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Quanex: fiscal 2013 second quarter results

Net loss of USD 7.3 million or USD 0.20 per diluted share; EPG net sales increase 15%; operating income improves to USD 5.9 million; Nichols Aluminum net sales increase 24%; shipped volume increases 27%

Quanex Building Products Corporation, a leading manufacturer of engineered materials, components and systems serving domestic and international window and door OEMs through its Engineered Products and Aluminum Sheet Products Groups, has released its fiscal 2013 second quarter results for the period ended 30 April 2013.
Consolidated second quarter 2013 net sales were USD 232.5 million, compared to USD 194.4 million a year ago. Second quarter 2013 net loss was USD 7.3 million, or USD 0.20 per diluted share compared to net loss of USD 12.3 million, or USD 0.34 per diluted share in the year ago quarter. Consolidated EBITDA, a non-GAAP measure, was USD 2.2 million, compared to a loss of USD 6.5 million a year ago.
Fiscal year-to-date consolidated 2013 net sales were USD 418.2 million, compared to USD 356.0 million a year ago. Year-to-date consolidated net loss was USD 15.5 million compared to a loss of USD 19.0 million a year ago, which included USD 9 million of strike-related costs at Nichols Aluminum. Consolidated fiscal year-to-date EBITDA, a non-GAAP measure, was a loss of USD 1.9 million, compared to a loss of USD 8.1 million a year ago.
The 2013 second quarter and year-to-date results, when measured against comparable prior year periods, benefitted from the elimination of strike-related costs at Nichols Aluminum. Adjusting for strike-related costs, second quarter and year-to-date results were negatively impacted by lower spread at Nichols resulting from lower aluminium prices and higher corporate expenses from Enterprise Resource Planning (ERP) implementation costs.
Quanex’s two business segments are highly cyclical with the building and construction market and the impact of adverse winter weather. As a result, Quanex typically reports lower revenue and operating income results during the first half of its fiscal year when building and construction activity is reduced compared to the second half of its fiscal year.
Engineered Products Group (EPG) is focused on providing window and door OEMs with fenestration components, products, and systems. Key end markets are residential repair & remodel (R&R) and new home construction.
EPG’s second quarter 2013 net sales were USD 125.2 million compared to USD 108.8 million a year ago. The 15.1% improvement was primarily related to the acquisition of Aluminite as well as higher sales across the segment’s products. Aluminite contributed 11.4% of the improvement to net sales.
EPG’s second quarter 2013 EBITDA was USD 14.0 million compared to USD 7.1 million a year ago, driven by the benefits from last year’s insulating glass spacer facility consolidation as well as higher sales results. This was partially offset by pricing concessions and higher material costs. EPG’s second quarter 2012 results were negatively impacted by USD 3.7 million of IG facility consolidation expenses.
Corporate expenses in the quarter were USD 14.8 million compared to USD 8.7 million in the year ago quarter. The increase in corporate expenses was primarily due to higher ERP expenses of USD 3.6 million, (including USD 1.1 million of depreciation), USD 1 million of higher information technology and infrastructure-related costs and USD 0.9 million of project-related costs. The remaining USD 0.6 million of higher expense is largely due to stock based compensation and workers compensation costs.
In 2011, Quanex launched a multi-year, company-wide programme to transform business processes, including the transition to a single ERP software system, which is expected to improve accessibility and consistency of information, enable standardized business activities, help deliver business process improvements and support business growth. To date, the company has spent USD 37.8 million. The initial phase of the project went live during the second quarter of fiscal 2013. Depreciation expense associated with the ERP system is expected to be USD 2.1 million per quarter until the completion of the next phase of the ERP rollout.  ERP-related costs are expected to be lower during the third quarter of 2013, with a further decline taking place during the fourth quarter of 2013.
At quarter end, Quanex had total cash of USD 9.6 million and total debt outstanding of USD 11.4 million. Cash used by operating activities for the first six months of 2013 was USD 20.8 million. The use of cash from operating activities was primarily due to the reported net loss and working capital needs. As of April 30, 2013, the company had USD 10 million in borrowings under its revolving credit facility, and available capacity due to the facility’s EBITDA covenant requirements was approximately USD 59.4 million.
Quanex is pleased to see a rebound in new construction and believes that growth will continue. New home construction, the R&R market and prime window demand remain low when compared to historical growth figures, and present a challenging environment, as does unemployment and tight credit conditions.
Additionally, increased global supply of aluminium product, coupled with tight regional aluminium scrap supply, continue to create a challenging spread environment for Nichols Aluminum. Quanex expects calendar year 2013 US window shipments to be approximately 42 million units, a 5% increase above 2012 levels but nearly 12% below Ducker’s current forecasted shipments of 47 million. The company believes the majority of the improvement in US window shipments will come from new construction (primarily multi-family units, where Quanex has less exposure) and R&R window shipments will be relatively flat in 2013 when compared to 2012 shipments.
With the spring building season underway, EPG is expected to report net sales during the second half of 2013 of about USD 315 million and operating income of about USD 35-USD 38 million. EPG’s depreciation and amortization for the second half of 2013 is expected to be about USD 16 million.
Corporate expenses during the second half of 2013 are expected to total USD 24 million, including USD 4.8 million of depreciation and amortization expense. Total second half 2013 corporate expenses include ERP-related expense of USD 1.5 million and ERP-related depreciation and amortization of USD 4.3 million.
Quanex remains very positive on the long-term growth prospects of its residential and commercial markets and expects to continue to invest for its future through both organic growth initiatives and acquisitions.
On 6 June 2013, the Board of Directors declared a quarterly cash dividend of USD 0.04 per share on the company’s common stock, payable 28 June 2013, to shareholders of record on 17 June 2013.

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