Quanex Building Products Corporation — Q1 FY2017 Form 10-Q
Reporting period: Three months ended January 31, 2017; unaudited. Comparisons are with the three months ended January 31, 2016, unless otherwise noted. Quanex supplies components to building-products OEMs, principally in fenestration and kitchen and bath cabinetry, through three reportable segments.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $195.1 million | $201.5 million |
| Operating loss | $3.8 million | $2.1 million |
| Net loss | $3.7 million | $7.2 million |
| Loss per diluted share | $0.11 | $0.21 |
| Cash from operations | $2.0 million | $0.8 million |
Sales declined 3%. Gross profit before depreciation and amortization was $40.1 million, approximately 20.6% of sales, versus $42.1 million, approximately 20.9%, a year earlier. Operating margin was approximately negative 2.0%, compared with negative 1.1%. Net loss improved despite the larger operating loss, primarily due to lower interest expense and a more favorable foreign-currency result. Interest expense fell to $2.2 million from $6.5 million; other income was $0.7 million versus other expense of $2.3 million.
Segment sales and operating income (loss): North American Engineered Components, $111.1 million and $0.3 million (prior-year sales $121.0 million and operating income $5.6 million); European Engineered Components, $31.6 million and $2.2 million (prior-year $33.1 million and $1.4 million); North American Cabinet Components, $53.0 million and a $1.1 million loss (prior-year $48.5 million and a $1.3 million loss). The North American engineered segment’s decline reflected lower U.S. vinyl volume; European operating income improved despite foreign-exchange-related sales pressure; cabinet sales increased but the segment remained loss-making.
Cash, debt and liquidity
Cash was $14.1 million at January 31, 2017, down from $25.5 million at October 31, 2016. Operating activities provided $2.0 million; investing used $16.2 million, including an $8.5 million HLP earn-out payment and $8.1 million of capital expenditures; financing provided $2.8 million. Working capital was $88.0 million.
Total debt was $272.5 million, including $17.6 million of current maturities; cash-adjusted debt was approximately $258.4 million. The $450 million credit agreement matures in 2021. Quanex reported $169.2 million available under the agreement, after outstanding borrowings and letters of credit, and was in compliance with its covenants. Reported borrowing rates were 2.8% at quarter-end and a 2.65% weighted average for the quarter. A 1 percentage-point interest-rate change would affect annual pretax results by approximately $2.7 million, based on quarter-end variable-rate debt.
Changes, outlook and risks
- Management’s margin and cash-flow initiative calls for exiting $65 million to $85 million of lower-margin business, revised upward from the previously announced $50 million to $70 million range. The company said the volume reduction had begun to affect U.S. vinyl and Woodcraft results.
- Three plants were being closed—two U.S. vinyl facilities and one Mexican cabinet-door facility—with assets being relocated. Q1 restructuring charges were $1.1 million. Management expected additional fiscal 2017 costs, including equipment moves, possible asset retirements and inventory adjustments.
- Closures also prompted revised useful-life estimates, adding $1.6 million of depreciation and $0.9 million of amortization in the quarter. The company expected a further $1.0 million of incremental amortization during the rest of FY2017 and said additional accelerated depreciation or disposal gains or losses remained possible.
- No specific company revenue or earnings guidance was provided. Third-party forecasts cited by management indicated market growth: U.S. housing starts of 1.2 million in 2016 and 2017, rising to 1.3 million in 2018; U.S. window shipments and U.S. residential cabinet demand were also forecast to grow. These are external forecasts, not company guidance.
- Key exposures include housing and remodeling demand, customer concentration, raw-material and energy costs, foreign exchange, variable interest rates, and the company’s ability to execute operating changes and service debt. Commodity pass-through arrangements mitigate some, but not all, cost volatility.
- A spacer-product migration issue carried an $0.8 million accrual; the company said it could not estimate liability for unasserted claims. Litigation over alleged defects in a subsidiary’s sealant product included a claim scheduled for trial in March 2017 seeking substantial damages. Quanex had recorded no accrual and said the ultimate outcome was not determinable, while expressing the view that it would not materially affect the company.
Investor facts to verify
- Whether the planned $65 million to $85 million business exit improves margins and cash generation as intended, and whether further restructuring or asset charges arise.
- Progress in restoring profitability at North American Engineered Components and North American Cabinet Components.
- Debt covenant headroom, borrowing costs, and cash availability given variable-rate debt and the $2.7 million annual pretax sensitivity to a 1-point rate move.
- Developments in the sealant litigation and spacer-migration claims, including any change in exposure, insurance coverage or accruals.
- Actual housing, window and cabinet demand versus the third-party forecasts cited in the filing.