NX Quanex Corp

Board Approves 100% Dividend Increase and Authorizes $60 Million Share Repurchase Program Strong Free Cash Flow Generation Facilitates Deleveraging and Return of Capital to Shareholders Significant Margin Expansion in NA Cabinet Components Segment Healthy Underlying Growth Continues in NA and EU Engineered Components Segments

 Quanex Building Products Corporation (NYSE:NX) (“Quanex” or the “Company”) today announced its results for the three months ended July 31, 2018.  The Company also announced today a significant increase in the return of capital to shareholders through a 100% increase in the quarterly cash dividend and a $60 million share repurchase authorization.

Bill Griffiths, Chairman, President and Chief Executive Officer, stated, “We delivered solid third quarter results, driven by improved operational efficiency and margin expansion of 200 basis points in our North American Cabinet Components segment, despite ongoing inflationary pressures.  Underlying growth remains healthy in our North American and European Engineered Components segments.

“We are also pleased that our strong free cash flow generation in the third quarter facilitated a further reduction of our leverage ratio to 2.0x Net Debt to LTM Adjusted EBITDA as of July 31, 2018.  In addition, our Board of Directors has approved a robust capital return program, including both a 100% increase to our quarterly cash dividend and a $60 million share repurchase program, which reflects our strong balance sheet, commitment to returning capital to shareholders and confidence in our prospects for growth and value creation.

“As part of a strategic review process, our Board of Directors and management team, with the support of outside advisors, recently undertook a thorough review of Quanex’s strategy and business, and evaluated a broad range of strategic alternatives to maximize shareholder value.  Our Board of Directors unanimously concluded that the best path forward for the Company and its shareholders at this time is the continued execution of our strategic plan and the accelerated return of capital.  We remain open to and will continue to consider all opportunities to create additional shareholder value.”

Third Quarter 2018 Results Summary  

The Company reported the following selected financial results:

		Three Months Ended July 31,				Nine Months Ended July 31,
		2018		2017		2018		2017
Net Sales		$239.8		$229.4		$645.7		$634.4
Net Income		$10.8		$10.2		$19.8		$8.0
Diluted EPS		$0.31		$0.29		$0.56		$0.23
Adjusted Net Income		$11.6		$11.5		$15.1		$13.9
Adjusted Diluted EPS		$0.33		$0.33		$0.43		$0.40
Adjusted EBITDA		$30.8		$32.2		$65.7		$65.7
Cash provided by operating activities		$26.8		$29.7		$48.5		$46.5
Free Cash Flow		$21.0		$20.2		$27.4		$19.4

(See Non-GAAP Terminology Definitions and Disclaimers section, Non-GAAP Financial Measure Disclosure table, Selected Segment Data table and Free Cash Flow Reconciliation table for additional information)

Similar to the first half of 2018, the increase in net sales during the third quarter was largely driven by market growth combined with price increases mostly related to raw material inflation recovery and a favorable foreign exchange impact.  (See Sales Analysis table for additional information)

The increase in net income for the third quarter of 2018 was primarily driven by lower depreciation and amortization coupled with a lower effective tax rate.

Adjusted EBITDA decreased slightly during the third quarter of 2018 mainly due to the negative impact of inflationary pressures combined with an increase in selling, general and administrative expense as results for the third quarter of 2017 included a benefit of $2.0 million related to a legal expense reimbursement from one of Quanex’s insurance carriers.          

As of July 31, 2018, the Company’s leverage ratio of Net Debt to LTM Adjusted EBITDA decreased to 2.0x.  (See Non-GAAP Terminology Definitions and Disclaimers section for additional information)

Strategy Update and Recent Events

Quanex is committed to driving operational improvement and creating shareholder value.  As part of a strategic review process, the Company’s Board of Directors (the “Board”) and management team, with Citi as financial advisor, recently completed a comprehensive review of Quanex’s overall strategy, capital structure and capital allocation priorities.  As part of that review process, the Board evaluated a broad range of strategic alternatives, including a potential sale of the Company, and carefully considered feedback from shareholders.

The Board unanimously concluded that, at this time, Quanex is best positioned to drive value for shareholders through the continued successful execution of its strategy and continued focus on driving improved performance and returning capital to shareholders.

As such, the Board declared a quarterly cash dividend of $0.08 per share on the Company’s common stock, representing a 100% increase compared to the prior dividend, payable September 28, 2018, to shareholders of record on September 14, 2018.

In addition, Quanex’s Board of Directors authorized a $60 million share repurchase program representing approximately 10% of common shares outstanding based on the Company’s stock price and share count as of July 31, 2018.  Repurchases under the new program will be made in open market transactions or privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors.  The program does not have an expiration date or a limit on the number of shares that may be purchased.

The Board will continue to consider all opportunities to further enhance shareholder value now and in the future.

Conference Call and Webcast Information

The Company has scheduled a conference call for Friday, September 7, 2018, 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 3847158, 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 September 14, 2018.  To access the replay dial (855) 859-2056 for domestic callers and (404) 537-3406 for international callers, in both cases referencing conference passcode 3847158. 

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, Investor Relations & Treasurer, at 713-877-5327 or scott.zuehlke@quanex.com.

Non-GAAP Terminology Definitions and Disclaimers

Adjusted Net Income (Loss) (defined as net income further adjusted to exclude purchase price accounting inventory step-ups, transaction costs, gain/loss on the sale of fixed assets, restructuring charges, other net adjustments related to foreign currency transaction gain/loss and effective tax rates reflecting impacts of adjustments on a with and without basis) and Adjusted EPS are non-GAAP financial measures that Quanex believes provide a consistent basis for comparison between periods and more accurately reflects operational performance, as they are not influenced by certain income or expense items not affecting ongoing operations. EBITDA (defined as net income or loss before interest, taxes, depreciation and amortization and other, net) and Adjusted EBITDA (defined as EBITDA further adjusted to exclude purchase price accounting inventory step-ups, transaction costs, gain/loss on the sale of fixed assets, and restructuring charges) are non-GAAP financial measures that the Company uses to measure operational performance and assist with financial decision-making.  When Quanex provides expectations for Adjusted EBITDA on a forward-looking basis, a reconciliation of the differences between the non-GAAP expectations and corresponding GAAP measures is generally not available without unreasonable effort.  Net Debt is calculated using the sum of current maturities of long-term debt and long-term debt, minus cash and cash equivalents.  The leverage ratio of Net Debt to LTM Adjusted EBITDA is a financial measure that the Company believes is useful to investors and financial analysts in evaluating Quanex’s leverage.  In addition, with certain limited adjustments, this leverage ratio is the basis for a key covenant in the Company’s credit agreement.  Free Cash Flow is a non-GAAP measure calculated using cash provided by operating activities less capital expenditures.   Quanex believes that the presented non-GAAP measures provide a consistent basis for comparison between periods, and will assist investors in understanding the Company’s financial performance when comparing results to other investment opportunities.  The presented non-GAAP measures may not be the same as those used by other companies.  Quanex does not intend for this information to be considered in isolation or as a substitute for other measures prepared in accordance with U.S. 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, the Company’s future operating results, future financial condition, future uses of cash and other expenditures, expenses and tax rates, expectations relating to Quanex’s industry, and the Company’s future growth, including any guidance discussed in this press release.  The statements and guidance set forth in this release are based on current expectations.  Actual results or events may differ materially from this release.  For a complete discussion of factors that may affect Quanex’s future performance, please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2017, under the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”.  Any forward-looking statements in this press release are made as of the date hereof, and Quanex undertakes no obligation to update or revise any forward-looking statements to reflect new information or events.

QUANEX BUILDING PRODUCTS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)(In thousands, except per share data)(Unaudited)
		Three Months Ended July 31,								Nine Months Ended July 31,
			2018				2017				2018				2017
Net sales		$	239,821			$	229,367			$	645,699			$	634,406
Cost of sales			185,610				176,758				508,791				494,647
Selling, general and administrative			24,190				20,478				72,049				74,839
Restructuring charges			243				864				851				3,083
Depreciation and amortization			12,691				13,915				39,274				43,701
Operating income			17,087				17,352				24,734				18,136
Interest expense			(2,641	)			(2,575	)			(7,584	)			(7,126	)
Other, net			(62	)			46				150				572
Income before income taxes			14,384				14,823				17,300				11,582
Income tax (expense) benefit			(3,631	)			(4,608	)			2,536				(3,631	)
Net income		$	10,753			$	10,215			$	19,836			$	7,951
Income per common share, basic		$	0.31			$	0.30			$	0.57			$	0.23
Income per common share, diluted		$	0.31			$	0.29			$	0.56			$	0.23
Weighted average common shares outstanding:
Basic			34,840				34,224				34,766				34,141
Diluted			35,120				34,924				35,124				34,771
Cash dividends per share		$	0.04			$	0.04			$	0.12			$	0.12

QUANEX BUILDING PRODUCTS CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)(Unaudited)
		July 31, 2018				October 31, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	12,400			$	17,455
Accounts receivable, net			80,236				79,411
Inventories, net			87,105				87,529
Prepaid and other current assets			8,636				7,406
Total current assets			188,377				191,801
Property, plant and equipment, net			205,304				211,131
Goodwill			221,587				222,194
Intangible assets, net			127,071				139,778
Other assets			9,184				8,975
Total assets		$	751,523			$	773,879
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	44,871			$	44,150
Accrued liabilities			31,693				38,871
Income taxes payable			2,405				2,192
Current maturities of long-term debt			16,120				21,242
Total current liabilities			95,089				106,455
Long-term debt			193,654				218,184
Deferred pension and postretirement benefits			6,612				4,433
Deferred income taxes			16,765				21,960
Other liabilities			15,640				16,000
Total liabilities			327,760				367,032
Stockholders’ equity:
Common stock			374				375
Additional paid-in-capital			253,806				255,719
Retained earnings			240,025				225,704
Accumulated other comprehensive loss			(27,601	)			(25,076	)
Treasury stock at cost			(42,841	)			(49,875	)
Total stockholders’ equity			423,763				406,847
Total liabilities and stockholders' equity		$	751,523			$	773,879

QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
	Nine Months Ended July 31,
		2018			2017 (1)
Operating activities:
Net income	$	19,836			$	7,951
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		39,274				43,701
Stock-based compensation		1,002				4,305
Deferred income tax		(5,788	)			(1,847	)
Other, net		404				1,136
Changes in assets and liabilities:
(Increase) decrease in accounts receivable		(1,247	)			6,923
Decrease (increase) in inventory		310				(8,576	)
Increase in other current assets		(1,242	)			(379	)
Increase (decrease) in accounts payable		1,161				(3,145	)
Decrease in accrued liabilities		(7,565	)			(11,327	)
Increase in income taxes payable		231				4,349
Increase in deferred pension and postretirement benefits		2,179				2,537
Increase in other long-term liabilities		210				1,226
Other, net		(312	)			(389	)
Cash provided by operating activities		48,453				46,465
Investing activities:
Acquisitions, net of cash acquired		-				(8,497	)
Capital expenditures		(21,098	)			(27,098	)
Proceeds from disposition of capital assets		260				1,232
Cash used for investing activities		(20,838	)			(34,363	)
Financing activities:
Borrowings under credit facilities		33,500				53,500
Repayments of credit facility borrowings		(62,750	)			(74,125	)
Repayments of other long-term debt		(1,394	)			(2,240	)
Common stock dividends paid		(4,202	)			(4,127	)
Issuance of common stock		3,767				6,379
Payroll tax paid to settle shares forfeited upon vesting of stock		(960	)			(976	)
Cash used for financing activities		(32,039	)			(21,589	)
Effect of exchange rate changes on cash and cash equivalents		(631	)			(248	)
Decrease in cash and cash equivalents		(5,055	)			(9,735	)
Cash and cash equivalents at beginning of period		17,455				25,526
Cash and cash equivalents at end of period	$	12,400			$	15,791
(1) Updated to reflect adoption of ASU 2016-09.

QUANEX BUILDING PRODUCTS CORPORATIONFREE CASH FLOW RECONCILIATION(In thousands)(Unaudited)
The following table reconciles the Company's calculation of Free Cash Flow, a non-GAAP measure, to its most directly comparable GAAP measure.  The Company defines Free Cash Flow as cash provided by operating activities less capital expenditures.
		Three Months Ended July 31,								Nine Months Ended July 31,
			2018				2017				2018				2017
Cash provided by operating activities		$26,838				$29,736					$48,453				$46,465
Capital expenditures			(5,885)				(9,548)				(21,098)				(27,098)
Free Cash Flow		$20,953				$20,188				$27,355				$19,367

QUANEX BUILDING PRODUCTS CORPORATIONNON-GAAP FINANCIAL MEASURE DISCLOSURE(In thousands, except per share data)(Unaudited)
		Three Months Ended										Three Months Ended										Nine Months Ended										Nine Months Ended
Reconciliation of Adjusted Net Income and Adjusted EPS		July 31, 2018										July 31, 2017										July 31, 2018										July 31, 2017
		Net Income				Diluted EPS						Net Income				Diluted EPS						Net Income				Diluted EPS						Net Income				Diluted EPS
Net income as reported		$	10,753			$	0.31					$	10,215			$	0.29					$	19,836			$	0.56					$	7,951			$	0.23
Reconciling items from below			828				0.02						1,277				0.04						(4,727	)			(0.13	)					5,965				0.17
Adjusted net income and adjusted EPS		$	11,581			$	0.33					$	11,492			$	0.33					$	15,109			$	0.43					$	13,916			$	0.40
Reconciliation of Adjusted EBITDA		Three Months Ended July 31, 2018										Three Months Ended July 31, 2017										Nine Months Ended July 31, 2018										Nine Months Ended July 31, 2017
		Reconciliation										Reconciliation										Reconciliation										Reconciliation
Net income as reported		$	10,753									$	10,215									$	19,836									$	7,951
Income tax expense (benefit)			3,631										4,608										(2,536	)									3,631
Other, net			62										(46	)									(150	)									(572	)
Interest expense			2,641										2,575										7,584										7,126
Depreciation and amortization			12,691										13,915										39,274										43,701
EBITDA			29,778										31,267										64,008										61,837
Reconciling items from below			1,027										899										1,649										3,892
Adjusted EBITDA		$	30,805									$	32,166									$	65,657									$	65,729
Reconciling Items		Three Months Ended July 31, 2018										Three Months Ended July 31, 2017										Nine Months Ended July 31, 2018										Nine Months Ended July 31, 2017
		Income Statement				Reconciling Items						Income Statement				Reconciling Items						Income Statement				Reconciling Items						Income Statement				Reconciling Items
Net sales		$	239,821			$	-					$	229,367			$	-					$	645,699			$	-					$	634,406			$	-
Cost of sales			185,610				-						176,758				-						508,791				-						494,647				(104	)	(1	)
Selling, general and administrative			24,190				(784	)	(2	)			20,478				(35	)	(2	)			72,049				(798	)	(2	)			74,839				(705	)	(2	)
Restructuring charges			243				(243	)	(3	)			864				(864	)	(3	)			851				(851	)	(3	)			3,083				(3,083	)	(3	)
EBITDA			29,778				1,027						31,267				899						64,008				1,649						61,837				3,892
Depreciation and amortization			12,691				-						13,915				(1,277	)	(4	)			39,274				(852	)	(5	)			43,701				(5,502	)	(4	)
Operating income			17,087				1,027						17,352				2,176						24,734				2,501						18,136				9,394
Interest expense			(2,641	)			-						(2,575	)			-						(7,584	)			-						(7,126	)			-
Other, net			(62	)			79		(6	)			46				(39	)	(6	)			150				(88	)	(6	)			572				(514	)	(6	)
Income before income taxes			14,384				1,106						14,823				2,137						17,300				2,413						11,582				8,880
Income tax (expense) benefit			(3,631	)			(278	)	(7	)			(4,608	)			(860	)	(7	)			2,536				(7,140	)	(7	)			(3,631	)			(2,915	)	(7	)
Net income (loss)		$	10,753			$	828					$	10,215			$	1,277					$	19,836			$	(4,727	)				$	7,951			$	5,965
Diluted earnings per share		$	0.31									$	0.29									$	0.56									$	0.23
(1) Relates solely to purchase price accounting inventory step-up impact from HL Plastics acquisition.
(2) Transaction and advisory fees and in 2017, loss on sale of fixed assets related to the closure of a plant and a one-time employee benefit adjustment.
(3) Restructuring charges relate to the closure of several manufacturing plant facilities.
(4) Accelerated depreciation and amortization for restructured PP&E and intangible assets.
(5) Accelerated depreciation for a plant re-layout in the North American Cabinet Components segment.
(6) Foreign currency transaction losses (gains).
(7) Impact on a with and without basis.  Nine months ended July 31, 2018 includes $6.5 million adjustment related to the Tax Cuts and Jobs Act.

QUANEX BUILDING PRODUCTS CORPORATIONSELECTED 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.
		NA Engineered Components				EU Engineered Components				NA Cabinet Components				Unallocated Corp & Other				Total
Three months ended July 31, 2018
Net sales		$	133,397			$	42,661			$	65,114			$	(1,351	)		$	239,821
Cost of sales			100,999				30,840				54,755				(984	)			185,610
Selling, general and administrative			13,147				5,535				3,584				1,924				24,190
Restructuring charges			240				-				3				-				243
Depreciation and amortization			6,741				2,352				3,432				166				12,691
Operating income (loss)			12,270				3,934				3,340				(2,457	)			17,087
Depreciation and amortization			6,741				2,352				3,432				166				12,691
EBITDA			19,011				6,286				6,772				(2,291	)			29,778
Transaction and advisory fees			-				-				-				784				784
Restructuring charges			240				-				3				-				243
Adjusted EBITDA		$	19,251			$	6,286			$	6,775			$	(1,507	)		$	30,805
Adjusted EBITDA Margin %			14.4%				14.7%				10.4%								12.8%
Three months ended July 31, 2017
Net sales		$	126,446			$	40,359			$	63,839			$	(1,277	)		$	229,367
Cost of sales			94,169				29,002				54,538				(951	)			176,758
Selling, general and administrative			11,829				5,162				3,968				(481	)			20,478
Restructuring charges			727				-				137				-				864
Depreciation and amortization			7,899				2,391				3,491				134				13,915
Operating income			11,822				3,804				1,705				21				17,352
Depreciation and amortization			7,899				2,391				3,491				134				13,915
EBITDA			19,721				6,195				5,196				155				31,267
Transaction and advisory fees			-				-				-				35				35
Restructuring charges			727				-				137				-				864
Adjusted EBITDA		$	20,448			$	6,195			$	5,333			$	190			$	32,166
Adjusted EBITDA Margin %			16.2%				15.3%				8.4%								14.0%
Nine months ended July 31, 2018
Net sales		$	350,280			$	115,481			$	183,705			$	(3,767	)		$	645,699
Cost of sales			269,156				83,261				159,066				(2,692	)			508,791
Selling, general and administrative			40,393				17,218				12,894				1,544				72,049
Restructuring charges			728				-				123				-				851
Depreciation and amortization			20,561				7,328				10,957				428				39,274
Operating income (loss)			19,442				7,674				665				(3,047	)			24,734
Depreciation and amortization			20,561				7,328				10,957				428				39,274
EBITDA			40,003				15,002				11,622				(2,619	)			64,008
Transaction and advisory fees			-				-				-				798				798
Restructuring charges			728				-				123				-				851
Adjusted EBITDA		$	40,731			$	15,002			$	11,745			$	(1,821	)		$	65,657
Adjusted EBITDA Margin %			11.6%				13.0%				6.4%								10.2%
Nine months ended July 31, 2017
Net sales		$	343,694			$	106,133			$	188,359			$	(3,780	)		$	634,406
Cost of sales			260,479				75,304				161,704				(2,840	)			494,647
Selling, general and administrative			38,770				15,132				12,739				8,198				74,839
Restructuring charges			2,207				-				876				-				3,083
Depreciation and amortization			26,377				6,753				10,160				411				43,701
Operating income (loss)			15,861				8,944				2,880				(9,549	)			18,136
Depreciation and amortization			26,377				6,753				10,160				411				43,701
EBITDA			42,238				15,697				13,040				(9,138	)			61,837
Transaction and advisory fees			-				-				-				327				327
Mexico restructuring, loss on sale of fixed assets			-				-				190				-				190
One-time employee benefit adjustment			-				-				188				-				188
PPA-Inventory Step-up			-				104				-				-				104
Restructuring charges			2,207				-				876				-				3,083
Adjusted EBITDA		$	44,445			$	15,801			$	14,294			$	(8,811	)		$	65,729
Adjusted EBITDA Margin %			12.9%				14.9%				7.6%								10.4%

QUANEX BUILDING PRODUCTS CORPORATIONSALES ANALYSIS(In thousands)(Unaudited)
		Three Months Ended								Nine Months Ended
		July 31, 2018				July 31, 2017				July 31, 2018				July 31, 2017
NA Engineered Components:
	United States - fenestration (1)	$	112,914			$	107,193			$	297,700			$	289,231
	International - fenestration		11,851				9,959				27,758				24,945
	United States - non-fenestration (2)		4,675				7,060				13,518				19,590
	International - non-fenestration		3,957				2,234				11,304				9,928
		$	133,397			$	126,446			$	350,280			$	343,694
EU Engineered Components  (3):
	United States - fenestration	$	-			$	190			$	-			$	304
	International - fenestration (4)		34,881				35,087				97,597				94,528
	International - non-fenestration		7,780				5,082				17,884				11,301
		$	42,661			$	40,359			$	115,481			$	106,133
NA Cabinet Components:
	United States - fenestration	$	3,650			$	4,322			$	10,500			$	12,316
	United States - non-fenestration (5)		60,843				59,237				171,547				174,404
	International - non-fenestration		621				280				1,658				1,639
		$	65,114			$	63,839			$	183,705			$	188,359
Unallocated Corporate & Other:
	Eliminations	$	(1,351	)		$	(1,277	)		$	(3,767	)		$	(3,780	)
		$	(1,351	)		$	(1,277	)		$	(3,767	)		$	(3,780	)
Net Sales		$	239,821			$	229,367			$	645,699			$	634,406
(1) Reflects the loss of revenue associated with eliminated products of $2.6 million and $11.7 million for the three and nine months ended July 31, 2018.
(2) Reflects the loss of revenue associated with eliminated products of $2.1 million and $7.5 million for the three and nine months ended July 31, 2018.
(3) Reflects a gain of $1.1 million and $7.9 million in revenue associated with foreign currency exchange rate impacts for the three and nine months ended July 31, 2018.
(4) Reflects loss of revenue associated with eliminated products of $1.8 million and $6.5 million for the three and nine months ended July 31, 2018.
(5) Reflects the loss of revenue associated with eliminated products of $0.2 million and $3.9 million for the three and nine months ended July 31, 2018.