Quanex Building Products Corporation — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 31, 2019; unaudited. Quanex supplies fenestration and cabinet components to building-products OEMs, primarily in North America and the U.K. and Europe.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $196.8 million | $191.7 million |
| Operating loss | $2.5 million | $0.6 million |
| Net income (loss) | $(3.6) million | $4.9 million |
| Diluted earnings (loss) per share | $(0.11) | $0.14 |
| Operating cash flow | $(20.2) million | $8.2 million |
| Capital expenditures | $6.3 million | $7.8 million |
- Sales rose 3% year over year, but operating performance weakened: cost of sales increased 3%, while selling, general and administrative expense increased 16%. Operating margin was approximately negative 1.2%, versus negative 0.3%.
- Net loss included a $1.0 million income-tax benefit. The prior-year comparison included a $7.7 million tax benefit from remeasuring deferred taxes after U.S. tax reform, materially boosting prior-year net income.
- Operating cash flow declined $28.4 million year over year. Management attributed the decline to lower earnings and working-capital outflows, including seasonal inventory build, higher accrued-incentive payments, and lower receivables collections.
- Cash was $17.5 million at January 31, down from $29.0 million at October 31, 2018. Net inventory increased $12.1 million to $81.4 million.
- Total debt was $230.7 million, including $215.0 million drawn on the revolving facility, versus $210.6 million at October 31. The company had $105.3 million of facility availability and $4.7 million of letters of credit. Borrowings bore interest at 4.25%; the company reported compliance with its debt covenants.
- Current assets were $177.9 million and current liabilities $71.7 million. The $325 million revolving facility matures in October 2023 and includes leverage and interest-coverage covenants.
- Financing cash inflow was $14.6 million, primarily reflecting $20.0 million of gross credit-facility borrowings and $23.0 million of repayments. The company paid $2.7 million in dividends and repurchased $2.0 million of treasury stock.
Segments and changes versus prior year
| Segment | Sales | Operating result | Year-over-year context |
|---|---|---|---|
| North American Fenestration | $109.0 million, up 6% | $1.8 million income | Higher market/new-product volume, pricing, and surcharges; cost inflation offset sales growth. |
| European Fenestration | $35.3 million, up 4% | $2.8 million income, versus $1.4 million | Price and volume gains were partly offset by $2.1 million of unfavorable currency effects. |
| North American Cabinet Components | $53.9 million, down 4% | $2.3 million loss, improved from $2.7 million | Lower volume was partly offset by price increases and surcharges; lower production reduced costs. |
| Unallocated Corporate & Other | $(1.3) million eliminations | $4.8 million loss, versus $1.1 million | Higher medical costs, planned-headcount severance, and transaction/advisory fees drove the increase. |
Corporate results also reflected $1.2 million of severance associated with a planned headcount reduction and $1.6 million of higher medical expenses. Restructuring charges were $0.1 million, primarily for an un-sublet closed U.S. vinyl facility lease.
Outlook, risks, and unusual items
- Management cited third-party forecasts for modest housing-start growth through 2020, U.S. window-shipment growth of 2%–3% annually through 2020, and U.S. semi-custom cabinet-demand growth of about 3% annually. These are market estimates, not company financial guidance; the filing gives no specific company revenue or earnings forecast.
- Management said its strategy includes protecting margins and cash flow, investing in organic growth, and considering strategic acquisitions. It expects to repatriate excess foreign cash and use funds for debt reduction or working capital.
- Risks include changes in housing and remodeling activity, customer demand, raw-material and energy costs, foreign exchange, interest rates, and the ability to service debt. Customer price adjusters and surcharges mitigate some commodity exposure but do not cover all inputs and may lag cost changes.
- Brexit remained a source of uncertainty for U.K. operations, particularly regarding currency and the availability and cost of upstream materials. Management said it was preparing to use its wider supply network to limit disruption.
- Quanex remains involved in claims alleging defects in a commercial sealant product sold in the 2000s. It recorded no accrual, believed its defenses and insurance position supported no material adverse effect, but said timing and ultimate outcome were not determinable.
- The company reported no current environmental remediation matters. It warned that warranty estimates involve judgment and actual claims may differ. The North American Cabinet Components goodwill reporting unit had fair value approximately 7.2% above carrying value at the August 2018 annual test; lower-than-expected future results could lead to impairment.
- ASC 606 was adopted effective November 1, 2018 using the modified retrospective method, with no material financial-statement impact. The company planned to adopt the new lease standard in fiscal 2020 and was evaluating its effect.
Key facts for investors to verify
- Whether North American Cabinet Components can recover volume and improve profitability, and whether corporate cost increases persist.
- Whether operating cash flow rebounds after seasonal inventory and accrued-payment outflows; monitor inventory, receivables, and accrued liabilities.
- Debt, interest expense, covenant compliance, and remaining borrowing availability, especially as variable-rate debt exposes pretax results to rate changes.
- Developments in housing and remodeling markets, raw-material pass-through timing, foreign exchange, and Brexit-related supply costs.
- Updates on commercial sealant litigation, warranty claims, and the North American Cabinet Components goodwill valuation.