Quanex Building Products Corporation — Q1 FY2014
Reporting period: Three months ended January 31, 2014; unaudited. Quanex supplies engineered components and materials to building-products manufacturers through Engineered Products and Aluminum Sheet Products.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $202.4 million | $185.7 million |
| Operating loss | $5.1 million | $13.7 million |
| Net loss | $3.9 million | $8.1 million |
| Loss per diluted share | $0.11 | $0.22 |
| Cash used for operating activities | $11.5 million | $30.3 million |
| Capital expenditures | $6.7 million | $11.5 million |
- Sales rose 9%. Cost of sales increased 6%; gross profit before separately reported depreciation and amortization was approximately $30.5 million, versus $23.0 million. Operating margin improved to approximately negative 2.5% from negative 7.4%.
- Engineered Products sales increased 19% to $126.4 million and segment operating income rose to $7.5 million from $2.8 million. Aluminum Sheet Products sales fell 6% to $76.0 million; the segment recorded a $4.3 million operating loss, versus $4.2 million.
- At January 31, cash was $25.8 million, down $23.9 million from October 31. Total debt was $0.9 million, with no revolver borrowings. Revolver availability was $142.8 million, subject to facility terms; letters of credit totaled $6.3 million. Working capital was $107.7 million.
- Cash dividends were $0.04 per share. The company paid $1.5 million in dividends during the quarter.
Changes, outlook and notable items
- The smaller net loss reflected higher Engineered Products sales, lower corporate and administrative costs, and a $2.8 million warranty-accrual reversal. Lower aluminum pricing weighed on Aluminum Sheet Products sales despite a 2% increase in shipped pounds.
- Management cited improving U.S. housing starts and window shipments, and expected growth in window markets. It highlighted potential demand for warm-edge spacers in Europe as customers respond to energy-efficiency standards. No specific company earnings or revenue guidance was provided.
- After quarter-end, Quanex agreed to sell Nichols Aluminum, its Aluminum Sheet Products business, to Aleris for $110.0 million, subject to a working-capital adjustment. Regulatory approval had been received, and closing was expected March 31, 2014. Quanex expected to record a gain, but did not quantify it. The business was not classified as held for sale or discontinued operations at January 31. On a pro forma basis excluding that business, Q1 FY2014 sales were $122.9 million and net loss was $1.2 million; comparable prior-year figures were $101.1 million and $5.4 million net loss.
- A November 2013 fire damaged equipment at the Decatur, Alabama facility. Quanex recorded a $0.5 million impairment charge and estimated total losses, including business interruption, of $7.0 million; it expected insurance recovery excluding a $0.5 million deductible and had received $0.4 million by quarter-end.
- Environmental reserves were $10.4 million, principally for remediation at the Decatur facility; estimated recoveries from the former owners were $10.6 million. Actual costs and timing remain uncertain. Management said it believed reserves were adequate and did not expect environmental matters to have a material adverse effect.
- Management said cash, operating cash flow and available credit should meet anticipated needs. The company was in compliance with credit covenants. A potential tax valuation allowance could increase if the company records three years of cumulative losses; net deferred tax assets were $45.9 million. The IRS notified the company that it would examine its 2011 and 2012 federal returns.
- Key risks include housing and remodeling demand, aluminum and resin prices, customer purchasing patterns, foreign exchange, warranty claims, environmental costs, and execution of operating plans and acquisitions. The company uses derivatives to manage certain aluminum and currency exposures and stated it does not use them for speculative purposes.
Investor verification points
- Confirm the Nichols Aluminum sale’s closing, working-capital adjustment, proceeds and realized gain; assess the effect of the divestiture on ongoing results and cash generation.
- Assess whether improved Engineered Products profitability is sustainable, particularly given the $2.8 million warranty-accrual benefit, and whether Aluminum Sheet Products’ losses would have persisted absent the sale.
- Track operating cash flow and working-capital movements, including inventory build, against the reported quarterly cash decline.
- Monitor fire-insurance collections and remediation estimates, recoveries and obligations associated with the Decatur facility.
- Review tax-asset realizability, potential valuation allowances and the outcome of the IRS examination.