Quanex Building Products Corporation — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended April 30, 2012. Quanex makes engineered products primarily for the window and door industry and aluminum sheet products. Results are affected by housing construction and remodeling activity. The comparison with 2011 is affected by the March 2011 acquisition of Edgetech, which contributed only one month of results in the prior-year quarter.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $194.4 million | $203.1 million | $356.0 million | $362.9 million |
| Operating income (loss) | $(16.1) million | $(2.3) million | $(27.4) million | $(10.0) million |
| Net income (loss) | $(12.3) million | $(1.4) million | $(19.0) million | $(6.1) million |
| Diluted loss per share | $(0.34) | $(0.04) | $(0.52) | $(0.16) |
| Cash from operating activities | Six months: $(11.8) million | Prior-year six months: $(5.3) million |
Q2 sales fell 4.3%; six-month sales fell 1.9%. Operating margin was approximately negative 8.3% for Q2 and negative 7.7% for the six-month period, versus negative 1.1% and negative 2.7%, respectively, a year earlier. The income tax benefit was $3.9 million in Q2 and $8.4 million for six months.
- Segments: Engineered Products sales rose 31.9% in Q2 and 25.0% for six months, including Edgetech. Same-store sales increased 16.4% and 5.6%, respectively. Segment operating income was $0.1 million in Q2 and $1.9 million for six months. Aluminum Sheet Products sales declined 28.2% in Q2 and 23.8% for six months; the segment posted operating losses of $7.5 million and $13.1 million, respectively.
- Cash, debt and liquidity: Cash and equivalents were $54.1 million at April 30, down from $89.6 million at October 31, 2011. Total debt was $1.5 million, with no revolving-facility borrowings. Facility availability was $166.0 million, constrained by covenant-based leverage availability; the facility expires April 23, 2013. Working capital was $116.8 million, versus $140.3 million at fiscal year-end.
- Cash investment: Six-month capital expenditures were $21.3 million. Investing cash outflow was $21.3 million, compared with $121.0 million in the prior year, which included acquisitions. Dividends paid were $2.9 million.
Material changes and drivers
- Aluminum Sheet Products was hit by a January strike at two Davenport facilities. Shipments fell 23.3% in Q2; management estimated the strike accounted for about two-thirds of the quarterly volume decline. Lower aluminum prices, higher costs for purchased semi-finished coils, and reduced production also pressured results.
- The strike ended, but the company reported no formal union agreement. Management expected productivity and shipments to improve in the second half as staffing returned to necessary levels.
- Engineered Products benefited from Edgetech and stronger vinyl extrusion sales, but Q2 operating income declined year over year amid consolidation expenses, the Barbourville facility roof collapse, and costs at the German start-up operation.
Outlook, risks and unusual items
- Management expected 2012 U.S. window shipments of about 39 million units, below Ducker Worldwide’s 40.5 million forecast. It cited weak housing-related conditions, low consumer confidence and constrained homeowner lending, while remaining positive on long-term demand and energy-efficiency opportunities.
- The Barbourville-to-Cambridge IG spacer consolidation was expected to finish in 2012. The company estimated $16 million of total cash spending, $9 million of project expenses, and annual pretax cash savings of $9 million once complete. Approximately $5.7 million of cumulative costs had been incurred by April 30; management said the project was ahead of schedule and on budget.
- A roof collapse at Barbourville caused about $0.5 million of Q2 cleanup and related costs. Additional costs were expected, with insurance recovery anticipated but not yet recognized.
- Management expected approximately $2 million of strike-related carryover expenses in Q3 and forecast lower aluminum spreads in the second half than in second-half 2011, citing tight scrap supply and scrap costs high relative to LME prices. Fiscal 2012 capital expenditures were projected at approximately $49 million. Management expected second-half operating cash flow to be positive.
- Environmental reserves were $12.4 million, offset by a recorded $11.9 million expected indemnification recovery. Final remediation costs and timing remain uncertain; payments are expected to extend through at least fiscal 2034. Total unrecognized tax benefits were $19.2 million; the company said about $3.5 million could reverse within twelve months due to statute-of-limitations lapses.
- Other risks include commodity and foreign-exchange movements, customer and supplier performance, housing-market conditions, warranty claims, environmental regulation and remediation estimates, and execution of integration and operating plans. The revolving-credit facility’s availability also depends on rolling EBITDA and lender performance.
Key facts for investors to verify
- Whether Aluminum Sheet Products shipments and margins recover after the strike, and whether labor terms are formalized.
- Actual Barbourville consolidation spending, completion timing, insurance proceeds, and realization of the projected $9 million annual savings.
- Second-half aluminum spreads and the extent to which expected shipment and operating-cash-flow improvement materialize.
- Liquidity and covenant-based credit availability as earnings change ahead of the facility’s April 2013 expiration.
- Updates to environmental remediation costs and recoveries, and the potential timing and amount of uncertain-tax-benefit reversals.