Quanex Building Products (NX) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Quanex Building Products Corporation as of April 30, 2022, and for the three and six-month periods then ended Condensed Consolidated Financial Statements The company's financial position strengthened, with total assets increasing to $740.5 million, net income saw significant growth, rising 82% for the quarter and 69% for the six-month period year-over-year, though cash flow from operations turned negative for the six-month period due to increased inventory and working capital changes Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | April 30, 2022 | October 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $298,920 | $249,047 | | Total Assets | $740,490 | $717,323 | | Total Current Liabilities | $146,588 | $158,001 | | Total Liabilities | $304,316 | $297,541 | | Total Stockholders' Equity | $436,174 | $419,782 | Condensed Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $322,893 | $270,357 | $589,933 | $500,504 | | Operating Income | $34,550 | $21,380 | $48,676 | $33,215 | | Net Income | $26,522 | $14,551 | $37,761 | $22,403 | | Diluted EPS | $0.80 | $0.43 | $1.13 | $0.67 | Condensed Consolidated Cash Flow Highlights (Six Months Ended April 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Cash (used for) provided by operating activities | $(1,881) | $28,960 | | Cash used for investing activities | $(13,749) | $(8,134) | | Cash provided by (used for) financing activities | $16,502 | $(24,272) | | Decrease in cash and cash equivalents | $(1,161) | $(2,363) | Notes to Financial Statements The notes provide detailed disclosures on accounting policies and financial items, covering revenue recognition, business segment performance, debt structure, and stock-based compensation, with the company operating in three segments and managing a revolving credit facility - The company is a component supplier to OEMs in the building products industry, focusing on fenestration (window and door) components and kitchen and bath cabinet components, serving customers primarily in North America and the U.K.[21] Net Sales by Segment (in thousands) | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | NA Fenestration | $177,908 | $146,143 | $324,539 | $274,259 | | EU Fenestration | $73,427 | $61,657 | $132,341 | $110,748 | | NA Cabinet Components | $72,878 | $63,562 | $135,231 | $117,556 | | Total Net Sales | $322,893 | $270,357 | $589,933 | $500,504 | Operating Income by Segment (in thousands) | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | NA Fenestration | $22,221 | $15,783 | $34,372 | $26,986 | | EU Fenestration | $12,597 | $10,250 | $20,412 | $18,437 | | NA Cabinet Components | $568 | $(284) | $(885) | $(297) | | Total Operating Income | $34,550 | $21,380 | $48,676 | $33,215 | - As of April 30, 2022, the company had $63.0 million of borrowings outstanding under its $325.0 million revolving credit facility, with $257.6 million available for use, and was in compliance with all debt covenants[56] Management's Discussion and Analysis (MD&A) Management discusses the company's financial performance, highlighting strong revenue growth across all segments driven by price increases and raw material surcharges, which offset inflationary pressures and, in some cases, volume declines, while maintaining strong liquidity despite decreased operating cash flow due to working capital investments Market Overview and Outlook The company's performance is driven by North American new home construction and residential remodeling, with positive market forecasts for 2022, but faces risks from commodity price fluctuations and broader economic uncertainties - Market forecasts for 2022 are generally positive, with total window shipments expected to increase by approximately 5% and U.S. residential semi-custom cabinet demand projected to grow by 2%[113] - The company faces commodity price volatility in materials like PVC, aluminum, and wood, with price adjusters mitigating long-term exposure but short-term risk due to timing lags[114] - Geopolitical tensions, such as the war in Ukraine, and the ongoing impact of COVID-19 contribute to market uncertainty, potentially affecting commodity prices, supply chains, and interest rates[109][111] Results of Operations For Q2 2022, net sales grew 19% to $322.9 million and net income increased 82% to $26.6 million year-over-year, with growth driven by pricing actions across all segments, though NA Cabinet Components' profitability was challenged Q2 2022 vs Q2 2021 Performance (in millions) | Metric | Q2 2022 | Q2 2021 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $322.9 | $270.4 | $52.5 | 19% | | Operating Income | $34.6 | $21.4 | $13.2 | 62% | | Net Income | $26.6 | $14.6 | $12.0 | 82% | - NA Fenestration (Q2): Net sales increased 22% to $177.9 million, driven by price/surcharges ($21.5 million) and higher volumes ($10.2 million), with operating income growing 41%[118] - EU Fenestration (Q2): Net sales rose 19% to $73.4 million, primarily from price increases ($14.8 million) that offset negative foreign currency effects, with operating income increasing 24%[123] - NA Cabinet Components (Q2): Net sales grew 15% to $72.9 million, as price increases ($18.3 million) were partially offset by a significant volume decrease (-$9.0 million) due to supply chain issues, with the segment returning to a small operating profit[126] Liquidity and Capital Resources The company maintains a healthy liquidity position with $38.9 million in cash and $257.6 million available under its credit facility, despite operating cash flow decreasing due to unfavorable working capital changes and increased inventory values - As of April 30, 2022, the company had $38.9 million in cash and cash equivalents and $257.6 million available under its revolving credit facility[152] - Operating cash flow declined by $30.9 million for the six months ended April 30, 2022, compared to the prior year, primarily due to unfavorable working capital changes, driven by an increase in inventory value from raw material price inflation and higher payouts of accrued incentives[154] - Cash from financing activities was $16.5 million, reflecting $24.6 million in net debt borrowings, partially offset by dividend payments ($5.3 million) and treasury stock purchases ($1.6 million)[156] Market Risk Disclosures The company is exposed to interest rate, foreign currency, and commodity price risks, managing some through derivatives and price adjustment mechanisms, though short-term volatility remains - A hypothetical 1.0% change in interest rates would impact annual pre-tax income by approximately $0.6 million based on debt levels at April 30, 2022[164] - The company has exposure to foreign currency fluctuations, primarily the Euro, British Pound Sterling, and Canadian Dollar, and uses foreign exchange contracts to manage a portion of this risk[165] - Commodity price risk for materials like PVC, oil-based products, and hardwood is managed through price adjuster programs with customers, but the company remains exposed to short-term volatility due to timing lags in these adjustments[166][167][168] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of April 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of April 30, 2022, the company's disclosure controls and procedures were effective[170] - No changes in internal controls over financial reporting occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[171] PART II. OTHER INFORMATION Issuer Purchases of Equity Securities In December 2021, the Board of Directors authorized a new stock repurchase program for up to $75.0 million, with the company repurchasing 75,000 shares during Q2 fiscal 2022 - A stock repurchase program of up to $75.0 million was approved by the Board of Directors in December 2021[174] Share Repurchases in Q2 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | February 2022 | — | $— | | March 2022 | — | $— | | April 2022 | 75,000 | $20.92 | | Total | 75,000 | $20.92 | - As of April 30, 2022, the maximum remaining value of shares that may be repurchased under the program was approximately $73.4 million[174]