Quanex Building Products Corporation — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended April 30, 2019. Results are unaudited. Quanex supplies fenestration and cabinet components to building-products OEMs, with North American Fenestration, European Fenestration and North American Cabinet Components segments.
Financial performance and liquidity
| Metric | Three months ended Apr. 30, 2019 | Six months ended Apr. 30, 2019 | Comparable 2018 period |
|---|---|---|---|
| Net sales | $218.2 million | $415.0 million | $214.2 million and $405.9 million |
| Operating income (loss) | $(19.4) million | $(21.8) million | $7.8 million and $7.2 million |
| Net income (loss) | $(24.0) million | $(27.6) million | $4.1 million and $9.1 million |
| Diluted EPS | $(0.73) | $(0.84) | $0.12 and $0.26 |
| Operating cash flow | $0.1 million for six months | $21.6 million for six months |
- Sales increased 2% year over year in both the quarter and first half. Reported operating losses include a $30.0 million goodwill impairment; excluding that charge, operating income was $10.6 million for the quarter and $8.2 million for the six-month period.
- Cash and equivalents were $20.3 million at April 30, down from $29.0 million at October 31, 2018. Cash used in investing was $12.7 million, including $13.0 million of capital expenditures.
- Total debt, including capital leases and other debt, was $225.8 million, compared with $210.6 million at October 31. Revolver borrowings were $210.0 million; $110.2 million remained available under the $325 million facility. Quanex reported covenant compliance. Revolver borrowings bore interest at 4.23%.
- Cash from operations fell sharply, reflecting the lower earnings and unfavorable working-capital changes, including a seasonal inventory build and incentive payments. Inventory rose to $86.6 million from $70.7 million.
- Dividends were $0.08 per share in the quarter and $0.16 for six months, twice the comparable 2018 amounts. Six-month financing also included $4.7 million of treasury-stock purchases.
Material changes and segment results
- North American Fenestration: Sales rose 1% in the quarter and 3% for six months. Segment operating income increased to $6.3 million and $8.1 million, respectively, with lower SG&A partly offsetting higher material costs.
- European Fenestration: Sales increased 7% in the quarter and 6% for six months. Operating income rose to $4.8 million and $7.6 million; reported sales growth included volume and pricing gains, partly offset by unfavorable currency translation.
- North American Cabinet Components: Quarterly sales were approximately flat; six-month sales declined 2%, reflecting lower volume. The segment recorded a $30.0 million goodwill impairment and operating losses of $28.7 million for the quarter and $30.9 million for six months. The impairment followed weaker-than-planned results and a reduced outlook associated with an industry shift from semi-custom to stock cabinets.
- Quanex changed costing for certain inventory at two plants from LIFO to FIFO in Q2 and retrospectively adjusted prior-period balances. It also adopted the new revenue standard; management said the impact was not material.
Outlook, commentary and risks
- No specific company revenue or earnings guidance is stated in the provided filing text. Management cited third-party forecasts of modest housing-start growth through 2021, U.S. window-shipment growth of 1% through 2020 and flat shipments in 2021, and approximately 3% annual growth in U.S. semi-custom cabinet demand through 2020. These are market forecasts, not company guidance.
- Management described a focus on protecting margins and cash flow, reducing low-margin customer volume, improving operating efficiency, and investing in organic growth and complementary products.
- Key exposures include housing and remodeling demand, customer purchasing, raw-material and energy costs, commodity-price pass-through timing, foreign exchange, interest rates, and the ability to control costs and service debt. The filing notes uncertainty around Brexit, especially potential effects on U.K. raw-material availability and pricing.
- The company expects to contribute approximately $5.4 million to its pension plan in September 2019. It expects adoption of lease accounting in fiscal 2020 to have a significant balance-sheet impact; the assessment was ongoing.
- Quanex reported legacy commercial-sealant product claims and litigation but recorded no accrual, stating that it did not expect a material adverse effect based on information then available. Outcomes and insurance coverage remain uncertain. It reported no current environmental remediation matter and no expected material environmental costs in fiscal 2019.
- A hypothetical 1% change in interest rates could affect annual pretax results by approximately $2.1 million, based on debt balances at April 30. The company also disclosed that variable commodity costs not covered by customer adjusters remain an exposure.
Important facts for investors to verify
- Whether the cabinet segment’s weaker outlook and shift toward stock cabinets lead to further impairment or sustained operating deterioration.
- Whether cash generation improves after the seasonal inventory build and incentive payments, and how working capital develops.
- Debt levels, borrowing costs, covenant headroom and remaining revolver availability, particularly if operating results weaken.
- Execution of the expected pension contribution and the balance-sheet effects of adopting lease accounting in fiscal 2020.
- Developments in sealant claims, insurance coverage, Brexit-related supply and currency exposure, and raw-material cost recovery.