Quanex Building Products Corporation — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended April 30, 2020. Financial statements are unaudited. Quanex supplies fenestration and cabinet components to building-products OEMs, principally in North America and the U.K.
Key financial results
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $187.5 million | $218.2 million | $384.1 million | $415.0 million |
| Operating income (loss) | $8.9 million | $(19.4) million | $10.9 million | $(21.8) million |
| Net income (loss) | $5.5 million | $(24.0) million | $5.5 million | $(27.6) million |
| Diluted EPS | $0.17 | $(0.73) | $0.17 | $(0.84) |
| Operating cash flow | Not separately reported for the quarter | $2.5 million | $0.1 million |
- Q2 sales declined 14%; six-month sales declined 7%. Management estimated COVID-19 reduced sales by $20–25 million for both the quarter and six-month period.
- Q2 operating margin was approximately 4.7%, compared with a loss margin of approximately 8.9% in the prior-year quarter. The comparison benefited from the absence of a $30.0 million goodwill impairment recorded in Q2 2019.
- Six-month capital expenditures were $16.3 million, versus $13.0 million; investing cash outflow was $16.3 million. Financing activities provided $63.5 million, principally reflecting net debt borrowings.
- At April 30, cash was $80.3 million; total debt was $230.4 million, including $216.0 million drawn on the revolving facility. The company reported $104.2 million of availability under its $325 million facility and compliance with debt covenants. It repaid $50 million of revolver borrowings in May 2020.
- Current assets were $231.8 million and current liabilities $79.0 million. Operating lease liabilities of $42.2 million were recognized following adoption of ASC 842.
Material changes and segment performance
- North American Fenestration Q2 sales fell 6% to $108.6 million; operating income rose to $7.4 million, with a 7% margin.
- European Fenestration Q2 sales fell 30% to $29.2 million, including COVID-related volume declines and unfavorable currency effects; operating income fell to $0.6 million, with a 2% margin.
- North American Cabinet Components Q2 sales fell 19% to $50.7 million amid customer strategy shifts and COVID-19 effects. The segment recorded a $1.2 million operating loss, versus a $28.7 million loss in the prior-year quarter, which included the impairment charge.
- Lower sales, particularly in Europe and cabinet components, were partly offset by lower SG&A, interest expense and the absence of the prior-year impairment. Six-month SG&A fell to $40.8 million from $51.7 million.
Outlook, risks and unusual items
- No company earnings or sales guidance is provided. Management said the pandemic’s duration and financial effects were highly uncertain; it expected reduced production to hurt results, cash flows and financial position, but could not reasonably estimate the impact.
- Quanex reduced operating schedules, staggered shifts and furloughed employees; U.K. government shutdowns temporarily closed both U.K. plants, which had reopened by the filing. It cut planned FY2020 capital expenditures by approximately 30–35% and reduced discretionary spending.
- Management cited third-party market forecasts: U.S. housing starts of 1.1 million in 2020, rising to 1.3 million in 2021; U.S. R&R window shipments forecast to decline about 6% in 2020; and U.S. semi-custom cabinet demand forecast to decline about 10% in 2020. These are industry forecasts, not Quanex guidance.
- COVID-19 may affect customer demand and collections, supply chains, asset valuations, goodwill, intangibles, receivables and inventory. The company’s qualitative goodwill assessment found no impairment was more likely than not at April 30, but future impairment remains possible.
- Other risks include housing and remodeling conditions, customer concentration or strategy changes, commodity-price and pass-through timing exposure, foreign exchange and Brexit-related effects, variable interest rates, debt covenant compliance and litigation. A 1% interest-rate change was estimated to affect annual pretax results by about $2.2 million.
- One cabinet-components plant closure generated $0.3 million of restructuring charges in the six months. The U.S. defined-benefit pension plan was frozen effective January 1, 2020; the company expects a $3.7 million contribution in September 2020. Commercial sealant defect claims remain unresolved; no accrual was recorded, and management did not expect a material overall effect based on currently available information and expected insurance coverage.
Investor verification points
- Track post-quarter sales, production, customer demand and collections to assess the duration and scale of COVID-19 effects.
- Verify the May repayment’s effect on cash, revolver borrowings, facility availability and covenant headroom.
- Monitor cabinet-component segment recovery, customer strategy changes, restructuring costs and potential asset or goodwill impairments.
- Check actual capital spending against the reduced plan, and confirm pension contributions and dividend or repurchase activity.
- Review developments in commercial sealant claims, insurance coverage, commodity-price adjustments, foreign exchange and U.K.–EU trade arrangements.