Quanex Building Products Corporation — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended April 30, 2018. Quanex supplies components to building-products OEMs, primarily in North America and Europe. Its segments are North American Engineered Components, European Engineered Components, and North American Cabinet Components.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $214.2 million | $209.1 million | $405.9 million | $404.2 million |
| Operating income | $8.1 million | $4.6 million | $7.6 million | $0.8 million |
| Net income (loss) | $4.1 million | $1.5 million | $9.1 million | $(2.3) million |
| Diluted EPS | $0.12 | $0.04 | $0.26 | $(0.07) |
- Consolidated operating margin was approximately 3.8% in Q2 versus 2.2% a year earlier; for the first half it was approximately 1.9% versus 0.2%. Cost of sales excluding depreciation and amortization rose faster than sales in both comparisons.
- First-half operating cash flow was $21.6 million, compared with $16.7 million. Capital expenditures were $15.2 million, versus $17.6 million; operating cash flow less capital expenditures was $6.4 million, versus negative $0.8 million.
- Cash declined $7.4 million from October 31, 2017, to $10.1 million. Total debt was $227.0 million, down from $239.4 million; the company reported $215.7 million of unused credit availability and was in compliance with debt covenants.
- At April 30, current assets were $188.1 million and current liabilities were $97.5 million. The quarterly dividend was $0.04 per share ($0.08 for the first half).
Changes and segment results
- Q2 sales increased 2% year over year, while first-half sales were nearly flat. First-half operating income improved substantially, supported by lower SG&A, restructuring charges, and depreciation and amortization than in the prior year.
- For the first half, North American Engineered Components sales were $216.9 million and operating income was $7.2 million, up from $4.0 million. European Engineered Components sales rose 11% to $72.8 million, but operating income fell to $3.7 million from $5.1 million, reflecting cost inflation and higher expenses. North American Cabinet Components sales declined 4% to $118.6 million, and the segment recorded a $2.7 million operating loss versus $1.2 million income.
- First-half net income included a $6.5 million discrete tax benefit from the Tax Cuts and Jobs Act. The company reported a $6.2 million income tax benefit overall, compared with a $1.0 million benefit in the prior-year period; reported earnings therefore benefited materially from tax items.
Outlook, commentary, and risks
- Management cited forecasts for stable U.S. housing starts in 2018 with slight growth in 2019, U.S. window shipment growth, and continued cabinet-demand growth. These are external forecasts, not company guidance.
- Management expected an FY2018 effective tax rate of approximately 8%, or approximately 24% excluding discrete items. Tax accounting under the new law remained provisional in certain respects.
- Management said commodity-cost recovery through customer surcharges may lag, particularly for wood, and may not cover all inputs. European silicone and vinyl-resin inflation, labor costs, foreign-exchange movements, customer concentration, and housing-market conditions remain relevant risks.
- The company continued to incur costs for previously closed facilities. A German spacer-product migration matter had a $1.6 million accrual at April 30, 2018; future unasserted claims could not be estimated. Legacy commercial sealant claims remained unresolved, though management said it did not expect a material adverse effect and recorded no accrual for them.
- Goodwill fair value for the North American Cabinet Components reporting unit exceeded carrying value by approximately 4.5% at March 31, 2018, down from 5.2% at the prior annual test. Management warned that weaker-than-expected results could lead to a potentially material impairment.
- Variable-rate debt exposes earnings to interest-rate changes; a hypothetical 1 percentage-point rate move would affect annual pretax results by approximately $2.1 million. The credit agreement includes leverage and fixed-charge covenants and restricts certain transactions, including dividends.
Investor verification priorities
- Assess the sustainability of operating-income improvement after excluding prior-year accelerated depreciation, restructuring costs, and current-year stock-compensation and tax effects.
- Track North American Cabinet Components’ sales, margins, market conditions, and goodwill impairment headroom.
- Verify the timing and effectiveness of commodity surcharges relative to raw-material cost inflation and resulting margin recovery.
- Review debt reduction, interest-rate exposure, covenant headroom, and planned cash uses, including dividends and the expected pension contribution.
- Monitor the spacer migration accrual, commercial sealant litigation and insurance coverage, and remaining restructuring lease obligations.