Quanex Building Products Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended April 30, 2016; fiscal year ends October 31. Unaudited. Quanex supplies components to building-products OEMs, including fenestration and cabinet components.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $229.5 million | $142.0 million | $430.9 million | $269.9 million |
| Operating income (loss) | $10.6 million | $3.7 million | $8.4 million | $(1.9) million |
| Net income (loss) | $3.9 million | $2.3 million | $(3.3) million | $(0.8) million |
| Diluted EPS | $0.11 | $0.07 | $(0.10) | $(0.02) |
| Operating margin | 4.6% | 2.6% | 2.0% | (0.7)% |
- Q2 sales increased 62%; six-month sales increased 60%. Acquisitions, particularly Woodcraft and HLP, account for much of the reported growth. Excluding acquisitions and certain foreign and other results, management reported sales growth of approximately 2.3% for Q2 and 2.7% for the six-month period.
- Q2 net income improved year over year, while six-month net loss widened. The six-month results include substantially higher interest expense following acquisition financing: $12.1 million versus $0.3 million in the prior-year period.
- Cash provided by operations was $24.6 million, compared with $3.3 million. Investing used $262.4 million, including $245.9 million for Woodcraft; capital expenditures were $17.4 million. Cash at period-end was $29.0 million. Operating cash flow less capital expenditures was approximately $7.2 million.
- At April 30, total debt was $309.4 million, including $304.1 million of long-term debt and current maturities. The company had no ABL borrowings, $82.8 million of availability under its credit facilities, and $5.9 million of letters of credit. Working capital was $119.4 million; current assets were $221.9 million and current liabilities $102.5 million.
- Quarterly dividends were $0.04 per share; six-month dividends were $0.08 per share.
Changes, outlook and notable matters
- Woodcraft was acquired on November 2, 2015 for $245.9 million cash, net of acquired cash. It contributed $108.1 million of six-month revenue and a $3.8 million net loss. Its reported six-month segment operating loss was $0.9 million, including corporate allocation and a $2.3 million inventory step-up effect.
- HLP, acquired in June 2015, contributed $46.7 million of six-month revenue and $2.4 million of net income. The acquisitions changed the company’s reporting to three segments: North American Engineered Components, European Engineered Components and North American Cabinet Components.
- Management said it was optimistic about near-term growth, citing improving housing markets, acquisition-driven diversification and continued emphasis on manufacturing efficiency and customer service. It did not provide specific company revenue or earnings guidance in the supplied filing text.
- Management cited third-party forecasts of U.S. housing starts rising from 1.1 million in 2015 to 1.2 million in 2016, and window shipments increasing from 47.6 million units in 2015 to 51.4 million in 2016. These are external market forecasts, not company guidance. Management noted that multi-family growth may be less favorable for Woodcraft’s semi-custom cabinet focus and that weather makes fenestration seasonal.
- Debt is variable rate; the company estimated a 1 percentage-point rate move could change annual pretax results by approximately $3.1 million. The company was in compliance with debt covenants at April 30, 2016. It was evaluating a possible refinancing, which could trigger write-offs of unamortized financing fees and original issue discount.
- An unhedged foreign-currency position associated with HLP acquisition debt generated a $1.5 million six-month loss; management said it was evaluating hedging alternatives. Commodity surcharge mechanisms mitigate, but do not eliminate, exposure to raw-material price changes and timing lags.
- The company accrued $1.5 million for claims involving possible spacer migration in certain pre-March 2014 products; it cannot estimate future liability for unasserted claims. Warranty estimates also involve uncertainty. Management reported no current environmental remediation activities and did not expect ordinary-course litigation to materially affect results.
- Disclosure controls were deemed effective. Management was still evaluating and implementing internal-control changes for HLP and Woodcraft, with the aim of full Sarbanes-Oxley compliance by October 31, 2016.
Investor verification points
- Separate acquisition-related revenue and costs from underlying organic growth, and assess Woodcraft’s path to profitability.
- Review cash conversion, working-capital movements and capital spending alongside reported operating cash flow.
- Track debt reduction, refinancing plans, covenant headroom, variable-rate exposure and available borrowing capacity.
- Monitor the spacer-migration claims reserve, unhedged currency exposure and integration of acquired-company controls.
- Compare management’s market assumptions with actual housing, remodeling and window-shipment trends; the filing provides no specific company earnings guidance.