material usage and inventory reserves.
- Interest expense declined substantially after the July 2016 refinancing: $2.4 million versus $5.6 million in Q2, and $4.6 million versus $12.1 million year to date. The six-month average borrowing rate was 2.76%, compared with 6.09% in 2016.
- Foreign-currency translation and transaction effects were significant, including a $9.1 million adverse impact on six-month EU segment sales. The British pound’s decline was a key factor.
Outlook, management commentary and risks
- Quanex is exiting $65 million to $85 million of sales from low-margin business to protect margins and improve cash flow. It closed two U.S. vinyl plants and one Mexican cabinet-door plant and expects further restructuring, lease, equipment-move and employee-related costs in fiscal 2017.
- Restructuring charges were $2.2 million for the six months. Shortened asset lives and accelerated amortization added approximately $4.3 million to six-month depreciation and amortization. Management also expected $0.6 million of additional amortization in the remainder of fiscal 2017.
- No company earnings or revenue guidance is stated in the provided filing text. Management cited third-party forecasts for growth in housing starts, window shipments and U.S. residential cabinet demand, while noting that actual results depend on market conditions and execution.
- Variable-rate debt exposes results to interest-rate changes; a hypothetical one-percentage-point rate change would affect annual pretax results by about $2.7 million. Commodity-price adjusters mitigate, but do not eliminate, exposure and may lag market prices.
- Contingencies include a $0.8 million accrual for spacer-migration claims and ongoing commercial-sealant product litigation. Quanex paid its $0.5 million share of a settlement in May 2017; other related claims remain unresolved and no accrual was recorded for them. Management said outcomes and timing are uncertain.
- A planned pension contribution of approximately $3.6 million was expected in September 2017. Quanex also disclosed an unhedged foreign-currency position related to HLP acquisition financing.
Most important facts for investors to verify
- Whether the planned low-margin business exits and plant closures improve operating margins and cash generation, and how much additional restructuring cost remains.
- Whether sales declines in North American Engineered Components stabilize and cabinet-component cost pressures ease.
- Debt covenant headroom, facility availability, refinancing exposure and sensitivity to interest-rate and currency movements.
- Potential costs and developments in spacer-migration claims and commercial-sealant litigation.
- Whether industry forecasts and commodity pass-through arrangements translate into the growth and margin recovery management expects.