Quanex Building Products Corporation — Q1 FY2015 Form 10-Q
Reporting period: Three months ended January 31, 2015, compared with the three months ended January 31, 2014. Financial statements are unaudited. Quanex manufactures components primarily for the window and door industry and reports one aggregated segment. Nichols Aluminum was sold in April 2014 and is presented as a discontinued operation.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $127.9 million | $126.4 million |
| Operating loss | $5.6 million | $0.9 million |
| Loss from continuing operations | $3.1 million | $1.2 million |
| Net loss | $3.1 million | $3.9 million |
| Basic and diluted loss per share | $0.09 | $0.11 |
| Cash used in operating activities | $5.7 million | $11.5 million |
Cost of sales, excluding depreciation and amortization, increased 10% to $105.8 million, while sales rose 1%. The resulting gross margin was approximately 17.3%, compared with 23.9% a year earlier. Operating margin was approximately negative 4.4%, versus negative 0.7%. SG&A declined 13% to $19.5 million; depreciation and amortization was $8.2 million.
Cash and cash equivalents were $63.9 million at January 31, down $56.5 million from October 31, 2014. Working capital was $139.3 million. Total debt was $0.8 million, with no revolving-credit borrowings; $124.7 million was available under the facility, and the company reported covenant compliance. The quarter’s cash decline primarily reflected $42.7 million of treasury-stock purchases, capital expenditures of $7.3 million, dividends of $1.4 million, and operating cash use.
Capital expenditures were $7.3 million. The quarterly dividend was $0.04 per share. Total assets were $453.0 million and stockholders’ equity was $381.3 million at January 31, 2015.
Changes versus the prior period
- Sales increased $1.5 million, or 1%. Management attributed the increase to volume, favorable pricing and mix; lost volume at a large customer was offset by Greenville acquisition volume and growth with other customers.
- Operating loss worsened by $4.8 million. Cost of sales rose amid higher medical and workers’ compensation claims, freight and resin costs, and lower labor and overhead efficiency. The comparison also reflects a $2.8 million warranty-accrual reversal in Q1 FY2014.
- SG&A fell $3.0 million, partly because Q1 FY2014 included restructuring-related severance and transaction costs, along with higher professional fees and stock-based incentive expense.
- Net loss improved by $0.8 million, mainly because Q1 FY2014 included a $2.7 million after-tax loss from discontinued Nichols operations. Continuing-operations loss, by contrast, increased $1.9 million.
- Operating cash use improved by $5.7 million year over year. Cash used in investing fell to $6.8 million from $11.2 million, largely because the prior-year quarter included the Greenville acquisition.
Outlook, risks and unusual items
- Management cited improving U.S. housing and window-shipment markets and expected Quanex’s growth rates to converge with industry growth during 2015. These were market expectations, not company-specific earnings or sales guidance. The filing cites third-party forecasts of 1.2 million U.S. housing starts in 2015 and continued growth in window shipments.
- Business is seasonal, with activity generally lower in the first half of the fiscal year. Key sensitivities include new-home construction and remodeling demand, customer purchasing, resin and oil-related input costs, currency movements, energy costs and the ability to pass costs through contractual surcharges.
- A discrete tax benefit related to reassessment of an uncertain tax position associated with the 2008 spin-off contributed to the quarter’s $2.8 million income-tax benefit. The reassessment also generated a noncash $10.0 million increase in retained earnings; the filing reports that the uncertain-tax-position liability fell from $4.6 million to $0.5 million.
- The company had a $0.9 million accrual for asserted claims related to possible spacer migration in certain German products; it could not estimate exposure for unasserted claims. A separate vinyl-extrusion warranty accrual increased, primarily due to a specific claim linked to a formulation change.
- Quanex completed its $75.0 million share-repurchase program in February 2015, after quarter-end. Cumulative purchases were 3,992,229 shares at an average $18.79 per share.
- Management stated that cash, operating cash flow and credit availability should be sufficient for anticipated needs over the next twelve months and foreseeable future. Actual results remain subject to the company’s stated market, customer, cost, currency, tax, control and litigation risks.
Investor verification priorities
- Assess whether sales growth and margins recover after the sharp increase in cost of sales, including the effects of resin, freight, claims and manufacturing efficiency.
- Track operating cash flow, seasonal working-capital needs, capital spending and cash remaining after the completed $75.0 million repurchase program.
- Verify progress on the spacer-migration claims and the vinyl-product warranty claim, including any changes in accruals or estimates.
- Review the sustainability and accounting effects of the tax-position reassessment and any remaining uncertain tax exposures.
- Monitor housing and remodeling demand, large-customer volumes, and the effectiveness and timing of contractual raw-material surcharges.