Quanex Building Cuts Q2 Loss, Misses Ests - Analyst Blog

Quanex Building Products Corporation NX posted adjusted loss of 4 cents per share in the second quarter of fiscal 2014 (ended Apr 30, 2014), compared with the prior-year loss of 11 cents per share. The bottom line fell short of the Zacks Consensus Estimate of earnings of 2 cents.

Adjusted loss in the quarter excludes asset impairment charges and discontinued enterprise resource planning (ERP) expenses of 2 cents. The year ago quarter's loss excludes discontinued ERP expenses of 8 cents.  On a reported basis, loss was 5 cents per share in the quarter versus a loss of 19 cents in the year-ago quarter.

Operational Update

Despite poor weather and weakness in housing and construction, Quanex Building reported revenues of $135 million, an 8% improvement year over year. However, the reported figure beat the Zacks Consensus Estimate of $134 million.

Cost of sales during the quarter increased 13.5% to $108.6 million from $95.7 million in the prior-year quarter. However, gross profit declined 9.7% year over year to $26.6 million. Consequently, gross margin contracted 390 basis points to 19.6%.

Selling, general and administrative expenses decreased 27.7% year over year to $20.4 million. Quanex Building reported an operating loss of $2.8 million, narrower than a loss of $8.6 million in the year-ago quarter. The company's inability to pass through a 12% increase in vinyl resin price on around 60% of vinyl shipments led to the loss.  Additionally, repair and maintenance costs were abnormally high during the quarter. The company posted an adjusted loss of $2 million versus a loss of $4.9 million in the prior-year quarter.

Financial Update

Cash and cash equivalents were $126.9 million as of Apr 30, 2014, compared with $49.7 million as of Oct 31, 2013. Long-term debt decreased to $0.6 million as of Apr 30, 2014 compared with $0.7 million as of Oct 31, 2013. Cash used in operating activities for the period of six months ended Apr 30, 2014 was $11 million compared with $20.8 million in the year-ago comparable period.

On May 29, 2014, the company also declared a quarterly cash dividend of 4 cents per share, payable on Jun 30, 2014, to shareholders of record on Jun 16, 2014.

Guidance

For fiscal 2014, Quanex Building expects revenue to grow approximately 8% to 9% over 2013 levels. The company trimmed its earnings before interest, taxes, depreciation and amortization (EBITDA) guidance to the range of $55—$60 million from the previous band of $55—$65 million due to margin headwinds in the vinyl profile business this year, though EBITDA guidance assumes no further increase in resin prices for the rest of the year.

Excluding transaction and deferred compensation-related costs Quanex Building anticipates corporate expenses of $28-$30 million during fiscal 2014. Capital expenditures are expected to be $40 million for the fiscal year, which includes $30 million from continuing operations and $10 million from discontinued operations. Capital expenditures will primarily focus on improvements in growth initiatives, operational efficiency and cost reduction. In addition, depreciation and amortization is expected to be approximately $34 million during fiscal 2014.

Ducker Worldwide, LLC (Ducker), a market intelligence firm, projected U.S. window shipments to increase 7.5% in 2014, with new constructions increasing 12.5% and R&R (residential remodeling and replacement units) increasing 4.2% from 2013 shipments.

Our View

In early 2014, Quanex Building expanded its product portfolio with its purchase of the assets of Atrium Windows and Doors Inc.'s Texas plant. The acquisition will help the company to strengthen its manufacturing presence in the southern U.S. It will also allow Quanex to serve customers better in the new construction market.

On Apr 2014, Quanex Building completed the sale of Nichols (Aluminum Sheet Products Group) to Aleris for $110 million. The move will enable the company to focus on its window and door components business.

Moreover, Quanex Building is positive on the long-term growth prospects of its markets and expects to continue investing through both organic growth initiatives and acquisitions. However, repair and maintenance costs will remain high in the third quarter of fiscal 2014 due to Quanex Building's investment in upgrading the vinyl profile equipment and facilities. This will hurt the company's profitability.

Houston, TX-based Quanex Building Products Corporation is a leading manufacturer of engineered materials, components and systems, serving domestic and international window and door original equipment manufacturers (OEMs) through its Engineered Products and Aluminum Sheet Products Groups.

Quanex Building currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Gibraltar Industries, Inc. ROCK, Simpson Manufacturing Co., Inc. SSD and James Hardie Industries plc JHX. While Gibraltar Industries and Simpson Manufacturing sport a Zacks Rank #1 (Strong Buy), James Hardie Industries carries a Zacks Rank #2 (Buy).