Quanex Building Products Corporation — Q1 FY2018 10-Q
Reporting period: Three months ended January 31, 2018; comparisons are with the three months ended January 31, 2017 unless stated otherwise. Quanex supplies components to building-products OEMs, primarily for windows, doors, and cabinets. The filing is unaudited.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $191.7 million | $195.1 million |
| Operating loss | $0.5 million | $3.8 million |
| Net income (loss) | $4.9 million | $(3.7) million |
| Diluted EPS | $0.14 | $(0.11) |
| Cash from operations | $8.2 million | $3.1 million |
| Capital expenditures | $7.8 million | $8.1 million |
| Cash dividends per share | $0.04 | $0.04 |
Operating margin improved to approximately negative 0.3% from negative 2.0%; net margin was approximately 2.6%, versus negative 1.9%. The net income improvement chiefly reflects a $7.6 million income-tax benefit, including the impact of U.S. tax reform; it does not represent an equivalent improvement in operating performance.
Cash and equivalents were $13.8 million at January 31, 2018, down from $17.5 million at October 31, 2017. Total debt was $236.1 million, including $20.8 million of current maturities; the company reported $211.2 million available under its credit agreement and was in compliance with its covenants. Working capital was $86.3 million. Net cash used in financing was $4.4 million, including $4.5 million of net debt repayments and $1.4 million of dividends.
Material changes and segment results
- Sales declined 1.8%, reflecting lower volumes, partly offset by pricing, commodity surcharges, and favorable foreign exchange in Europe. Management cited its intentional exit from lower-margin business, a major customer loss, plant closures, and slower-than-expected activity at some cabinet OEMs.
- North American Engineered Components sales fell 3% to $102.7 million; operating income increased to $1.6 million from $0.1 million, aided by lower depreciation and restructuring costs.
- European Engineered Components sales rose 8% to $34.0 million, including a $3.1 million favorable foreign-exchange effect; operating income fell 41% to $1.3 million as costs rose.
- North American Cabinet Components sales fell 5% to $55.9 million; its operating loss widened to $2.9 million from $0.8 million, with lower volume, higher wood and labor costs, and product mix cited as pressures.
- SG&A decreased to $24.1 million from $27.4 million, and depreciation and amortization fell to $13.3 million from $15.4 million. Restructuring charges declined to $0.4 million from $1.1 million. The prior-year comparison included accelerated depreciation and amortization associated with restructuring.
Outlook, risks, contingencies, and unusual items
- Management expected a fiscal 2018 effective tax rate of approximately 9%, or 24% excluding discrete items. The company recorded a $6.5 million discrete tax benefit related to tax reform and stated that some tax-law effects remained provisional under the SEC measurement-period guidance.
- External market forecasts cited by management anticipated stable U.S. housing starts in 2018, modest growth in window shipments, and 4%–6% annual growth in U.S. residential semi-custom cabinet demand through 2020. These are third-party forecasts, not company revenue guidance.
- Management continued to emphasize margin protection, cash flow, organic investment, and potential strategic acquisitions. It was evaluating repatriation of foreign earnings, with possible use of funds to repay debt or meet working-capital needs.
- Key exposures include housing and remodeling demand, customer concentration and volume, raw-material costs and surcharge timing, foreign exchange, variable interest rates, and the ability to maintain debt covenant compliance. A 1% interest-rate change was estimated to affect annual pretax results by approximately $2.2 million.
- The company reported a $1.4 million accrual for spacer-migration claims and could not estimate liability for unasserted claims. It also described legacy commercial-sealant litigation; no accrual was recorded, and ultimate timing and outcome remained uncertain. Environmental matters were not expected to have a material impact based on current information.
- Restructuring costs were expected to continue during fiscal 2018. A planned pension contribution of approximately $3.6 million was expected in September 2018. The Shawano wood-flooring business sale included a receivable collectible over five years and a commitment to supply wood to the facility at cost through fiscal 2018.
Important facts for investors to verify
- How much of reported net income and the expected fiscal-year tax rate depends on provisional or one-time tax-reform benefits.
- Whether volume and profitability stabilize, particularly in North American Cabinet Components, and whether deliberate customer exits continue to reduce sales.
- Whether commodity-cost increases, especially wood and resin, can be recovered through pricing and surcharges without margin pressure.
- Debt balances, covenant headroom, variable-rate exposure, and the intended use and timing of any foreign cash repatriation.
- Developments in spacer-migration claims, commercial-sealant litigation, and continuing restructuring and lease costs.