Quanex Building Products Corporation — Form 10-Q Summary
Reporting period: Three months ended January 31, 2016; balance-sheet comparisons are to October 31, 2015. Quanex supplies components to building-products OEMs, including fenestration products and, following its Woodcraft acquisition, cabinet doors and components.
Financial performance and liquidity
- Revenue: $201.5 million, up 58% from $127.9 million. Growth primarily reflects the acquisitions of HLP and Woodcraft; management reported approximately 3% sales growth excluding acquisitions.
- Margins and operating results: Gross profit before depreciation and amortization was $42.1 million, or 20.9% of sales, versus $22.1 million, or 17.3%. Operating loss improved to $2.1 million from $5.6 million; operating margin was approximately -1.1% versus -4.4%.
- Net results: Net loss was $7.2 million, or $0.21 per diluted share, compared with a $3.1 million loss, or $0.09 per diluted share. Interest expense rose to $6.5 million from $0.1 million; other expense was $2.4 million, including substantial foreign-currency losses.
- Cash flow: Operating activities provided $0.8 million, compared with $5.7 million used a year earlier. Investing activities used $254.0 million, principally for the $245.9 million Woodcraft acquisition. Financing activities provided $257.0 million, mainly from new borrowings. Cash ended the quarter at $27.7 million.
- Debt and liquidity: Book debt was $320.9 million, including $310.0 million principal under the term loan, $10.5 million under the ABL facility, and capital leases and other debt. The company reported $60.6 million available under its credit facilities and was in compliance with covenants. Working capital was $114.3 million.
- Other measures: Total assets were $829.9 million, up from $566.8 million at October 31, 2015, largely reflecting acquisitions. The quarterly dividend was $0.04 per share.
Material changes versus the prior year
- Woodcraft, acquired November 2, 2015 for $245.9 million cash, contributed $48.5 million in sales and an operating loss of $1.3 million in the quarter. Results included $2.3 million of inventory step-up expense and $1.1 million of allocated corporate costs.
- HLP, acquired in June 2015, contributed $21.9 million in sales and a $0.6 million net loss in the quarter. European Engineered Components sales rose to $33.1 million from $11.2 million, primarily due to HLP.
- North American Engineered Components sales increased 3% to $121.0 million; segment operating income was $5.5 million versus an operating loss of $2.1 million. Management cited lower material, repair, freight and labor costs, partly offset by pricing and product-mix effects.
- Corporate transaction-related costs increased, including $5.1 million associated primarily with the Woodcraft purchase. The new debt facilities also drove higher interest costs and financing-related expense.
Outlook, commentary and risks
- Management expressed near-term optimism, citing acquisition-driven diversification, growth opportunities, and continued focus on manufacturing efficiency and customer service. The filing provides no specific company revenue or earnings guidance.
- Management cited third-party forecasts for U.S. housing starts of 1.3 million in 2016 and 1.5 million in 2017, and U.S. window shipments of 52.2 million in 2016 versus 48.7 million in 2015. These are market forecasts, not Quanex guidance.
- Risks include housing and remodeling demand, customer purchasing patterns, raw-material prices and the lag in customer surcharges, foreign exchange, interest rates, debt service and covenant compliance, warranty costs, and acquisition integration. The company noted an unhedged foreign-currency position related to HLP acquisition financing, associated with a $2.0 million quarterly loss.
- A German spacer-product migration matter had a $1.2 million accrual at January 31, 2016; the company said it could not estimate potential liability for unasserted claims. It also reported continuing investigation of new claims. Management stated ordinary-course litigation was not expected to materially affect the company.
- Management said disclosure controls were effective. Internal controls at HLP and Woodcraft were still being evaluated and updated, with full Sarbanes-Oxley compliance targeted by October 31, 2016.
Key facts for investors to verify
- How much reported growth and future profitability come from acquired businesses versus organic growth, and whether Woodcraft can improve from its initial operating loss.
- Debt-service capacity, borrowing availability, variable-rate exposure, and compliance with the new facilities’ financial covenants.
- Whether foreign-currency losses and the unhedged HLP-related exposure persist, and the effect of currency movements on goodwill and reported results.
- Potential additional costs from spacer-migration claims, warranty obligations, and the final Woodcraft purchase-price allocation.
- Whether management’s housing and window-market assumptions materialize, and how commodity surcharges, pricing, seasonality, and customer/product mix affect margins.