Quanex pays $28 million bank debt in 2018; more deleveraging planned

By Devika Patel

Knoxville, Tenn., Dec. 11 – Quanex Building Products Corp. paid down $28 million of bank debt in fiscal 2018 and plans to use the “exceptional” free cash flow generated in the last quarter and upcoming year to deleverage further.

“As a result of our strong cash flow, and consistent with our commitment to continue to reduce our leverage while returning capital to shareholders, we repurchased $32 million in stock in the fourth quarter and repaid $28 million of bank debt during fiscal 2018,” senior vice president of finance and chief financial officer Brent Korb said on the company’s fourth quarter and year ended Oct. 31 earnings conference call on Tuesday.

“We also achieved our targeted end of year leverage ratio of 2x net debt to last 12 months’ adjusted EBITDA as of Oct. 31, 2018, even after the $32 million stock repurchase,” Korb said.

Prior to the end of the last quarter, the company also revised the terms of its credit facility.

“We recently amended and extended our credit facility,” Korb said.

“This underscores the progress we have made over the past two years improving our leverage profile, and it provides a number of benefits including the maturity date on our outstanding debt was extended by more than two years.

“The new terms and covenants are less restrictive and give us more flexibility with respect to returning capital to shareholders and the new pricing grid is more favorable by 25 basis points across all tiers,” Korb said.

The company achieved “exceptional” free cash flow in 2018, especially in the fourth quarter. Free cash flow was $78.1 million for the year, a 73% increase year over year.

“Our strategy for the foreseeable future is to maintain a healthy balance sheet and return excess capital to shareholders,” chairman, president and chief executive officer Bill Griffiths said on the call.

“As a result, we had an even greater emphasis on working capital management and cash flow generation during the fourth quarter.

“This led to exceptional free cash flow of approximately $78 million in fiscal 2018 including approximately $51 million in the fourth quarter alone,” Griffiths said.

The company expects at least $50 million of free cash flow in fiscal 2019, which will be used to de-lever.

“Free cash flow for fiscal 2019 should be between $50 million and $55 million,” Griffiths said.

“We will continue to de-lever,” Griffiths said.

Cash and cash equivalents were $29,003,000 as of Oct. 31, 2018, compared to $17,455,000 as of Oct. 31, 2017.

On Oct. 18, Quanex said it had entered into a new $325 million senior secured amended and restated credit facility due 2023.

The facility replaced the company’s previous $150 million term loan A and $300 million revolving credit facilities.

At the time of closing, borrowings under the new facility totaled roughly $205 million.

“The new facility extends the maturity date on our outstanding debt by more than two years, is less restrictive and gives us more flexibility with respect to returning capital to shareholders,” Korb commented in a press release at the time.

“In addition, the new pricing grid is more favorable by 25 basis points across all tiers and is a testament to the progress we have made toward improving our leverage profile over the past two years.”

The new revolver bears interest at Libor plus an applicable margin based on Quanex’s consolidated leverage ratio. The applicable margin ranges from 125 bps to 200 bps and is initially 150 bps.

The commitment fee ranges from 20 bps to 30 bps, also based on the consolidated leverage ratio, and is initially 22.5 bps.

The revolver includes an up to $20 million sublimit for letters of credit and a $15 million sublimit for swingline loans.

The credit agreement requires the company to maintain a consolidated leverage ratio not exceeding 3.25x, subject to a step-up following a permitted acquisition, and a minimum interest coverage ratio of at least 2.25x.

Wells Fargo Securities, LLC and Bank of America Merrill Lynch acted as the joint lead arrangers and joint bookrunners for the new facility with Wells Fargo Bank, NA as administrative agent.

Bank of America, NA is syndication agent, and Citibank, NA and JPMorgan Chase Bank, NA are co-documentation agents.

The prior credit facilities were terminated on Oct. 18 in connection with the new credit facility. In connection with the termination, Quanex paid a total of $214,994,224.42.

Quanex is a Houston-based supplier of window and door components.

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