Quanex Building Products Announces Fourth Quarter and Fiscal Year 2016 Results

Houston, Texas, UNITED STATES


Margin Expansion Drives Improved Fiscal 2016 Results

Company Achieves Leverage Profile Target with ~$52 Million in Debt Repayments

HOUSTON, Dec. 15, 2016 (GLOBE NEWSWIRE) --  Quanex Building Products Corporation (NYSE:NX) (“Quanex” or the “Company”) today announced its results for the quarter and fiscal year ended October 31, 2016.

Fourth Quarter 2016 Highlights

  • Net sales increased 27% to $249.2 million compared to $195.5 million in Q4 2015
  • Income from continuing operations of $5.4 million, primarily impacted by $12.6 million non-cash goodwill impairment related to U.S. vinyl profiles business, compared to income from continuing operations of $9.9 million in Q4 2015
  • Adjusted EBITDA increased 14% to $34.6 million versus $30.4 million in Q4 2015
  • Bank debt reduced by approximately $32 million in the quarter

Fiscal Year 2016 Highlights

  • Net sales increased 44% to $928.2 million compared to $645.5 million in 2015
  • Loss from continuing operations of $1.9 million, largely impacted by $16.7 million interest expense related to the debt refinancing and $12.6 million non-cash goodwill impairment related to U.S. vinyl profiles business, compared to income from continuing operations of $15.6 million in 2015
  • Adjusted EBITDA increased 58% to $110.3 million versus $69.7 million in 2015
  • Cash provided by operating activities increased 29% to $86.4 million compared to $67.1 million during 2015
  • Bank debt reduced by approximately $52 million since closing acquisition of Woodcraft Industries on November 2, 2015
  • Debt refinanced, significantly reducing future annual interest expense

Bill Griffiths, Chairman, President and Chief Executive Officer, commented, “Our stated goals for fiscal 2016 were to expand margins, improve the leverage profile and refinance our debt.  The dedication of our hard working employees allowed us to accomplish all of these goals, and we look forward to another successful year in 2017.”

Fourth Quarter 2016 Results Summary
(Unaudited – See Non-GAAP Terminology Definitions and Disclaimers section for additional information)

  Three Months Ended October 31, 2016 Three Months Ended October 31, 2015
  Results
Before

Adjustments
 Adjustments Adjusted
Results
 Results
Before

Adjustments
 Adjustments Adjusted
Results
Net sales $249,171  $-  $249,171  $195,459  $-  $195,459 
Cost of sales (1)  188,168   (32)  188,136   145,628   (1,229)  144,399 
Selling, general and administrative (2)  26,480   (1)  26,479   22,379   (1,698)  20,681 
Restructuring charges (3)  529   (529)  -   -   -   - 
Asset impairment charges (4)  12,602   (12,602)  -   -   -   - 
EBITDA  21,392   13,164   34,556   27,452   2,927   30,379 
Depreciation and amortization(5)  13,387   (1,295)  12,092   10,679   -   10,679 
Operating income  8,005   14,459   22,464   16,773   2,927   19,700 
Interest expense  (2,174)  -   (2,174)  (367)  -   (367)
Other, net (6)  (1,443)  1,501   58   (831)  962   131 
Income before income taxes  4,388   15,960   20,348   15,575   3,889   19,464 
Income tax benefit (expense) (7)  1,043   (5,764)  (4,721)  (5,632)  (468)  (6,100)
Income from continuing operations $5,431  $10,196  $15,627  $9,943  $3,421  $13,364 
             
Diluted earnings per share from continuing operations $0.16    $0.45  $0.29    $0.39 
             
(1) Cost of sales adjustment relates solely to purchase price accounting inventory step-up impact from HL Plastics acquisition.
(2) Selling, general and administrative adjustments are for acquisition related transaction costs.
(3) Restructuring charges relate to the closure of several manufacturing plant facilities.
(4) Asset impairment charges relate to goodwill impairment.
(5) Depreciation and amortization adjustments relate to accelerated amortization for restructured PP&E and intangible assets.
(6) Other, net adjustments relate to foreign currency transaction gains (losses).
(7) Effective tax rate reflects impacts of adjustments on a with and without basis.

Fiscal Year 2016 Results Summary
(Unaudited – See Non-GAAP Terminology Definitions and Disclaimers section for additional information

  Twelve Months Ended October 31, 2016 Twelve Months Ended October 31, 2015
  Results
Before

Adjustments
 Adjustments Adjusted
Results
 Results
Before

Adjustments
 Adjustments Adjusted
Results
Net sales $928,184  $-  $928,184  $645,528  $-  $645,528 
Cost of sales (1)  710,644   (2,671)  707,973   499,097   (4,159)  494,938 
Selling, general and administrative (2)  114,910   (4,988)  109,922   86,536   (5,628)  80,908 
Restructuring charges(3)  529   (529)  -   -   -   - 
Asset impairment charges(4)  12,602   (12,602)  -   -   -   - 
EBITDA  89,499   20,790   110,289   59,895   9,787   69,682 
Depreciation and amortization(5)  53,146   (1,295)  51,851   35,220   -   35,220 
Operating income  36,353   22,085   58,438   24,675   9,787   34,462 
Interest (expense) benefit (9)  (36,498)  16,677   (19,821)  (991)  -   (991)
Other, net (6)  (5,479)  5,380   (99)  (531)  779   248 
(Loss) income before income taxes  (5,624)  44,142   38,518   23,153   10,566   33,719 
Income tax benefit (expense) (7)  3,765   (14,591)  (10,826)  (7,539)  (2,511)  (10,050)
(Loss) income from continuing operations $(1,859) $29,551  $27,692  $15,614  $8,055  $23,669 
             
Diluted (loss) earnings per share from continuing operations (8) $(0.05)   $0.80  $0.46    $0.69 
             
(1) Cost of sales adjustments relate solely to purchase price accounting inventory step-up impact from HL Plastics and Woodcraft Industries acquisitions.
(2) Selling, general and administrative adjustments are for acquisition related transaction costs.
(3) Restructuring charges relate to the closure of several manufacturing plant facilities.
(4) Asset impairment charges relate to goodwill impairment.
(5) Depreciation and amortization adjustments relate to accelerated amortization for restructured PP&E and intangible assets.
(6) Other, net adjustments relate to foreign currency transaction gains (losses).
(7) Effective tax rate reflects impacts of adjustments on a with and without basis.
(8) Adjusted EPS is calculated using diluted shares outstanding of 34.5 million shares.
(9) Interest expense adjustments relate to write off of deferred loan costs, unamortized original issuance discount, and prepayment call premium related to debt refinance.
 

Quanex reported net sales of $249.2 million and $928.2 million for the three months and twelve months ended October 31, 2016, an increase of 27% and 44%, respectively, compared to $195.5 million and $645.5 million for the three months and twelve months ended October 31, 2015.  The increases were primarily driven by revenue generated from the acquisitions of HL Plastics and Woodcraft Industries in 2015, partially offset by foreign exchange translation impact.  (See Sales Analysis table for additional information)

Adjusted EBITDA increased to $34.6 million and $110.3 million during the fourth quarter and full fiscal year 2016, respectively, compared to $30.4 million and $69.7 million during the same periods of fiscal 2015.  Due to the successful implementation of ongoing operational initiatives, the Company’s consolidated Adjusted EBITDA margin improved by approximately 110 basis points during fiscal 2016.  For its “legacy” U.S. windows components business, the Company realized an Adjusted EBITDA margin improvement of approximately 45 basis points during the three months ended October 31, 2016, and approximately 225 basis points during the twelve months ended October 31, 2016.  (See Non-GAAP Terminology Definitions and Disclaimers section and Selected Segment Data table for additional information)

As of October 31, 2016, Quanex’s leverage ratio of Net Debt to LTM Adjusted EBITDA was 2.2x.  (See Non-GAAP Terminology Definitions and Disclaimers section for additional information)

Business Update

The Company has been open about its willingness to walk away from less profitable business in an effort to protect margins and free up capacity to reduce further investment.  Quanex continues to evaluate profitability by customer and product line, specifically in its U.S. vinyl profiles and cabinet components businesses.   As a result, the Company has initiated the process of reducing volumes manufactured for a large U.S. vinyl profiles customer and expects the process to be carried out in a phased manner throughout 2017 and into 2018.  Similarly, Quanex has decided to discontinue manufacturing certain low-margin cabinet component products and continues to explore additional opportunities to improve margins in this business.  In total, the Company shed approximately $15 million of business in fiscal 2016 as part of this initiative while expanding margins.  It is probable that Quanex will shed a further $50 million to $70 million of business in fiscal 2017, which should have a positive impact on margin percentages.  

To prepare for these reductions, the Company has taken appropriate actions to rationalize capacity by closing two of its U.S. vinyl profile operations and one of its cabinet component operations, relocating assets to improve overall operational efficiency. 

Fiscal 2017 Outlook

Bill Griffiths, Chairman, President and Chief Executive Officer, stated, “Based on end market dynamics that continue to be positive, we remain steadfast in our belief that the housing recovery will follow a slow, steady path of mid to high single digit growth for the next three to five years.  We do not subscribe to the rhetoric that suggests we are in the late innings of the housing recovery.  In addition, we continue to believe that new housing starts need to return to at least 1.5 million per year and that there is pent up demand in the R&R market.”   

Quanex is projecting underlying sales growth of 5% to 6% for fiscal 2017 offset by the customer actions discussed above and a potential negative foreign currency translation impact, which could be approximately $20 million based on current exchange rates. The Company remains focused on driving continued margin enhancement and working capital management in an effort to further improve its free cash flow profile. 

Conference Call and Webcast Information

The Company has scheduled a conference call for Friday, December 16, 2016, at 11:00 a.m. ET (10:00 a.m. CT).  To participate in the conference call dial (877) 388-2139 for domestic callers and (541) 797-2983 for international callers, in both cases using the conference passcode 29475717, and ask for the Quanex call a few minutes prior to the start time.  A link to the live audio webcast will also be available on the Company’s website at http://www.quanex.com in the Investors section under Presentations & Events.  A telephonic replay of the call will be available approximately two hours after the live broadcast ends and will be accessible through December 23, 2016.  To access the replay dial (855) 859-2056 for domestic callers and (404) 537-3406 for international callers, in both cases referencing conference passcode 29475717. 

About Quanex

Quanex Building Products Corporation is an industry-leading manufacturer of components sold to Original Equipment Manufacturers (OEMs) in the building products industry.  Quanex designs and produces energy-efficient fenestration products in addition to kitchen and bath cabinet components.

For more information contact Scott Zuehlke, Vice President of Investor Relations & Treasurer, at (713) 877-5327 or scott.zuehlke@quanex.com.

Non-GAAP Terminology Definitions and Disclaimers

EBITDA (defined as net income or loss before interest, taxes, depreciation and amortization and other, net) and Adjusted EBITDA (defined as net income or loss before interest, taxes, depreciation and amortization and other, net, excluding transaction costs and purchase price accounting inventory step-ups) are non-GAAP financial measures that Quanex's management uses to measure its operational performance and assist with financial decision-making.  The Company believes these non-GAAP measures provide a consistent basis for comparison between periods, and will assist investors in understanding our financial performance when comparing our results to other investment opportunities. The leverage ratio of Net Debt to LTM Adjusted EBITDA is a financial measure that Quanex’s management believes is useful to investors and financial analysts in evaluating the Company’s leverage. In addition, with certain limited adjustments, this leverage ratio is the basis for a key covenant in Quanex’s credit agreements.  Net Debt is calculated using the sum of current maturities of long-term debt and long-term debt, minus cash and cash equivalents.  Adjusted Income (Loss) from Continuing Operations and Adjusted Diluted Earnings (Loss) from Continuing Operations are non-GAAP financial measures that exclude certain charges and credits because the Company believes that such items are not indicative of its core operating results, are not indicative of trends, and do not provide meaningful comparisons with other reporting periods.  Quanex believes the presented non-GAAP measures provide a consistent basis for comparison between periods, and will assist investors in understanding our financial performance when comparing our results to other investment opportunities.  The presented non-GAAP measures may not be the same as those used by other companies.  The Company does not intend for this information to be considered in isolation or as a substitute for other measures prepared in accordance with US GAAP.

Forward Looking Statements

Statements that use the words “estimated,” “expect,” “could,” “should,” “believe,” “will,” “might,” or similar words reflecting future expectations or beliefs are forward-looking statements. The forward-looking statements include, but are not limited to, future operating results of Quanex, the future financial condition of Quanex, future uses of cash and other expenditures, expenses and tax rates, expectations relating to the Company’s industry, and Quanex’s future growth, including any guidance discussed in this press release.  Guidance is a forward-looking estimate of performance and may not be indicative of actual results.  The statements and guidance set forth in this release are based on current expectations. Actual results or events may differ materially from this release. Factors that could impact future results may include, without limitation, the effect of both domestic and global economic conditions, the impact of competitive products and pricing, the availability and cost of raw materials, and customer demand. For a more complete discussion of factors that may affect the Company’s future performance, please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2015, under the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors,” and in Quanex’s other documents filed with the Securities and Exchange Commission from time to time.  Any forward-looking statements in this press release are made as of the date hereof, and Quanex Building Products Corporation undertakes no obligation to update or revise any forward-looking statements to reflect new information or events.

 
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
         
         
  Three Months Ended October 31, Twelve Months Ended October 31,
   2016   2015   2016   2015 
         
Net sales $249,171  $195,459  $928,184  $645,528 
Cost of sales  188,168   145,628   710,644   499,097 
Selling, general and administrative  26,480   22,379   114,910   86,536 
Restructuring charges  529   -   529   - 
Depreciation and amortization  13,387   10,679   53,146   35,220 
Asset impairment charges  12,602   -   12,602   - 
Operating income  8,005   16,773   36,353   24,675 
Interest expense  (2,174)  (367)  (36,498)  (991)
Other, net  (1,443)  (831)  (5,479)  (531)
Income (loss) before income taxes  4,388   15,575   (5,624)  23,153 
Income tax benefit (expense)  1,043   (5,632)  3,765   (7,539)
Income (loss) from continuing operations  5,431   9,943   (1,859)  15,614 
Income from discontinued operations, net of taxes  -   -   -   479 
Net income (loss) $5,431  $9,943  $(1,859) $16,093 
         
Income (loss) per common share:        
From continuing operations $0.16  $0.30  $(0.05) $0.46 
From discontinued operations  -   -   -   0.01 
Income (loss) per common share, basic $0.16  $0.30  $(0.05) $0.47 
         
Diluted income (loss) per common share:        
From continuing operations $0.16  $0.29  $(0.05) $0.46 
From discontinued operations $-  $-  $-  $0.01 
Income (loss) per common share, diluted $0.16  $0.29  $(0.05) $0.47 
         
Weighted average common shares outstanding:        
Basic  33,953   33,640   33,876   33,993 
Diluted  34,536   34,148   33,876   34,502 
         
Cash dividends per share $0.04  $0.04  $0.16  $0.16 
         


QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
     
  October 31, 2016 October 31, 2015 (1)
ASSETS    
Current assets:    
Cash and cash equivalents $25,526  $23,125 
Accounts receivable, net  83,625   64,080 
Inventories, net  84,335   63,029 
Prepaid and other current assets  10,488   7,992 
Total current assets  203,974   158,226 
Property, plant and equipment, net  198,497   140,672 
Deferred income taxes  -   8,783 
Goodwill  217,035   129,770 
Intangible assets, net  154,180   120,810 
Other assets  6,667   7,255 
Total assets $780,353  $565,516 
     
LIABILITIES AND STOCKHOLDERS' EQUITY    
Current liabilities:    
Accounts payable $47,781  $47,778 
Accrued liabilities  55,101   37,364 
Income taxes payable  732   747 
Current maturities of long-term debt  10,520   2,359 
Total current liabilities  114,134   88,248 
Long-term debt  259,011   53,767 
Deferred pension and postretirement benefits  8,167   5,701 
Deferred income taxes  18,322   - 
Liabilities for uncertain tax positions  579   564 
Other liabilities  12,309   21,941 
Total liabilities  412,522   170,221 
Stockholders’ equity:    
Common stock  376   376 
Additional paid-in-capital  254,540   250,937 
Retained earnings  214,047   222,138 
Accumulated other comprehensive loss  (38,765)  (10,049)
Treasury stock at cost  (62,367)  (68,107)
Total stockholders’ equity  367,831   395,295 
Total liabilities and stockholders' equity $780,353  $565,516 
     
(1) October 31, 2015 balance sheet reflects adoption of ASU 2015-03 and ASU 2015-17.
 


QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
    
 Twelve Months Ended October 31,
  2016   2015 
Operating activities:   
Net (loss) income$(1,859) $16,093 
Adjustments to reconcile net (loss) income to cash provided by operating activities:   
Depreciation and amortization 53,146   35,220 
Loss on disposition of capital assets (20)  495 
Stock-based compensation 6,089   4,266 
Deferred income tax (8,469)  5,204 
Excess tax benefit from share-based compensation (136)  (60)
Charge for deferred loan costs and debt discount 16,022   - 
Asset impairment charges 12,602   - 
Gain on involuntary conversion -   (1,263)
Other, net 339   (19)
Changes in assets and liabilities, net of effects from acquisitions:   
Decrease in accounts receivable 796   2,668 
Decrease in inventory 5,346   9,805 
Decrease (increase) in other current assets 2,503   (1,304)
Decrease in accounts payable (2,273)  (2,862)
Increase (decrease) in accrued liabilities 1,246   (576)
(Decrease) increase in income taxes payable (365)  369 
Increase (decrease) in deferred pension and postretirement benefits 588   (372)
Increase (decrease) in other long-term liabilities 956   (283)
Other, net (93)  (294)
Cash provided by operating activities 86,418   67,087 
Investing activities:   
Acquisitions, net of cash acquired (245,904)  (131,689)
Capital expenditures (37,243)  (29,982)
Proceeds from property insurance claim -   1,263 
Proceeds from disposition of capital assets 1,044   264 
Cash used for investing activities (282,103)  (160,144)
Financing activities:   
Borrowings under credit facilities 634,800   117,000 
Repayments of credit facility borrowings (422,875)  (67,000)
Debt issuance costs (11,435)  (496)
Repayments of other long-term debt (2,185)  (1,020)
Common stock dividends paid (5,470)  (5,515)
Issuance of common stock 3,400   5,109 
Excess tax benefit from share-based compensation 136   60 
Purchase of treasury stock -   (52,719)
Cash provided by financing activities 196,371   (4,581)
    
Effect of exchange rate changes on cash and cash equivalents 1,715   379 
    
Increase (decrease) in cash and cash equivalents 2,401   (97,259)
Cash and cash equivalents at beginning of period 23,125   120,384 
Cash and cash equivalents at end of period$25,526  $23,125 
    


QUANEX BUILDING PRODUCTS CORPORATION
SELECTED SEGMENT DATA
(In thousands)
(Unaudited)
           
This table provides operating income (loss), EBITDA, and Adjusted EBITDA by reportable segment.  Non-operating expense and income tax expense are not allocated to the reportable segments.  For a reconciliation of income from continuing operations to operating income (loss), see Non-GAAP Financial Measure Disclosure table.
           
  NA Engineered
Components
 EU Engineered
Components
 NA Cabinet
Components
 Unallocated
Corp & Other
 Total
Three months ended October 31, 2016          
Net sales $154,000  $39,953  $56,485  $(1,267) $249,171 
Cost of sales  111,491   27,754   49,844   (921)  188,168 
Restructuring charges  387   -   142   -   529 
Asset impairment charges  12,602   -   -   -   12,602 
Operating income (loss)  4,098   4,234   1,706   (2,033)  8,005 
Depreciation and amortization  8,874   2,148   2,239   126   13,387 
EBITDA  12,972   6,382   3,945   (1,907)  21,392 
Transaction related costs  -   -   -   1   1 
PPA-Inventory Step-up  -   32   -   -   32 
Restructuring charges  387   -   142   -   529 
Asset impairment charges  12,602   -   -   -   12,602 
Adjusted EBITDA $25,961  $6,414  $4,087  $(1,906) $34,556 
Adjusted EBITDA Margin %  17%  16%  7%    14%
           
Three months ended October 31, 2015          
Net sales $154,301  $42,340  $-  $(1,182) $195,459 
Cost of sales  114,122   32,105   -   (599)  145,628 
Operating income (loss)  18,126   2,873   -   (4,226)  16,773 
Depreciation and amortization  7,221   3,037   -   421   10,679 
EBITDA  25,347   5,910   -   (3,805)  27,452 
Transaction related costs  -   -   -   1,698   1,698 
PPA-Inventory Step-up  -   1,229   -   -   1,229 
Adjusted EBITDA $25,347  $7,139  $-  $(2,107) $30,379 
Adjusted EBITDA Margin %  16%  17%  0%    16%
           
Twelve months ended October 31, 2016          
Net sales $560,029  $150,203  $223,391  $(5,439) $928,184 
Cost of sales  415,925   104,452   193,560   (3,293)  710,644 
Restructuring charges  387   -   142   -   529 
Asset impairment charges  12,602   -   -   -   12,602 
Operating income (loss)  37,883   13,225   1,821   (16,576)  36,353 
Depreciation and amortization  30,298   9,339   12,948   561   53,146 
EBITDA  68,181   22,564   14,769   (16,015)  89,499 
Transaction related costs  -   -   -   4,988   4,988 
PPA-Inventory Step-up  -   384   2,287   -   2,671 
Restructuring charges  387   -   142   -   529 
Asset impairment charges  12,602   -   -   -   12,602 
Adjusted EBITDA $81,170  $22,948  $17,198  $(11,027) $110,289 
Adjusted EBITDA Margin %  14%  15%  8%    12%
           
Twelve months ended October 31, 2015          
Net sales $556,550  $93,644  $-  $(4,666) $645,528 
Cost of sales  429,097   72,319   -   (2,319)  499,097 
Operating income (loss)  39,253   3,253   -   (17,831)  24,675 
Depreciation and amortization  28,911   5,020   -   1,289   35,220 
EBITDA  68,164   8,273   -   (16,542)  59,895 
Transaction related costs  -   -   -   5,628   5,628 
PPA-Inventory Step-up  -   4,159   -   -   4,159 
Adjusted EBITDA $68,164  $12,432  $-  $(10,914) $69,682 
Adjusted EBITDA Margin %  12%  13%  0%    11%
           


QUANEX BUILDING PRODUCTS CORPORATION
SALES ANALYSIS
(In thousands)
(Unaudited)
           
           
  Sales Bridge for Three Months Ended October 31, 2016
  NA Engineered EU Engineered NA Cabinet Unallocated  
  Components Components Components Corporate & Other Consolidated
           
Net sales, three months ended October 31, 2015 $154,301  $42,340  $- $(1,182) $195,459 
Market volume  2,403   527   -  (85)  2,845 
Eliminated products  (1,946)  -   -  -   (1,946)
Price changes  (426)  (342)  -  -   (768)
Foreign currency impacts  -   (1,029)  -  -   (1,029)
Mergers & acquisitions  -   (1,543)  56,485  -   54,942 
Raw material pass through adjustments  (332)  -   -  -   (332)
Net Sales, three months ended October 31, 2016 $154,000  $39,953  $56,485 $(1,267) $249,171 
           
  Sales Bridge for Twelve Months Ended October 31, 2016
  NA Engineered EU Engineered NA Cabinet Unallocated  
  Components Components Components Corporate & Other Consolidated
           
Net sales, twelve months ended October 31, 2015 $556,550  $93,644  $- $(4,666) $645,528 
Market volume  17,161   3,244   -  (773)  19,632 
Eliminated products  (6,634)  -   -  -   (6,634)
Price changes  (1,819)  (1,710)  -  -   (3,529)
Foreign currency impacts  -   (2,803)  -  -   (2,803)
Mergers & acquisitions  -   57,828   223,391  -   281,219 
Raw material pass through adjustments  (5,229)  -   -  -   (5,229)
Net Sales, twelve months ended October 31, 2016 $560,029  $150,203  $223,391 $(5,439) $928,184