Quanex Building Loss Narrows Y/Y, Misses Ests

Quanex Building Products Corporation (NX) reported a loss of 14 cents per share in the first quarter of 2014, compared with the prior-year quarter loss of 17 cents per share. The results benefited from higher sales across all products within Engineered Products Group (:EPG). However, the loss per share was wider than the Zacks Consensus Estimate of a loss per share of 8 cents.

Operational Update

Revenues improved 9% year over year to $202 million. However, the reported figure lagged the Zacks Consensus Estimate of $204 million. Results were aided by double-digit sales growth in EPG.

Cost of sales during the quarter increased 5.7% to $171.9 million from $162.7 million in the prior-year quarter. Gross profit improved 32.3% year over year to $30.5 million. Consequently, gross margin expanded 260 basis points to 15%.

Selling, general and administrative expenses decreased 8% year over year to $24.8 million. Quanex Building reported an operating loss of $5.6 million, narrower than a loss of $13.7 million in the year-ago quarter. The company posted an adjusted loss of $6.8 million versus $11.3 million in the prior-year quarter.

Segment Performance

EPG: Net sales at the segment increased 19% year over year to $126 million. Operating income for the segment increased around threefold to $7.5 million from $2.8 million in the year-ago quarter.

Aluminum Sheet Products: The segment’s sales decreased 6% year over year to $80 million. However, the company reported an operating loss of $4.2 million in the reported quarter, flat with the year-ago quarter.

Financial Update

Cash and cash equivalents were $25.8 million as of Jan 31, 2014, compared with $49.7 million as of Oct 31, 2013. Long-term debt remained flat at $0.72 million as of Jan 31, 2014, compared with long-term debt as of Oct 31, 2013. In the reported quarter, cash used in operating activities was $11.5 million as against usage of $30 million in the year-ago comparable period.

Outlook

Quanex Building projects window shipments in the U.S to increase by 12% in 2014, with new construction rising 22% and replacement and remodeling (R&R) expanding 6%. For full-year 2014, the company expects revenues in the EPG segment to grow 5%–6% from 2013. However, earnings before interest, taxes, depreciation and amortization (:EBITDA) margins will be similar to 2013 levels for the segment. Pricing pressure, particularly on vinyl profiles, is expected to continue throughout 2014.

Our View

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

In addition, on Feb 2014, Quanex announced the sale of Nichols (Aluminum Sheet Products Group) to Aleris for $110 million. The move will enable Quanex to focus on the Engineered Products segment and direct more energy and capital to its window and door components business, given the housing market’s expected recovery with opportunities for organic and inorganic growth. The transaction is expected to close on Mar 31, 2014.

However, due to uncertainty with regard to new warehouse rules and their possible impact on net spreads, the company expects 2014 revenue growth for the Nichols group to be in the mid to high single-digit range.

Houston, Texas-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 currently carries a Zacks Rank #2 (Buy). Some better-ranked stocks in the sector include CaesarStone Sdot-Yam Ltd. (CSTE), USG Corporation (USG) and Wolseley plc (WOSYY). While CaesarStone sports a Zacks Rank #1 (Strong Buy), USG Corporation and Wolseley have a Zacks Rank #2 (Buy).

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