Quanex Building Products Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended July 31, 2016. Quanex supplies components to building-products OEMs, including fenestration products and cabinet components. Results include HLP, acquired in June 2015, and Woodcraft, acquired in November 2015; prior-period comparisons therefore include different acquisition contributions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $248.1 million | $180.2 million | $679.0 million | $450.1 million |
| Operating income | $19.9 million | $9.8 million | $28.3 million | $7.9 million |
| Operating margin | 8.0% | 5.5% | 4.2% | 1.8% |
| Net income (loss) | $(4.0) million | $6.9 million | $(7.3) million | $6.2 million |
| Diluted EPS | $(0.12) | $0.20 | $(0.22) | $0.18 |
| Cash from operations | Not separately stated | Not separately stated | $49.1 million | $27.5 million |
Q3 cost of sales was $186.6 million; selling, general and administrative expense was $28.6 million; and depreciation and amortization was $13.0 million. For the nine-month period, those expenses were $522.5 million, $88.4 million, and $39.8 million, respectively. The filing does not provide a clear consolidated gross-margin figure.
Cash, debt and liquidity
- Cash was $32.2 million at July 31, 2016, versus $23.1 million at October 31, 2015. Working capital was $92.3 million.
- Total debt was $302.1 million, including $300.0 million of borrowings under the new credit agreement and $4.8 million of capital leases and other debt, less $2.8 million of unamortized financing costs. The company reported $144.1 million of availability and $5.9 million of letters of credit.
- Operating cash flow of $49.1 million was more than offset by $270.9 million used in investing, including the $245.9 million Woodcraft acquisition, and was partly funded by $229.6 million of financing cash flow. Capital expenditures were $25.9 million; dividends paid were $4.1 million.
- On July 29, the company refinanced prior facilities with a $150 million term loan and $300 million revolving facility, maturing in 2021. It repaid $15 million of revolver borrowings on August 30. Quanex was in compliance with debt covenants at July 31.
Changes and notable items
- Reported sales rose 38% in Q3 and 51% year to date, principally reflecting acquired businesses. Excluding acquisitions and certain foreign and other results, management reported a 3.4% Q3 sales decline and flat nine-month sales.
- Operating income improved, with stronger North American engineered-components results and European segment profitability. Woodcraft contributed $58.8 million of Q3 sales and $1.0 million of operating income; its nine-month operating income was $0.1 million after corporate allocation and a $2.3 million inventory step-up.
- Net losses chiefly reflected sharply higher interest expense and foreign-exchange losses. Q3 interest expense was $22.2 million, including a $16.7 million charge from refinancing the prior debt facilities; nine-month interest expense was $34.3 million. Other expense included foreign-currency transaction losses of $2.5 million in Q3 and $3.7 million year to date.
- Foreign-currency translation reduced nine-month comprehensive income by $17.9 million. The British pound weakened following the UK vote to leave the EU; management said there had been no material operating effect to date.
Outlook, risks and contingencies
- No company-specific earnings or revenue guidance is provided. Management expressed near-term optimism, citing acquisitions, market growth and operational-efficiency efforts. It referenced external forecasts of rising US housing starts and window shipments, while noting that growth forecasts had moderated and Woodcraft may be less exposed to weather-driven seasonality.
- Management expects approximately $11 million in annual cash interest savings from the July refinancing. The new agreement includes leverage and fixed-charge coverage covenants, restrictions on certain transactions and a $10 million annual dividend limit.
- Key exposures include housing and remodeling demand, raw-material costs and timing lags in customer surcharges, foreign-exchange movements, variable interest rates, customer concentration, acquisition integration, warranty claims and debt covenant compliance. A 1 percentage-point interest-rate move was estimated to affect annual pretax results by about $3 million.
- The company continues to investigate claims involving possible spacer migration in certain products manufactured before March 2014; the accrual was $1.2 million, and future unasserted claims could not be estimated. Management said ordinary-course litigation was not expected to materially affect results. A $9.2 million HLP earn-out liability was recorded; settlement was expected in Q4 2016.
- Management judged disclosure controls effective. It was still evaluating and implementing internal-control changes for acquired HLP and Woodcraft, with full compliance targeted by October 31, 2016.
Important facts for investors to verify
- Whether operating cash flow and segment margins remain resilient after separating acquisition effects from underlying performance.
- Actual interest savings and debt reduction under the refinanced facilities, including covenant headroom and revolver availability.
- Integration progress and final purchase-price allocation for Woodcraft, plus the final HLP earn-out settlement.
- Subsequent effects of currency movements, housing-market conditions, commodity-price pass-throughs and spacer-migration claims.