Business context and reporting period
Quanex Building Products Corporation supplies components to building-product OEMs, including window and door components and cabinet doors. This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2020, ended July 31, 2020; comparisons are with the same periods in 2019. Results were affected by COVID-19 and lower sales volumes.
Financial and operating performance
- Third quarter: Net sales were $212.1 million, down 11% year over year. Operating income was $16.6 million, down 13%; net income was $10.8 million, down 8%; diluted EPS was $0.33 versus $0.36. Operating margin was approximately 7.8%, compared with 8.0%.
- First nine months: Net sales were $596.2 million, down 9%. Operating income was $27.4 million versus an operating loss of $2.7 million; net income was $16.3 million versus a net loss of $15.8 million; diluted EPS was $0.50 versus a loss of $0.48 per share. The prior-year period included $30.0 million of impairment charges, primarily goodwill impairment.
- Third-quarter segments: North American Fenestration sales fell 10% to $122.4 million and operating income fell to $12.4 million from $15.9 million. European Fenestration sales fell 14% to $38.3 million, while operating income was $5.4 million, approximately level with the prior year. North American Cabinet Components sales fell 12% to $51.9 million and recorded a $0.2 million operating loss, versus $1.6 million of operating income.
- Cash flow: Nine-month operating cash flow was $47.6 million, versus $30.0 million. Capital expenditures were $20.7 million, implying operating cash flow less capex of approximately $26.9 million. Cash increased $10.2 million to $41.1 million.
- Liquidity and debt: At July 31, cash was $41.1 million; total debt, including finance lease obligations and other debt, was $152.8 million. Revolver borrowings were $138.0 million, and $182.2 million remained available under the $325 million facility. The company reported compliance with its debt covenants. Current assets were $197.4 million and current liabilities $106.9 million.
- Other metrics: The quarterly dividend was $0.08 per share. Nine-month dividends paid were $7.9 million, and treasury-stock purchases were $6.7 million.
Material changes versus the prior period
- Quarterly sales and operating income declined, principally due to lower volumes, including COVID-19 impacts. For the first nine months, lower sales were partially offset by lower SG&A and interest expense.
- The prior-year nine-month results included a $30.0 million goodwill impairment in North American Cabinet Components; no impairment charge was recorded in the 2020 period.
- Quanex adopted lease accounting standard ASC 842 on November 1, 2019, adding approximately $39.3 million of lease liabilities and $38.9 million of right-of-use assets to the balance sheet. The company said adoption did not materially change income or cash flows.
Outlook, management commentary and risks
- Management said the duration and financial effects of COVID-19 remained uncertain and could not be reasonably estimated. Facilities were reopened by May 2020; the company reduced discretionary spending, monitored working capital and cut its 2020 capital expenditure plan by approximately 25%–30%.
- The company provided no specific company revenue or earnings guidance in the filing. External forecasts cited by management anticipated 2020 housing starts of 1.1 million, a 5% decline in window shipments in the residential remodeling and replacement market, and a roughly 10% decline in U.S. semi-custom cabinet demand. Management noted that some sales expected in fiscal 2020 might shift into fiscal 2021 or 2022.
- Risks include renewed pandemic-related shutdowns, weaker construction and remodeling demand, customer and supplier disruption, raw-material price volatility and timing lags in customer surcharges, foreign-exchange movements and Brexit-related uncertainty. COVID-related changes in demand could also prompt asset, goodwill, receivable or inventory write-downs.
- North American Cabinet Components faced industry movement from semi-custom to stock cabinets and a large customer’s strategy change; Quanex closed one plant and recorded $0.3 million of related restructuring costs in the nine-month period. The company also disclosed unresolved commercial sealant defect claims, for which it recorded no accrual, while stating it did not expect a material adverse outcome.
- The company temporarily borrowed $50 million in March as a precaution and repaid it during the third quarter. Management said additional borrowing could be needed depending on pandemic impacts and believed liquidity and covenant compliance were adequate to manage the situation.
Important facts for investors to verify
- Whether demand and sales volumes recover, particularly in fenestration and cabinet components, and whether deferred sales materialize.
- COVID-19’s continuing effects on operations, customers, suppliers, cash collection and the company’s asset valuations.
- Revolver availability, covenant headroom, variable-rate debt exposure and future borrowing needs.
- Cabinet-segment performance following the customer strategy change and plant closure, including any further restructuring or impairment charges.
- Exposure to raw-material costs, surcharge recovery lags, foreign currency and Brexit-related trade or supply costs.
- Potential resolution and insurance coverage of the commercial sealant claims; timing and financial impact remain undetermined.