Quanex Building Products Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended January 31, 2020, compared with the three months ended January 31, 2019. Quanex supplies components to building-products OEMs, with reportable segments in North American fenestration, European fenestration and North American cabinet components.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $196.6 million | $196.8 million |
| Operating income (loss) | $2.0 million | $(2.5) million |
| Net income (loss) | $10,000 | $(3.6) million |
| Operating cash flow | $(3.7) million | $(20.2) million |
| Capital expenditures | $9.3 million | $6.3 million |
| Cash and equivalents, period end | $23.1 million | $17.5 million |
- Operating margin was approximately 1.0%, versus approximately negative 1.2%. Net income was near break-even; basic and diluted EPS rounded to $0.00, versus a loss of $0.11 per share.
- Cash declined $7.8 million during the quarter. Financing provided $5.0 million, including $10.0 million in net revolving-credit borrowings; dividends paid were $2.7 million and treasury-stock purchases were $4.6 million.
- At January 31, 2020, total debt was $167.4 million, including $152.5 million outstanding on the revolving facility. The company reported $167.7 million available under the $325 million facility and compliance with its debt covenants. Facility borrowings bore interest at 3.15%.
- Current assets were $173.2 million and current liabilities were $90.6 million. The balance sheet included $41.7 million of operating-lease right-of-use assets and $42.0 million of operating-lease liabilities following adoption of the new lease standard.
Changes versus the prior-year quarter
- Sales were essentially flat. North American Fenestration sales rose 1% to $110.5 million, and European Fenestration sales rose 4% to $36.8 million. North American Cabinet Components sales fell 7% to $50.0 million.
- Cabinet Components’ lower sales reflected reduced volume, primarily after a large customer changed strategy, and lower raw-material surcharges and pricing. Its operating loss improved modestly to $2.1 million but remained negative.
- Consolidated operating results improved by $4.4 million, principally as corporate and other SG&A fell by $4.0 million and segment results improved overall. Interest expense declined $0.9 million to $1.6 million.
- Operating cash use improved by approximately $16.6 million, with management citing improved receivables collections and a lower payout of accrued incentives. Investing cash use increased with higher capital expenditures.
Outlook, management commentary and risks
- The filing provides no specific company earnings or revenue guidance. Management cited third-party expectations for slightly higher housing starts through 2021 and U.S. window shipments increasing 1% in 2020 and 1.5% in 2021; trailing-twelve-month window shipments through December 2019 had declined 1%.
- Management began restructuring North American Cabinet Components, including announcing a plant closure, following weaker current and forecast demand and a large customer’s strategy change. Further restructuring costs were expected. The segment’s goodwill could be impaired if future results fall below expectations; a $74.6 million impairment had been recorded in FY2019.
- The filing added a risk factor that COVID-19 or similar outbreaks could disrupt Quanex, customer or supplier operations and harm demand, cash flow and results.
- Brexit transition arrangements were scheduled to continue through December 31, 2020. Management highlighted uncertainty around future trade arrangements, foreign-exchange movements and raw-material availability and pricing for U.K. operations.
- Raw-material costs, including PVC, wood, aluminum and silicone, may fluctuate; contractual surcharges and price adjusters mitigate but do not eliminate exposure, including timing lags. A 1% interest-rate change was estimated to affect annual pretax results by approximately $1.5 million.
- Commercial sealant product-defect claims remain unresolved. The company had recorded no accrual and stated that an adverse material effect was not expected based on available information and anticipated insurance coverage; ultimate timing and impact were not determinable.
- The company froze defined-benefit pension benefits effective January 1, 2020 and recognized an approximately $2.5 million actuarial gain in other comprehensive income. It expected to contribute approximately $3.7 million to the plan in September 2020.
Important facts for investors to verify
- Whether Cabinet Components demand, customer volumes and the announced plant closure develop as expected, and whether any further restructuring or goodwill impairment is required.
- How COVID-19, housing and remodeling activity, Brexit and foreign-exchange movements affect operations after the quarter.
- Cash generation, planned capital spending, revolving-credit use and continued compliance with leverage and interest-coverage covenants.
- Developments in the sealant litigation and the availability and extent of insurance coverage.
- The effect of the unusually high 97.7% effective tax rate for the quarter, which management attributed largely to a discrete equity-award tax charge; the filing reported $0.4 million of tax expense on $0.4 million of pretax income.