We believe that we have sufficient funds and adequate financial resources available to meet our anticipated liquidity needs. We expect to use our cash flow from operations to fund operations for the next twelve months and the foreseeable future. We believe these funds should be adequate to provide for our working capital requirements, capital expenditures, and dividends, while continuing to meet our debt service requirements.
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. Estimates and assumptions about future events and their effects cannot be perceived with certainty. Estimates may change as new events occur, as more experience is acquired, as additional information becomes available and as our operating environment changes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, and that we believe provide a basis for making judgments about the carrying value of assets and liabilities that are not readily available through open market quotes. We must use our judgment with regard to uncertainties in order to make these estimates. Actual results could differ from these estimates.
We believe the following are the most critical accounting policies used in the preparation of our consolidated financial statements as well as the significant judgments and uncertainties affecting the application of these policies. We consider an estimate to be critical if it is subjective and if changes in the estimate using different assumptions would result in a material impact to our financial position or results of operations.
On November 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method and applying ASC Topic 606 to all revenue contracts with customers. Results for reporting periods beginning on or after November 1, 2018 are presented under ASC Topic 606. In accordance with the modified retrospective approach, prior period amounts were not adjusted and are reported under ASC Topic 605, Revenue Recognition. As a result of adoption, there was not a material impact on our consolidated financial statements. We expect the impact of the adoption of ASC Topic 606 to continue to be immaterial to our net income on an ongoing basis.
Revenue Recognition
We recognize revenue that reflects the consideration we expect to receive for product sales when the promised items are transferred to customers. Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we expect to be entitled to consideration in exchange for transferring those products. We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those services, and when collectability of the consideration due is probable.
Performance obligations
A performance obligation is a promise to provide the customer with a good or service. Our performance obligations include product sales, with each product included in a customer contract being recognized as a separate performance obligation. For contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable.
Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to account for product returns related to general returns and product nonconformance.
Pricing and sales incentives
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts.
Practical expedients and exemptions
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Shipping and handling costs
We have elected to account for shipping and handling services as fulfillment services in accordance with ASC Topic 606 guidance; accordingly, freight revenue will be combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in Cost of sales in the accompanying Condensed Consolidated Statements of Income.
Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration.
Allowance for Doubtful Accounts
We record trade accounts receivable at billed amounts, less an allowance for doubtful accounts. This allowance is established to estimate the risk of loss associated with our trade receivables which may arise due to the inability of our customers to pay or due to changes in circumstances. The allowance is maintained at a level that we consider appropriate based on factors that affect collectability, including: (a) historical trends of write-offs, recoveries and credit losses; (b) the credit quality of our customers; and (c) projected economic and market conditions. Different assumptions or changes in economic circumstances could result in changes to the allowance. Our historical bad debt expense has approximated 0.3% of sales for the years ended October 31, 2019, 2018 and 2017. If bad debt expense increased by 1% of net sales, the impact on operating results would have been an increase in net loss of $6.8 million for the year ended October 31, 2019, and a decrease in net income of $9.2 million and $6.4 million for the years ended October 31, 2018 and 2017, respectively.
Business Combinations - Contingencies
We apply the acquisition method of accounting for business combinations in accordance with U.S. GAAP, which requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net assets and liabilities acquired. We use established valuation techniques and engage reputable valuation specialists to assist us with these valuations. However, there is a risk that we may not identify all pre-acquisition contingencies or that our estimates may not reflect the actual results when realized. We utilize a reasonable measurement period to record any adjustment related to the opening balance sheet (generally, less than one year). After the measurement period, changes to the opening balance sheet can result in the recognition of income or expense as period costs. To the extent these items stem from contingencies that existed at the balance sheet date, but are contingent upon the realization of future events, the cost is charged to expense at the time the future event becomes known. If our purchase accounting estimates are not correct, or if we do not recognize contingent assets or liabilities accurately, we may incur losses.
Impairment or Disposal of Long-Lived Assets
Property, Plant and Equipment and Intangible Assets with Defined Lives
We make judgments and estimates in conjunction with the carrying value of our long-term assets, including property, plant and equipment, and identifiable intangibles. These judgments may include the basis for capitalization, depreciation and amortization methods and the useful lives of the underlying assets. In accordance with U.S. GAAP, we review the carrying values of these assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine that the carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value exceeds the sum of the undiscounted cash flows and after considering alternate uses for the asset, an impairment charge would be recorded in the period in which such review is performed. We measure the impairment loss as the amount by which the carrying amount of the long-lived asset exceeds its fair value. Fair value is determined by reference to quoted market prices in active markets, if available, or by calculating the discounted cash flows associated with the use and eventual disposition of the asset. Therefore, if there are indicators of impairment, we are required to make long-term forecasts of our future revenues and costs related to the assets subject to review. Forecasts require assumptions about demand for our products and future market conditions. Although there may be no indicators of impairment in the current period, unanticipated changes to assumptions or circumstances in future periods could result in an impairment charge in the period of the change.change. No impairment charges werewere incurred with regard to our property, plant and equipment for the years ended October 31, 2019, 20182022, 2021 and 2017.2020.
We monitor relevant circumstances, including industry trends, general economic conditions, and the potential impact that such circumstances might have on the valuation of our identifiable intangibles. Events and changes in circumstances that may cause a triggering event and necessitate such a review include, but are not limited to: a decrease in sales for certain customers, improvements or changes in technology, and/or a decision to phase-out a trademark or trade name. Such events could negatively impact the carrying value of our identifiable intangibles. It is possible that changes in such circumstances or in the numerous variables associated with the judgments, assumptions, and estimates made by us in assessing the appropriate valuation of our identifiable intangibles could require us to further write down a portion of our identifiable intangibles and record related non-cash impairment charges in the future. We apply a variety of techniques to establish the carrying value of our intangible assets, including the relief from royalty and excess current year earnings methods.
During October 2016 and continuing throughout 2017, we determined that a triggering event occurred which necessitated a review of our long-term assets as prescribed above (expected reduction in volume for our U.S. vinyl business and results below our forecasts for Woodcraft). Based on an undiscounted cash flow analysis, we determined that our property, plant and equipment and defined-lived intangible assets were not impaired. However, with regard to our U.S. vinyl business, we recorded a change in accounting estimate associated with shortening the remaining useful lives of certain property, plant and equipment to be retired as part of the announced closures of several plants. We recognized incremental depreciation expense of $4.3 million in 2017 as a result of the change in estimates. In addition, we shortened the life of several defined-lived intangible assets, which resulted in the recognition of incremental amortization expense of $1.9 million for the year ended October 31, 2017. There have been no impairments or related expenses of property, plant and equipment and defined-lived intangibles during the year ended October 31, 2019 and 2018.
Goodwill
We use the acquisition method to account for business combinations and, to the extent that the purchase price exceeds the fair value of the net assets acquired, we record goodwill. In accordance with U.S. GAAP, we are required to evaluate our goodwill at least annually. We perform our annual goodwill assessment as of August 31, or more frequently if indicators of impairment exist. Qualitative factors that indicate impairment could include, but are not limited to, (i) macroeconomic conditions, (ii) industry and market considerations, (iii) cost factors, (iv) overall financial performance of the reporting unit, and (v) other relevant entity-specific events. The first step in our annual goodwill assessment is to perform the optional qualitative assessment allowed by ASC Topic 350 “Intangibles - Goodwill and Other” (ASC 350). In our qualitative assessment, we evaluate relevant events or circumstances to determine whether it is more likely than not (i.e., greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, ASC 350 requires us to compare the fair value of such reporting unit to its carrying value including goodwill. To determine the fair value of our reporting units, we use multiple valuation techniques including a discounted cash flow analysis, using the applicable weighted average cost of capital, in combination with a market approach that utilizesuses market multiples and a selection of guideline public companies. This test requires us to make assumptions about the future growth of our business and the market in general, as well as other variables such as the level of investment in capital expenditure, growth in working capital requirements and the terminal or residual value of our reporting units beyond the periods of estimated annual cash flows. We use a third-party valuation firm to assist us with this analysis. If the fair value of each reporting unit exceeds its carrying value, no action is required. Otherwise, an impairment loss is recorded to the extent that the carrying amount of the reporting unit including goodwill exceeds the fair value of that reporting unit. We believe the estimates and assumptions used in our impairment assessment are reasonable based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated during current or future periods.
During the second quarter
Table of 2019, our reporting unit included in our NA Cabinet Components segment experienced financial performance for the year to date period ended March 31, 2019 that was below our budget. As a result, we developed a new long-range forecast for this reporting unit that was below its previous long-range forecast as a result of an industry-wide shift from semi-custom cabinets to stock cabinets. We determined that the combination of i) actual financial results below planned performance, ii) a downward revision of the long-range forecast, and iii) the historical narrow margin of fair value over carrying value in previous annual and interim goodwill assessments represented a triggering event that would more likely than not indicate that the carrying value of this reporting unit was greater than its fair value. Therefore, we performed a quantitative impairment test of the goodwill balance at March 31, 2019. The quantitative impairment test was conducted using multiple valuation techniques, including a discounted cash flow analysis, which utilizes Level 3 fair value inputs, and resulted in an asset impairment charge of $30.0 million during the second quarter of 2019.Contents At our annual testing date, August 31, 2019,2022, we had five reporting units with goodwill balances: two reporting units included in our NA Fenestration operating segment, two reporting units included in our EU Fenestration operating segment, and one reporting unit included in our NA Cabinet Components operating segment. We performed a qualitative assessment of one of the two reporting units in the NA Fenestration segment and the two reporting units in the EU Fenestration segment. This review included an analysis of historical goodwill test results, operating results relative to forecast, projected results over the next five years, and other measures and concluded that there were no indicators of potential impairment associated with these reporting units. Therefore, no additional testing was deemed necessary for the reporting units in the NA Fenestration segment and the EU Fenestration segment. Also, at our annual testing date, we performed asegment that were assessed qualitatively. We also updated the quantitative assessment ofassessments for the reportingreportable unit in ourthe NA Cabinet Components segment primarily due to the recent impairment of goodwill duringand the second quarter of 2019 andreportable unit in the history of a narrow margin of fair value above carrying value in quantitative assessments performed in prior years.NA Fenestration segment. We determined that the fair value of this reporting unitthese reportable units exceeded itsthe carrying value by approximately 5%. At that date, weby 12.0% and 384.9%, respectively, and concluded that no impairment was necessary.
After the annual assessment date and prior to our fiscal year end of October 31, 2019, the reporting unit in our NA Cabinet Components segment was notified about a change in strategy at one of our large customers that may result in lower sales volumes in the future. In addition, we continued to experience lower-than-expected volumes as a result of the ongoing shift in demand from semi-custom cabinets to stock cabinets. Based on this information, we updated our long-range forecast for this reporting unit to reflect the expected volume declines. This revised long-range forecast was utilized to perform another quantitative
impairment test of this reporting unit as of October 31, 2019, which resulted in an asset impairment charge of $44.6 million during the fourth quarter of 2019. As a result of the quantitative assessments performed in the second and fourth quarters of 2019, we recorded impairment charges totaling $74.6 million during the year ended October 31, 2019, reducing the goodwill balance applicable to the reporting unit included in our NA Cabinet Components operating segment from $113.7 million to $39.1 million.
Restructuring
We account for restructuring costs in accordance with U.S. GAAP, whereby we accrue for one-time severance benefits pursuant to an approved plan of restructuring at the communication date, when affected employees have been notified of the potential severance and sufficient information has been provided for the employee to calculate severance benefits, in the event the employee is involuntarily terminated. In addition, we accrue costs associated with the termination of contractual commitments including operating leases at the time the lease is terminated pursuant to the lease provisions or in accordance with another agreement with the landlord. Otherwise, we continue to recognize operating lease expense through the cease-use date. After the cease-use date, we determine if our operating lease payments are at market. We assume sublet of the facility at the market rate. To the extent our lease obligations exceed the fair value rentals, we discount to arrive at the present value and record a liability. If the facility is not sublet, we expense the amount of the lease in the current period until sublet. For other costs directly related to the restructuring effort, such as equipment moving costs, we expense in the period incurred.
In 2017, we incurred costs related to plant closures which were announced in 2016, including equipment moving costs, additional employee termination and severance costs, retirements and inventory adjustments, operating lease costs, accelerated amortization and depreciation costs, and equipment lease termination costs. In addition, we incurred costs related to the closure of a kitchen and bathroom cabinet door plant in Lansing, Kansas. Restructuring costs totaled $4.6 million for the year ended October 31, 2017. During the year ended October 31, 2018, we negotiated the exit from one of the vinyl extrusion plants, and the lease for the plant in Lansing, Kansas expired. During the years ended October 31, 2019 and 2018, we incurred $0.4 million and $1.5 million of restructuring costs related to these leases, and expect to continue to incur costs related to the remaining vinyl plant during fiscal 2020 until such time we are able to sublet or otherwise negotiate an exit from the facility.
Income Taxes
We operate in various jurisdictions and therefore our income tax expense relates to income taxes in the U.S., U.K., Canada, and Germany, as well as local and state income taxes. We recognize the effect of a change in tax rates in the period of the change. We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and the amounts reported in our consolidated balance sheets, as well as net operating losses and tax credit carry forward. We evaluate the carrying value of our net deferred tax assets and determine if our business will generate sufficient future taxable income to realize the net deferred tax assets. We perform this review for recoverability on a jurisdictional basis, whereby we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence can be objectively verified. We evaluate recoverability based on an estimate of future taxable income using the long-term forecasts we use to evaluate long-lived assets, goodwill and intangible assets for impairment, taking into consideration the future reversal of existing taxable temporary differences and reviewing our current financial operations. In the event that our estimates and assumptions indicate we will not generate sufficient future taxable income to realize our deferred tax assets, we will record a valuation allowance, to the extent indicated, to reduce our deferred tax assets to their realizable value.
Annually, we evaluate our tax positions to determine if there have been any changes in uncertain tax positions or if there has been a lapse in the statute of limitations with regard to such positions. Our liability for uncertain tax positions at October 31, 20192022 and 2018 totaled $0.62021 totaled $1.4 million and are related to certain federal and state tax items regarding the interpretation of tax laws and regulations.
We believe we will have sufficient taxable income in the future to fully utilize our unreserved deferred tax assets recorded as of October 31, 2019.2022, net of our valuation allowance. There is a risk that our estimates related to the future use of loss carry forwards and our ability to realize our deferred tax assets may not come to fruition, and that the results could materially impact our financial position and results of operations. We have recorded the benefit associated with the “patent box” deduction in the U.K. with regard to our operations at HLP. We believe that it is more likely than not that our deduction with regard to this position would be sustained upon examination. In addition, we recorded the effect of a statutory change in the deferred tax rate from 19% to 17% in the U.K. in 2017 results, which provided a discrete tax benefit of $1.0 million during the period. Our total gross deferred tax assets at October 31, 20192022 and 20182021 totaled $21.0$13.9 million and $19.8$13.8 million, respectively, against which we had recorded a valuation allowance of $1.6$0.5 million and $1.3$1.2 million, respectively.
Insurance
We manage our costs of workers’ compensation, group medical, property, casualty and other liability exposures through a combination of self-insurance retentions and insurance coverage with third-party carriers. Liabilities associated with our portion
of this exposure are not discounted. We estimate our exposure by considering various factors which may include: (1) historical claims experience, (2) severity factors, (3) estimated claims incurred but not reported and (4) loss development factors, which are used to estimate how claims will develop over time until settled or closed. While we consider a number of factors in preparing our estimate of risk exposure, we must use our judgment to determine the amounts to accrue in our financial statements. Actual claims can differ significantly from estimated liabilities if future claims experience differs from historical experience, and if we determine that our assumptions used for analysis or our development factors are flawed. We do not recognize insurance recoveries until any contingencies relating to the claim have been resolved.
Inventory
We record inventory at the lower of cost or marketnet realizable value. Inventories are valued using the first-in first-out (FIFO) method. In the second quarter of 2019, we changed the method of inventory costing for certain inventory in two plants included in our North American Fenestration reportable business segment to the FIFO method from the last-in first-out (LIFO) method. We utilize the FIFO method to determine costs at all of our other operating locations. We believe that the FIFO method is preferable as it provides uniformity of inventory valuation across our global operations, aligns with a majority of our peers which use FIFO as their only inventory valuation method, and provides better matching of revenues and expenses. The impact of this change in accounting principle on the financial statements for each period presented is further explained in Note 3, "Inventories", contained elsewhere herein this Annual Report on Form 10-K. Fixed costs related to excess manufacturing capacity have been expensed in the period, and therefore, are not capitalized into inventory. Inventory quantities are regularly reviewed and provisions for excess or obsolete inventory are recorded primarily based on our forecast of future demand and market conditions. Significant unanticipated changes to our forecasts or changes in the net realizable value of our inventory would require a change in the provisionprovision for excess or obsolete inventory. For the years ended October 31, 2019, 20182022, 2021 and 2017,2020, our inventory reserves are approximately 5%3%, 6%3%, and 5%10% of gross inventory, respectively. Assuming an increase in obsolescence equal to 1%
Retirement Plans
We sponsor a defined benefit pension plan and an unfunded postretirement plan that provides health care and life insurance benefits for a limited pool of eligible retirees and dependents. On January 1, 2020, we enacted changes to our pension plan whereby the benefits for all participants were frozen and thereafter those participants will receive increased benefits in the company sponsored defined contribution plan in lieu of participation in a defined benefit plan. During the three months ended October 31, 2022, we notified participants that our pension plan will be terminated effective November 1, 2022, with final settlement expected to occur in fiscal 2024. The measurement of liabilities related to these plans is based on our assumptions related to future events, including expected return on plan assets rate of compensation increases, and healthcare cost trend rates. The discount rate reflects the rate at which benefits could be effectively settled on the measurement date. We determine our discount rate using a RATE: LinkFTSE Above Median Model whereby target yields are developed from bonds across a range of maturity points, and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the curve and used to discount benefit payments associated with each future year. This model assumes spot rates will remain level beyond the 30-year point. We determine the present value of plan benefits by applying the discount rates to projected benefit cash flows. Actual pension plan asset investment performance, as well as other economic experience such as discount rate and demographic experience, will either reduce or increase unamortized pension losses at the end of any fiscal year, which ultimately affects future pension costs.
As of October 31, 2019,2022, our projected benefit obligation (PBO) and accumulated benefit obligation (ABO) each exceeded the fair value of the plan assets by $13.1$3.9 million and $12.1 million, respectively.. As a comparison, our PBO and ABO exceeded the fair value of plan assets by $3.9$4.7 million and $3.3 million, respectively, as of October 31, 2018.2021. During fiscal 2019, we contributed $0.7 million2022, no contributions to the pension plan were needed to meet minimum contribution requirements. We expect to continue to fund at this level for fiscal 2020. Expected contributions are dependent on many variables, including the variability of the market value of the assets as compared to the obligation and other market or regulatory conditions. In addition, we take into consideration our business investment opportunities and our cash requirements. Accordingly, actual funding may differ greatly from current estimates. As of October 31, 2019, a 1% decrease in the discount rate would result in an increase in the PBO of $5.7 million.
Under U.S. GAAP, we are not required to immediately recognize the effects of a deviation between actual and assumed experience under our pension plan, or to revise our estimate as a result. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted and disclosed as an unrecognized gain or loss. As of October 31, 20192022 and 2018,2021, a net actuarial loss of $6.7$3.6 million and $3.0and $4.5 million, respectively, was included in our accumulated other comprehensive (loss) income. There were no net prior service costs or transition obligations for the years ended October 31, 20192022 and 2018.2021. The effect on fiscal years after 20192022 will depend on the actual experience of the plans.
Mortality assumptions used to determine the obligations forfor our pension plans are based on the RP-2006Pri-2012 base mortality table with MP-2018MP-2021 mortality improvement scale.
Stock-Based CompensationContractual Obligations and Commercial Commitments
We have issued stock-based compensationOur contractual obligations and commercial commitments include unconditional purchase obligations which consist of commitments to buy miscellaneous parts, inventory, and expenditures related to capital projects in progress. In addition, during fiscal 2023, we do not expect to need to contribute to our pension plan to meet our minimum contribution requirements. Pension contributions beyond 2023 cannot be determined since the formamount of stock options to directors, employees and officers, and non-vested restricted stock awards to certain key employees and officers. We apply the provisions of ASC Topic 718 “Compensation - Stock Compensation” (ASC 718), to determine the fair value of stock option awardsany contribution is heavily dependent on the date of grant using the Black-Scholes valuation model. We recognize the fair value as compensation expensefuture economic environment and investment returns on a straight-line basis over the requisite service periodpension plan assets. Obligations are based on current and projected obligations of the awardplans, performance of the plan assets, if applicable, and the timing and amount of funding contributions. At October 31, 2022, we have recorded a long-term liability for deferred pension benefits totaling $3.9 million. We believe the effect of the plans on liquidity is not significant to our overall financial condition.
Our supplemental benefit plan and deferred compensation plan liabilities fluctuate based on awards ultimately expected to vest. Stock options granted to directors vest immediately while the stock options granted to our employees and officers typically vest ratably over a three-year period with service and continued employment as the vesting conditions. For new option grants to retirement-eligible employees, we recognize expense and vest immediately upon grant, consistent with the retirement vesting acceleration provisions of these grants. For employees near retirement age, we amortize such grants over the period from the grant date to the retirement-eligibility date if such period is shorter than the standard vesting schedule. For grants of non-vested restricted stock, we calculate the compensation expense at the grant date as the number of shares granted multiplied by the closing stock price of our common stock on the date of grant. This expense is recognized ratably over the vesting period. Our non-vested restricted stock grants to officers and employees cliff vest over a three-year period with service and continued employment as the only vesting criteria. Our fair value determination of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behavior over the expected term, our dividend rate, risk-free rate and expectation with regards to forfeitures. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, the valuation models may not provide an accurate measure of the fairmarket value of certain equity securities, including our employee stock options. Accordingly,common stock. As of October 31, 2022, our liability under the supplemental benefit plan and the deferred compensation plan was approximately $1.9 million and $3.3 million, respectively.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined in the rules promulgated by the SEC, that value may notwe believe would be indicativematerial to investors and for which it is reasonably likely to have a current or future effect on our financial condition, results of the fair value observed in a willing buyer/willing seller market transaction.operations, liquidity, capital expenditures or capital resources.
Effects of Inflation
We have granted other awards which are linked toexperienced the performanceimpact of inflation on our common stock, but will settle in cash rather than the issuancecost of shares of our common stock. The value of these awards fluctuates with changes in our stock price, with the resulting gains or losses reflected in the period of the change. We have recorded currentraw materials, labor, freight and non-current liabilities related to these awards reflected in our consolidated balance sheets at October 31, 2019 and 2018, included elsewhere within this Annual Report on Form 10-K.
In addition, we have granted performance share units which settle in cash and shares upon vesting. The awards granted during the years ended October 31, 2018 and 2017 have vesting criteria based on a market condition (relative total shareholder return) and an internal performance condition (earnings per share growth). The award grantedoverhead, particularly during the year ended October 31, 2019 utilizes return2022. Although we use contractual price indexing along with periodic base price increases to
minimize the effect of inflation on net assets as the vesting condition and settles in cash. We utilize a Monte Carlo simulation modelour results, we have not been able to value the market condition and our stock price on the date of grant to value the internal performance condition. We bifurcate the liability and equity portionfully recover all of the awards (amounts expected to settle in cashinflationary cost increases. We cannot provide assurance, however, that our results of operations and shares, respectively) and recognize expense ratably over the vesting period of three years. We estimate that the performance measuresfinancial position will not be met and shares will vest at target until the year of settlement (third year of cliff vesting). As of October 31, 2019, we expect 56,103 performance share awards to vest, of which 28,051 would be paid in our common stock and 28,051 would settle in cash.
We also awarded performance restricted stock units to key employees and officers in December 2018 and 2017. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of performance restricted stock units earned is variable depending on the metric achieved, and the settlement method is 100% in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the shares had been outstanding throughout the performance period. To value the performance restricted stock units, we utilize a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Similar to performance shares, the performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to resultmaterially impacted by inflation in the issuance of contingent shares.future.
Recent Accounting Pronouncements
In June 2016,From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standards setting bodies that we adopt as of the specified effective date. We did not adopt any new accounting pronouncements during the twelve months ended October 31, 2022. As of October 31, 2022, we believe the impact of any recently issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This amendment replaces the incurred loss impairment methodology in current U.S. GAAP and requiresstandards that financial assets be measured on an amortized cost basis and presentedare not yet effective are either not applicable to us at the net amount expected to be collected. This new methodology reflects expected credit losses (rather than probable credit losses) and requires consideration ofthis time or will not have a broader range of supportable information when determining these estimated credit losses, including relevant experience, current conditions and supportable forecasts to determine collectability. In addition, the amendment provides guidance with regard to the use of an allowance for credit losses for purchased financial assets and available-for-sale debt securities. This amendment
becomes effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We expect to adopt this amendment during fiscal 2021, with no material impact on our condensed consolidated financial statements.
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard is effective for us on November 1, 2019, with early adoption permitted. We plan to adopt using a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application. We expect to adopt the new standard on November 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to November 1, 2019.
The new standard provides a number of optional practical expedients in transition. We will elect all of the new standard’s available transition practical expedients.
This standard will have a material effect on our financial statements. The most significant effects on our financial statements relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our operating leases and providing significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between now andupon adoption.
On adoption, we will recognize additional operating liabilities ranging from $40.0 million to $45.0 million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.
The new standard also provides practical expedients for an entity’s ongoing accounting. We will elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20). This amendment modifies the disclosure requirements for employers that sponsor defined benefit pensions or other postretirement plans. Specifically, the amendment removes disclosures which were no longer considered cost beneficial, clarifies certain disclosure requirements, and adds disclosures identified as relevant. This amendment becomes effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. We expect to adopt this amendment during fiscal 2022, with no impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The following discussion of our exposure to various market risks contains “forward looking statements” regarding our estimates, assumptions and beliefs concerning our exposure. Although we believe these estimates and assumptions are reasonable in light of information currently available to us, we cannot provide assurance that these estimates will not materially differ from actual results due to the inherent unpredictability of interest rates, foreign currency rates and commodity prices as well as other factors. We do not use derivative financial instruments for speculative or trading purposes.
Interest Rate Risk
Our outstanding debt bears interest at variable rates and accordingly is sensitive to changes in interest rates. Based upon the balances of the variable rate debt at October 31, 2019,2022, a hypothetical 1.0% increase or decrease in interest rates could result in approximately $1.4 million $0.1 million of additional pre-tax charges or credit to our operating results. This sensitivity pertains primarily to our outstanding revolving credit facility borrowings outstanding under the 2018 Credit Facility as of October 31, 2019.2022.
Foreign Currency Rate Risk
Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in the Euro, the British Pound Sterling and the Canadian Dollar. From time to time, we enter into foreign exchange contracts associated with our operations to manage a portion of the foreign currency rate risk.
The notional and fair market values of these positions at October 31, 2019 and 2018, were as follows:
|
| | | | | | | | | | | | | | |
| | Notional as indicated | | Fair Value in $ |
| | October 31, 2019 | | October 31, 2018 | | October 31, 2019 | | October 31, 2018 |
Foreign currency exchange derivatives: | | (In thousands) |
Buy EUR, Sell USD | EUR | 301 |
| | 455 |
| | $ | 1 |
| | $ | 1 |
|
Sell CAD, Buy USD | CAD | 405 |
| | 229 |
| | 2 |
| | — |
|
Sell GBP, Buy USD | GBP | 73 |
| | 22 |
| | — |
| | — |
|
Buy EUR, Sell GBP | EUR | 57 |
| | 34 |
| | — |
| | — |
|
Buy USD, Sell EUR | USD | 13 |
| | 12 |
| | — |
| | — |
|
At October 31, 2019 and 2018, we held2022 or 2021. These foreign currency derivative contracts hedginghedge cross-border intercompany and commercial activity for our insulating glass spacer business. Although these derivatives hedge our exposure to fluctuations in foreign currency rates, we do not apply hedge accounting and therefore, the change in the fair value of these foreign currency derivatives is recorded directly to other income and expense in the accompanying consolidated statements of (loss) income. To the extent the gain or loss on the derivative instrument offsets the gain or loss from the remeasurementre-measurement of the underlying foreign currency balance, changes in exchange rates should have no effect. See Note 12, "Derivative Instruments", contained elsewhere herein this Annual Report on Form 10-K.
During October 2018, we settled an unhedged foreign currency intercompany loan which facilitated the HLP acquisition. For the year ended October 31, 2018, we realized a loss of less than $0.1 million related to this foreign currency exposure. For the year ended October 31, 2017, we recorded a foreign currency gain of $0.7 million, of which $0.5 million was realized.
On June 23, 2016, voters in the U.K. voted for the U.K. to exit the E.U. (referred to as Brexit). The U.K. is currently due to leave the E.U. on January 31, 2020, but the actual timing, terms of its withdrawal and the nature of its future with the E.U. are still being debated. Since the 2016 vote, the primary impact on our financial performance has been related to foreign currency fluctuations of the British Pound Sterling. This fluctuation has driven foreign currency translation impacts, as well as raw material cost increases from upstream suppliers located outside of the U.K.
Given the lack of comparable precedent, it is difficult for us to predict the future impacts on our U.K. based operations, which accounted for approximately 15% of our total sales for the year ended October 31, 2019. Due to the fact that we manufacture and sell a majority of our U.K. products within the U.K., there is minimal risk to our ability to physically deliver goods and complete sales. As such, we believe we are well positioned within the U.K. to respond to potential changes to underlying demand as a result
of the final Brexit outcome. The primary focus for our U.K. operations centers on the availability and pricing of raw materials. While we source the majority of our raw materials from within the U.K., many of the primary upstream raw materials our vendors utilize are being sourced from outside of the U.K., which could expose us to cross-border issues and raw material price impacts due to foreign currency volatility. If the U.K. exits the E.U. without an agreement (referred to as a hard Brexit), there could be complete closure of the U.K. border which could have widespread negative ramifications for the U.K. We do not expect a full closure to occur and instead assume at a minimum that trading with certain countries will continue uninterrupted. Since we purchase the same raw materials utilized in our U.K. facilities at our other non-U.K. facilities and source raw materials from multiple countries, we believe we are prepared to utilize our existing Quanex-wide supply infrastructure to minimize potential supply disruptions as much as possible.
Commodity Price Risk
We purchase polyvinyl resin (PVC)PVC as the significant raw material consumed in the manufacture of vinyl extrusions. We have a monthly resin adjusteradjusters in place with a majority of our customers and our resin supplier that is adjusted based upon published industry indices for lagging resin prices for the prior month. This adjusterprices. These adjusters effectively sharesshare the base pass-through price changes of PVC with our customers commensurate with the market at large. Our long-term exposure to changes in PVC prices is somewhat mitigated due to the contractual component of the resin adjuster program. In addition,However, there is a level of exposure to short-term volatility due to the one month lag.timing lags.
We also chargeadjust the pricing of petroleum-based raw materials for the majority of our customers a surcharge related to petroleum-based rawwho purchase products using these materials. The surchargeThis is intended to offset the risingfluctuating cost of products which are highly correlated to the price of oil including butyl and other oil-based raw materials. The surcharge is in place with the majority of our customers who purchase these products andThis program is adjusted monthly based upon the 90-day average published price for Brent crude. The oil-based raw materials that we purchase are subject to similar pricing schemes. As such, our long-term exposure to changesincreases in oil-based raw material prices is significantly reduced under this surcharge program.
Similarly, WoodcraftNA Cabinet Components includes a surchargeprice index provision in the majority of its customer arrangements to insulate against significant fluctuations in the price for various hardwood products used as the primary raw material for kitchen and bathroom cabinet doors. Like our vinyl extrusion business, we are exposed to short-term volatility in wood prices due to a lag in the timing of price updates which generally could extend for up to three months.
We have begun implementing additional programs for other raw materials to facilitate more accurate pricing and reduce our exposure to changing material costs when necessary, however these are also subject to timing lags. While we maintain surcharges and other adjusters to manage our exposure to changes in the prices of our critical raw materials, we use several
commodities in our business that are not covered by contractual surcharges or adjusters for which pricing can fluctuate, including PVC compound micro ingredients, silicone and other inputs.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Quanex Building Products Corporation
| | | | | |
| |
| Page |
Reports of Independent Registered Public Accounting Firm (PCAOB ID 248) | |
Management's Annual Report on Internal Control over Financial Reporting | |
Consolidated Financial Statements | |
Consolidated Balance Sheets | |
Consolidated Statements of (Loss) Income | |
Consolidated Statements of Comprehensive (Loss) Income | |
Consolidated Statement of Stockholders’ Equity | |
Consolidated Statements of Cash Flow | |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Quanex Building Products Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Quanex Building Products Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of October 31, 20192022 and 2018,2021, the related consolidated statements of (loss) income, comprehensive (loss) income,changes in stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2019,2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2019,2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of October 31, 2019,2022, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated December 12, 201916, 2022 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit mattersmatter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinionsopinion on the critical audit matter or on the accounts or disclosures to which they relate.it relates.
Goodwill
Quantitative goodwill impairment assessment of the reporting unit included in the North American Cabinet Components operating segment
As described further in Note 1 to the Company’s financial statements, the Company is required to evaluate goodwill for impairment annually or more frequently if indicators of impairment exist. The Company performs its annual goodwill impairment test as of August 31. The Company determined that indicatorsperformed a quantitative assessment of impairment exist as of March 31, 2019 and then subsequently on October 31, 2019 for the reporting unit included in the North American (“NA”) Cabinet Components operating segment. As such,segment primarily due to the Company estimated thehistory of a narrow margin of fair value of this reporting unit to determine ifover carrying value in the fair value was less than the carrying amount. As a result of thesequantitative assessments the Company recognized goodwill impairments of $30.0 million at March 31, 2019 and $44.6 million at October 31, 2019.performed in prior years. We identified the estimation of the fair value of thethis reporting unit included in the NA Cabinet Components operating segment as a critical audit matter.
The principal considerations for our determination that the goodwill impairmentestimation of the fair value of this reporting unit included in the NA Cabinet Components operating segment is a critical audit matter includerelates to the significant judgments and assumptionsuse of the income approach which is one method management makesuses to estimate the fair value of the reporting unit for purposes of measuring the impairment of goodwill.unit. Auditing the fair value of
the reporting unit involved a high degree of auditor judgment, subjectivity and audit effort in evaluating management’s significant assumptions used in the income approach, including future revenues, earnings and cash flows expected growth rates, terminal growth rates, discount rates, guideline public companiesrelated to the reporting unit and market multiples.the weighted average cost of capital (WACC). In addition, the audit effort involved the use of valuation specialists to assist in performing these procedures and evaluating the audit evidence obtained.
Our audit procedures related to the estimation of the fair value of thethis reporting unit included in the NA Cabinets Components operating segment included the following, among others.
•We tested the effectiveness of controls over goodwill impairment including those over the determination of fair value, including controls relating to management’s development of forecasts of future revenues, earnings, and cash flows discount rates, market multiples and selectionWACC.
•We evaluated management’s ability to accurately forecast revenues, earnings and cash flows by comparing actual results to management’s historical forecastsforecasts.
•We evaluated the reasonableness of management’s forecasts of revenues, earnings and cash flows by comparing the forecasts to historical revenues, earnings and cash flows, current budgets, our understanding of the current business strategy, communications to the Board of Directors, press releases and industry reports.
•We utilized our valuation specialists to evaluate:evaluate the reasonableness of the WACC used by management, including the testing of underlying source information and developing a range of independent estimates and comparing those to the rate selected by management.
| | |
◦ | The discount rate, including the testing of underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management. |
| |
◦ | Market multiples by evaluating the selected comparable publicly traded companies and the adjustments made for difference in growth prospects and risk profiles between the reporting unit and the comparable publicly traded companies. We tested the underlying source information and mathematical accuracy of calculations. |
|
| |
/s/ GRANT THORNTON LLP | |
| |
We have served as the Company's auditor since 2014. | |
| |
Houston, Texas | |
December 12, 2019 | 16, 2022 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Quanex Building Products Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Quanex Building Products Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of October 31, 2019,2022, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2019,2022, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended October 31, 2019,2022, and our report dated December 12, 201916, 2022 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| | |
/s/ GRANT THORNTON LLP |
|
/s/ GRANT THORNTON LLPHouston, Texas |
|
Houston, Texas |
December 12, 201916, 2022 |
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system was designed to provide reasonable assurance to management and the Company’s Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may become inadequate over time because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 20192022 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on this assessment, management has concluded that, as of October 31, 2019,2022, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles based on such criteria.
Grant Thornton LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. This report appears on page 40.
QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of October 31, 20192022 and 20182021 | | | October 31, | | October 31, |
| 2019 | | 2018 | | 2022 | | 2021 |
| (In thousands, except share amounts) | | (In thousands, except share amounts) |
ASSETS | | | | ASSETS | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 30,868 |
| | $ | 29,003 |
| Cash and cash equivalents | $ | 55,093 | | | $ | 40,061 | |
Accounts receivable, net of allowance for doubtful accounts of $393 and $325 | 82,946 |
| | 84,014 |
| |
Accounts receivable, net of allowance for credit losses of $289 and $340 | | Accounts receivable, net of allowance for credit losses of $289 and $340 | 96,018 | | | 108,309 | |
Inventories, net | 67,159 |
| | 70,730 |
| Inventories, net | 120,890 | | | 92,529 | |
| Prepaid and other current assets | 9,353 |
| | 7,296 |
| Prepaid and other current assets | 8,664 | | | 8,148 | |
Total current assets | 190,326 |
| | 191,043 |
| Total current assets | 280,665 | | | 249,047 | |
Property, plant and equipment, net of accumulated depreciation of $317,568 and $288,607 | 193,600 |
| | 201,370 |
| |
Property, plant and equipment, net of accumulated depreciation of $348,528 and $336,493 | | Property, plant and equipment, net of accumulated depreciation of $348,528 and $336,493 | 180,400 | | | 178,630 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 56,000 | | | 52,708 | |
Goodwill | 145,563 |
| | 219,627 |
| Goodwill | 137,855 | | | 149,205 | |
Intangible assets, net | 107,297 |
| | 121,919 |
| Intangible assets, net | 65,035 | | | 82,410 | |
Other assets | 8,324 |
| | 9,255 |
| Other assets | 4,662 | | | 5,323 | |
Total assets | $ | 645,110 |
| | $ | 743,214 |
| Total assets | $ | 724,617 | | | $ | 717,323 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable | $ | 63,604 |
| | $ | 52,389 |
| Accounts payable | $ | 77,907 | | | $ | 86,765 | |
Accrued liabilities | 39,221 |
| | 45,968 |
| Accrued liabilities | 52,114 | | | 56,156 | |
Income taxes payable | 6,183 |
| | 2,780 |
| Income taxes payable | 1,049 | | | 6,038 | |
Current maturities of long-term debt | 746 |
| | 1,224 |
| Current maturities of long-term debt | 1,046 | | | 846 | |
Current operating lease liabilities | | Current operating lease liabilities | 7,727 | | | 8,196 | |
Total current liabilities | 109,754 |
| | 102,361 |
| Total current liabilities | 139,843 | | | 158,001 | |
Long-term debt | 156,414 |
| | 209,332 |
| Long-term debt | 29,628 | | | 52,094 | |
Noncurrent operating lease liabilities | | Noncurrent operating lease liabilities | 49,286 | | | 45,367 | |
Deferred pension and postretirement benefits | 13,322 |
| | 4,218 |
| Deferred pension and postretirement benefits | 3,917 | | | 4,737 | |
Deferred income taxes | 19,363 |
| | 17,510 |
| Deferred income taxes | 22,277 | | | 21,965 | |
Liability for uncertain tax positions | 556 |
| | 606 |
| Liability for uncertain tax positions | 1,361 | | | 1,388 | |
Other liabilities | 15,514 |
| | 13,965 |
| Other liabilities | 13,470 | | | 13,989 | |
Total liabilities | 314,923 |
| | 347,992 |
| Total liabilities | 259,782 | | | 297,541 | |
Commitments and contingencies |
| |
| Commitments and contingencies | |
Stockholders’ equity: | | | | Stockholders’ equity: | |
Preferred stock, no par value, shares authorized 1,000,000; issued and outstanding - none | — |
| | — |
| |
Common stock, $0.01 par value, shares authorized 125,000,000; issued 37,370,402 and 37,433,817 respectively; outstanding 33,021,789 and 33,339,032, respectively | 374 |
| | 374 |
| |
Preferred stock, no par value, shares authorized 1,000,000 issued and outstanding - none | | Preferred stock, no par value, shares authorized 1,000,000 issued and outstanding - none | — | | | — | |
Common stock, $0.01 par value, shares authorized 125,000,000 issued 37,211,056 and 37,273,510 respectively; outstanding 33,129,250 and 33,274,785, respectively | | Common stock, $0.01 par value, shares authorized 125,000,000 issued 37,211,056 and 37,273,510 respectively; outstanding 33,129,250 and 33,274,785, respectively | 372 | | | 373 | |
Additional paid-in-capital | 254,673 |
| | 254,678 |
| Additional paid-in-capital | 251,947 | | | 254,162 | |
Retained earnings | 185,703 |
| | 243,904 |
| Retained earnings | 337,456 | | | 259,718 | |
Accumulated other comprehensive loss | (33,817 | ) | | (30,705 | ) | Accumulated other comprehensive loss | (49,422) | | | (21,770) | |
Less: Treasury stock at cost, 4,348,613 and 4,094,785 shares, respectively | (76,746 | ) | | (73,029 | ) | |
Less: Treasury stock at cost, 4,081,806 and 3,998,725 shares, respectively | | Less: Treasury stock at cost, 4,081,806 and 3,998,725 shares, respectively | (75,518) | | | (72,701) | |
Total stockholders’ equity | 330,187 |
| | 395,222 |
| Total stockholders’ equity | 464,835 | | | 419,782 | |
Total liabilities and stockholders' equity | $ | 645,110 |
| | $ | 743,214 |
| Total liabilities and stockholders' equity | $ | 724,617 | | | $ | 717,323 | |
See notes to consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
For the Years Ended October 31, 2019, 20182022, 2021 and 20172020 | | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands, except per share amounts) |
Net sales | $ | 1,221,502 | | | $ | 1,072,149 | | | $ | 851,573 | |
Cost and expenses: | | | | | |
Cost of sales (excluding depreciation and amortization) | 953,004 | | | 831,541 | | | 658,750 | |
Selling, general and administrative | 117,108 | | | 115,967 | | | 89,707 | |
Restructuring charges | — | | | 39 | | | 622 | |
Depreciation and amortization | 40,109 | | | 42,732 | | | 47,229 | |
| | | | | |
Operating income | 111,281 | | | 81,870 | | | 55,265 | |
Non-operating (expense) income: | | | | | |
Interest expense | (2,559) | | | (2,530) | | | (5,245) | |
Other, net | 1,041 | | | 754 | | | 280 | |
Income before income taxes | 109,763 | | | 80,094 | | | 50,300 | |
Income tax expense | (21,427) | | | (23,114) | | | (11,804) | |
Net income | $ | 88,336 | | | $ | 56,980 | | | $ | 38,496 | |
| | | | | |
Basic earnings per common share | $ | 2.67 | | | $ | 1.72 | | | $ | 1.18 | |
| | | | | |
Diluted earnings per common share | $ | 2.66 | | | $ | 1.70 | | | $ | 1.17 | |
| | | | | |
Weighted-average common shares outstanding: | | | | | |
Basic | 33,048 | | | 33,193 | | | 32,689 | |
Diluted | 33,205 | | | 33,495 | | | 32,821 | |
| | | | | |
Cash dividends per share | $ | 0.32 | | | $ | 0.32 | | | $ | 0.32 | |
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (In thousands, except per share amounts) |
Net sales | $ | 893,841 |
| | $ | 889,785 |
| | $ | 866,555 |
|
Cost and expenses: | | | | | |
Cost of sales (excluding depreciation and amortization) | 694,420 |
| | 697,022 |
| | 672,488 |
|
Selling, general and administrative | 101,292 |
| | 103,758 |
| | 98,085 |
|
Restructuring charges | 370 |
| | 1,486 |
| | 4,550 |
|
Depreciation and amortization | 49,586 |
| | 51,822 |
| | 57,495 |
|
Asset impairment charges | 74,600 |
| | — |
| | — |
|
Operating (loss) income | (26,427 | ) | | 35,697 |
| | 33,937 |
|
Non-operating (expense) income: |
| | | | |
Interest expense | (9,643 | ) | | (11,100 | ) | | (9,595 | ) |
Other, net | 116 |
| | 1,156 |
| | 1,160 |
|
(Loss) income before income taxes | (35,954 | ) | | 25,753 |
| | 25,502 |
|
Income tax (expense) benefit | (10,776 | ) | | 800 |
| | (6,819 | ) |
Net (loss) income | $ | (46,730 | ) | | $ | 26,553 |
| | $ | 18,683 |
|
|
| | | | |
Basic (loss) earnings per common share | $ | (1.42 | ) | | $ | 0.77 |
| | $ | 0.55 |
|
Diluted (loss) earnings per common share | $ | (1.42 | ) | | $ | 0.76 |
| | $ | 0.54 |
|
| | | | | |
Weighted-average common shares outstanding: | | | | | |
Basic | 32,960 |
| | 34,701 |
| | 34,230 |
|
Diluted | 32,960 |
| | 35,025 |
| | 34,837 |
|
| | | | | |
Cash dividends per share | $ | 0.32 |
| | $ | 0.20 |
| | $ | 0.16 |
|
See notes to consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the Years Ended October 31, 2019, 20182022, 2021 and 20172020 | | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
Net income | $ | 88,336 | | | $ | 56,980 | | | $ | 38,496 | |
Other comprehensive income: | | | | | |
Foreign currency translation adjustments (loss) gain | (28,334) | | | 7,152 | | | 1,078 | |
| | | | | |
Change in pension from net unamortized gain (loss) (pretax) | 897 | | | 5,477 | | | (376) | |
Change in pension from net unamortized gain (loss) tax (expense) benefit | (215) | | | (1,375) | | | 91 | |
Total other comprehensive (loss) income, net of tax | (27,652) | | | 11,254 | | | 793 | |
Comprehensive income | $ | 60,684 | | | $ | 68,234 | | | $ | 39,289 | |
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Net (loss) income | $ | (46,730 | ) | | $ | 26,553 |
| | $ | 18,683 |
|
Other comprehensive (loss) income: | | | | | |
Foreign currency translation adjustments gain (loss) | 1,864 |
| | (6,640 | ) | | 11,524 |
|
Change in pension from net unamortized (loss) gain (pretax) | (6,572 | ) | | 2,253 |
| | 3,462 |
|
Change in pension from net unamortized (loss) gain tax benefit (expense) | 1,596 |
| | (1,242 | ) | | (1,297 | ) |
Total other comprehensive (loss) income, net of tax | (3,112 | ) | | (5,629 | ) | | 13,689 |
|
Comprehensive (loss) income | $ | (49,842 | ) | | $ | 20,924 |
| | $ | 32,372 |
|
See notes to consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Years Ended October 31, 2019, 20182022, 2021 and 20172020
| | | | | | | | | | | | | | | | | | | Common Stock | | Accumulated | | Treasury Stock | | Total |
| Common Stock | | | | | | Accumulated | | Treasury Stock | | Total | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Other Comprehensive Loss | | Shares | | Amount | | Stockholders’ Equity |
| Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Other Comprehensive Loss | | Shares | | Amount | | Stockholders’ Equity | | (In thousands, except share amounts) |
| (In thousands, except share amounts) | |
Balance at October 31, 2016 | 37,560,249 |
| | $ | 376 |
| | $ | 254,540 |
| | $ | 214,892 |
| | $ | (38,765 | ) | | (3,339,753 | ) | | $ | (62,367 | ) | | $ | 368,676 |
| |
Balance at October 31, 2019 | | Balance at October 31, 2019 | 37,370,402 | | | $ | 374 | | | $ | 254,673 | | | $ | 185,703 | | | $ | (33,817) | | | (4,348,613) | | | $ | (76,746) | | | $ | 330,187 | |
Net income | — |
| | — |
| | — |
| | 18,683 |
| | — |
| | — |
| | — |
| | 18,683 |
| Net income | — | | | — | | | — | | | 38,496 | | | — | | | — | | | — | | | 38,496 | |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | 11,524 |
| | — |
| | — |
| | 11,524 |
| |
Change in pension from net unamortized gain (net of tax expense of $1,297) | — |
| | — |
| | — |
| | — |
| | 2,165 |
| | — |
| | — |
| | 2,165 |
| |
Common dividends ($0.16 per share) | — |
| | — |
| | — |
| | (5,516 | ) | | — |
| | — |
| | — |
| | (5,516 | ) | |
Foreign currency translation adjustments | | Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 1,078 | | | — | | | — | | | 1,078 | |
Change in pension from net unamortized loss (net of tax benefit of $91) | | Change in pension from net unamortized loss (net of tax benefit of $91) | — | | | — | | | — | | | — | | | (285) | | | — | | | — | | | (285) | |
Common dividends ($0.32 per share) | | Common dividends ($0.32 per share) | — | | | — | | | — | | | (10,534) | | | — | | | — | | | — | | | (10,534) | |
Treasury shares purchased, at cost | | Treasury shares purchased, at cost | — | | | — | | | — | | | — | | | — | | | (450,000) | | | (7,233) | | | (7,233) | |
Expense related to stock-based compensation | — |
| | — |
| | 5,189 |
| | — |
| | — |
| | — |
| | — |
| | 5,189 |
| Expense related to stock-based compensation | — | | | — | | | 879 | | | — | | | — | | | — | | | 879 | |
Stock options exercised | — |
| | — |
| | (76 | ) | | (1,451 | ) | | — |
| | 507,660 |
| | 9,480 |
| | 7,953 |
| Stock options exercised | — | | | — | | | 66 | | | (242) | | | — | | | 215,733 | | | 3,801 | | | 3,625 | |
Tax benefit from share-based compensation | — |
| | — |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | (4 | ) | |
Restricted stock awards granted | — |
| | — |
| | (1,752 | ) | | — |
| | — |
| | 161,350 |
| | 1,752 |
| | — |
| Restricted stock awards granted | — | | | — | | | (1,212) | | | 94 | | | — | | | 63,400 | | | 1,118 | | | — | |
Performance share awards vested | — |
| | — |
| | (1,261 | ) | | — |
| | — |
| | — |
| | 1,261 |
| | — |
| Performance share awards vested | — | | | — | | | (495) | | | — | | | — | | | 28,051 | | | 495 | | | — | |
Other | (51,372 | ) | | (1 | ) | | (917 | ) | | (59 | ) | | — |
| | — |
| | (1 | ) | | (978 | ) | Other | (74,236) | | | (1) | | | (453) | | | — | | | — | | | — | | | — | | | (454) | |
Balance at October 31, 2017 | 37,508,877 |
| | $ | 375 |
| | $ | 255,719 |
| | $ | 226,549 |
| | $ | (25,076 | ) | | (2,670,743 | ) | | $ | (49,875 | ) | | $ | 407,692 |
| |
Balance at October 31, 2020 | | Balance at October 31, 2020 | 37,296,166 | | | $ | 373 | | | $ | 253,458 | | | $ | 213,517 | | | $ | (33,024) | | | (4,491,429) | | | $ | (78,565) | | | $ | 355,759 | |
Net income | — |
| | — |
| | — |
| | 26,553 |
| | — |
| | — |
| | — |
| | 26,553 |
| Net income | — | | | — | | | — | | | 56,980 | | | — | | | — | | | — | | | 56,980 | |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (6,640 | ) | | — |
| | — |
| | (6,640 | ) | |
Change in pension from net unamortized gain (net of tax expense of $1,242) | — |
| | — |
| | — |
| | — |
| | 1,011 |
| | — |
| | — |
| | 1,011 |
| |
Common dividends ($0.20 per share) | — |
| | — |
| | — |
| | (7,020 | ) | | — |
| | — |
| | — |
| | (7,020 | ) | |
Foreign currency translation adjustments | | Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 7,152 | | | — | | | — | | | 7,152 | |
Change in pension from net unamortized gain (net of tax of expense of $1,375) | | Change in pension from net unamortized gain (net of tax of expense of $1,375) | — | | | — | | | — | | | — | | | 4,102 | | | — | | | — | | | 4,102 | |
Common dividends ($0.32 per share) | | Common dividends ($0.32 per share) | — | | | — | | | — | | | (10,779) | | | — | | | — | | | — | | | (10,779) | |
Expense related to stock-based compensation | — |
| | — |
| | 1,874 |
| | — |
| | — |
| | — |
| | — |
| | 1,874 |
| Expense related to stock-based compensation | — | | | — | | | 1,970 | | | — | | | — | | | — | | | 1,970 | |
Treasury shares purchased, at cost | — |
| | — |
| | — |
| | — |
| | — |
| | (1,900,000 | ) | | (32,034 | ) | | (32,034 | ) | Treasury shares purchased, at cost | — | | | — | | | — | | | — | | | — | | | (478,311) | | | (11,182) | | | (11,182) | |
Stock options exercised | — |
| | — |
| | (149 | ) | | (2,141 | ) | | — |
| | 377,218 |
| | 7,036 |
| | 4,746 |
| Stock options exercised | — | | | — | | | 1,073 | | | — | | | — | | | 865,393 | | | 15,199 | | | 16,272 | |
Restricted stock awards granted | — |
| | — |
| | (1,371 | ) | | — |
| | — |
| | 73,400 |
| | 1,371 |
| | — |
| Restricted stock awards granted | — | | | — | | | (1,282) | | | — | | | — | | | 73,300 | | | 1,282 | | | — | |
Performance share awards vested | — |
| | — |
| | (473 | ) | | — |
| | — |
| | 25,340 |
| | 473 |
| | — |
| Performance share awards vested | — | | | — | | | (565) | | | — | | | — | | | 32,322 | | | 565 | | | — | |
Other | (75,060 | ) | | (1 | ) | | (922 | ) | | (37 | ) | | — |
| | — |
| | — |
| | (960 | ) | Other | (22,656) | | | — | | | (492) | | | — | | | — | | | — | | | — | | | (492) | |
Balance at October 31, 2018 | 37,433,817 |
| | $ | 374 |
| | $ | 254,678 |
| | $ | 243,904 |
| | $ | (30,705 | ) | | (4,094,785 | ) | | $ | (73,029 | ) | | $ | 395,222 |
| |
Net loss | — |
| | — |
| | — |
| | (46,730 | ) | | — |
| | — |
| | — |
| | (46,730 | ) | |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | 1,864 |
| | — |
| | — |
| | 1,864 |
| |
Change in pension from net unamortized loss (net of tax expense of $1,596) | — |
| | — |
| | — |
| | — |
| | (4,976 | ) | | — |
| | — |
| | (4,976 | ) | |
Balance at October 31, 2021 | | Balance at October 31, 2021 | 37,273,510 | | | $ | 373 | | | $ | 254,162 | | | $ | 259,718 | | | $ | (21,770) | | | (3,998,725) | | | $ | (72,701) | | | $ | 419,782 | |
Net income | | Net income | — | | | — | | | — | | | 88,336 | | | — | | | — | | | — | | | 88,336 | |
Foreign currency translation adjustments | | Foreign currency translation adjustments | — | | | — | | | — | | | — | | | (28,334) | | | — | | | — | | | (28,334) | |
Change in pension from net unamortized gain (net of tax expense of $215) | | Change in pension from net unamortized gain (net of tax expense of $215) | — | | | — | | | — | | | — | | | 682 | | | — | | | — | | | 682 | |
Common dividends ($0.32 per share) | — |
| | — |
| | — |
| | (10,644 | ) | | — |
| | — |
| | — |
| | (10,644 | ) | Common dividends ($0.32 per share) | — | | | — | | | — | | | (10,598) | | | — | | | — | | | — | | | (10,598) | |
Treasury shares purchased, at cost | — |
| | — |
| | — |
| | — |
| | — |
| | (583,398 | ) | | (9,551 | ) | | (9,551 | ) | Treasury shares purchased, at cost | — | | | — | | | — | | | — | | | — | | | (291,000) | | | (6,600) | | | (6,600) | |
Expense related to stock-based compensation | — |
| | — |
| | 2,045 |
| | — |
| | — |
| | — |
| | — |
| | 2,045 |
| Expense related to stock-based compensation | — | | | — | | | 2,291 | | | — | | | — | | | — | | | 2,291 | |
Stock options exercised | — |
| | 1 |
| | — |
| | (322 | ) | | — |
| | 204,770 |
| | 3,609 |
| | 3,288 |
| Stock options exercised | — | | | — | | | 38 | | | — | | | — | | | 35,600 | | | 651 | | | 689 | |
| Restricted stock awards granted | — |
| | — |
| | (1,720 | ) | | (505 | ) | | — |
| | 124,800 |
| | 2,225 |
| | — |
| Restricted stock awards granted | — | | | — | | | (1,534) | | | — | | | — | | | 84,400 | | | 1,534 | | | — | |
Performance share awards vested | | Performance share awards vested | — | | | — | | | (1,598) | | | — | | | — | | | 87,919 | | | 1,598 | | | — | |
Other | (63,415 | ) | | (1 | ) | | (330 | ) | | — |
| | — |
| | — |
| | — |
| | (331 | ) | Other | (62,454) | | | (1) | | | (1,412) | | | — | | | — | | | — | | | — | | | (1,413) | |
Balance at October 31, 2019 | 37,370,402 |
| | $ | 374 |
| | $ | 254,673 |
| | $ | 185,703 |
| | $ | (33,817 | ) | | (4,348,613 | ) | | $ | (76,746 | ) | | $ | 330,187 |
| |
Balance at October 31, 2022 | | Balance at October 31, 2022 | 37,211,056 | | | $ | 372 | | | $ | 251,947 | | | $ | 337,456 | | | $ | (49,422) | | | (4,081,806) | | | $ | (75,518) | | | $ | 464,835 | |
See notes to consolidated financial statements.
See notes to consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations, Basis of Presentation and Significant Accounting Policies
Nature of Operations
Quanex Building Products Corporation is a component supplier to original equipment manufacturers (OEMs) in the building products industry. These components can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of fenestration components include: (1) energy-efficient flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, and (4) precision-formed metal and wood products. We also manufacture cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, fencing, water retention barriers, and conservatory roof components. We have organized our business into 3three reportable business segments: (1) North American Fenestration (NA Fenestration), (2) European Fenestration (EU Fenestration) and (3) North American Cabinet Components (NA Cabinet Components). For additional discussion of our reportable business segments, see Note 17, "Segment16, “Segment Information."” We use low-cost production processes and engineering expertise to provide our customers with specialized products for their specific window, door, and cabinet applications. We believe these capabilities provide us with unique competitive advantages. We serve a primary customer base in North America and the United Kingdom (U.K.), and also serve customers in international markets through our operating plants in the U.K. and Germany, as well as through sales and marketing efforts in other countries.
Unless the context indicates otherwise, references to "Quanex"“Quanex”, the "Company"“Company”, "we"“we”, "us"“us” and "our"“our” refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries.
Basis of Presentation and Principles of Consolidation
Our consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). We consolidate our wholly-owned subsidiaries and eliminate intercompany sales and transactions. We have no cost or equity investments in companies that are not wholly-owned. In our opinion, these audited financial statements contain all adjustments necessary to fairly present our financial position, results of operations and cash flows for the periods presented.
Use of Estimates
In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. We review our estimates on an ongoing basis, including those related to impairment of long lived assets and goodwill, pension and retirement liabilities, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates. During the year ended October 31, 2017, we recorded a change in estimate related to certain assets involved in restructuring activities, as more fully described under the caption "Restructuring."
A summary of our significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Revenue from Contracts with Customers
On November 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method and applying ASC Topic 606 to all revenue contracts with customers. Results for reporting periods beginning on or after November 1, 2018 are presented under ASC Topic 606. In accordance with the modified retrospective approach, prior period amounts were not adjusted and are reported under ASC Topic 605, “Revenue Recognition.” As a result of adoption, there was not a material impact on our consolidated financial statements. We expect the impact of the adoption of ASC Topic 606 to continue to be immaterial to our net income on an ongoing basis.
Revenue recognition
The core principle of ASC Topic 606 is toWe recognize revenue that reflects the consideration we expect to receive for product sales when the promised items are transferredupon transfer to customers. Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we expect to beare entitled to consideration in exchange for transferring those products.such transfer. We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those services,products, and when collectability of the consideration due is probable.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Performance obligations
A performance obligation is a promise to provide the customer with a good or service. Our performance obligations include product sales, with each product included in a customer contract being recognized as a separate performance obligation. For contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to accountaccount for product returns related to general returns and product nonconformance.
Pricing and sales incentives
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts.
Practical expedients and exemptions
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Pricing and sales incentives
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts.
Shipping and handling costscosts
We have elected to account for shipping and handling services as fulfillment services in accordance ASC Topic 606 guidance;services; accordingly, freight revenue will beis combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in Costcost of sales in the accompanying Condensed Consolidated Statementsconsolidated statements of Income.income.
Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration.
Disaggregation of revenue
We produce a wide variety of products that are used in the fenestration industry, including insulating glass spacer systems; extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we produce certain non-fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other products.
The following table summarizes our product sales for the three years ended October 31, 2019, 2018,2022, 2021, and 20172020 into groupings by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. For further details regarding our results by segment, refer to Note 17,16, “Segment Information”.Information.”
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
NA Fenestration: | | | | | |
United States - fenestration | $ | 439,536 |
| | $ | 412,000 |
| | $ | 399,694 |
|
International - fenestration | 31,106 |
| | 39,309 |
| | 34,279 |
|
United States - non-fenestration | 17,061 |
| | 18,211 |
| | 25,263 |
|
International - non-fenestration | 16,134 |
| | 15,846 |
| | 15,642 |
|
| $ | 503,837 |
| | $ | 485,366 |
| | $ | 474,878 |
|
EU Fenestration: | | | | | |
United States - fenestration | $ | — |
| | $ | — |
| | $ | 303 |
|
International - fenestration | 139,638 |
| | 135,415 |
| | 129,140 |
|
International - non-fenestration | 25,359 |
| | 24,558 |
| | 18,520 |
|
| $ | 164,997 |
| | $ | 159,973 |
| | $ | 147,963 |
|
NA Cabinet Components: | | | | | |
United States - fenestration | $ | 13,144 |
| | $ | 14,596 |
| | $ | 17,083 |
|
United States - non-fenestration | 214,211 |
| | 232,990 |
| | 229,550 |
|
International - non-fenestration | 2,289 |
| | 2,227 |
| | 2,175 |
|
| $ | 229,644 |
| | $ | 249,813 |
| | $ | 248,808 |
|
Unallocated Corporate & Other: | | | | | |
Eliminations | $ | (4,637 | ) | | $ | (5,367 | ) | | $ | (5,094 | ) |
| $ | (4,637 | ) | | $ | (5,367 | ) | | $ | (5,094 | ) |
Net sales | $ | 893,841 |
| | $ | 889,785 |
| | $ | 866,555 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (in thousands) |
NA Fenestration: | | | | | |
United States - fenestration | $ | 609,572 | | | $ | 507,634 | | | $ | 427,616 | |
International - fenestration | 35,906 | | | 34,610 | | | 28,585 | |
United States - non-fenestration | 29,039 | | | 24,534 | | | 19,279 | |
International - non-fenestration | 12,941 | | | 11,554 | | | 7,935 | |
| $ | 687,458 | | | $ | 578,332 | | | $ | 483,415 | |
EU Fenestration: | | | | | |
| | | | | |
International - fenestration | $ | 194,854 | | | $ | 199,511 | | | $ | 134,432 | |
International - non-fenestration | 67,204 | | | 52,088 | | | 26,622 | |
| $ | 262,058 | | | $ | 251,599 | | | $ | 161,054 | |
NA Cabinet Components: | | | | | |
United States - fenestration | $ | 17,696 | | | $ | 13,326 | | | $ | 11,842 | |
United States - non-fenestration | 254,726 | | | 230,559 | | | 196,479 | |
International - non-fenestration | 3,282 | | | 2,190 | | | 1,778 | |
| $ | 275,704 | | | $ | 246,075 | | | $ | 210,099 | |
Unallocated Corporate & Other: | | | | | |
Eliminations | $ | (3,718) | | | $ | (3,857) | | | $ | (2,995) | |
| $ | (3,718) | | | $ | (3,857) | | | $ | (2,995) | |
Net sales | $ | 1,221,502 | | | $ | 1,072,149 | | | $ | 851,573 | |
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with an original maturity of three months or less. Such securities with an original maturity which exceeds three months are deemed to be short-term investments. We maintain cash and cash equivalents at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts.
Concentration of Credit Risk and Allowance for Doubtful AccountsCredit Losses
Certain of our businesses or product lines are largely dependent on a relatively few large customers. Although we believe we have an extensiveextensive customer base, the loss of 1one of these large customers or if such customers were to incur a prolonged period of decline in business, our financial condition and results of operations could be adversely affected. For the years ended October 31, 2019, 20182022 and 2017, no customers2020, one customer provided more than 10% of our consolidated net sales. For the year ended October 31, 2021, no customer provided more than 10% of our consolidated net sales.
We have establishedestablished an allowance for doubtful accountscredit losses to estimate the risk of loss associated with our accounts receivable balances. Our policy for determining the allowance is based on factors that affect collectability, including: (a) historical trends of write-offs, recoveries and credit losses; (b) the credit quality of our customers; and (c) projected economic and market conditions. We believe our allowance is adequate to absorb any known or probable losseslosses as of October 31, 2019.2022. Different assumptions or changes in economic circumstances could result in changes to the allowance.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Business Combinations
We apply the acquisition method of accounting for business combinations, in accordance with U.S. GAAP, which requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets and liabilities acquired. We account for contingent assets and liabilities at fair value on the acquisition date, and record changes to fair value associated with these assetsassets and liabilities as a period cost as incurred. We use established valuation techniques and engage reputable valuation specialists to assist us with these valuations.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS However, there is a risk that we may not identify all pre-acquisition contingencies or that our estimates may not reflect the actual results when realized. We use a reasonable measurement period to record any adjustment related to the opening balance sheet (generally, less than one year). After the measurement period, changes to the opening balance sheet can result in the recognition of income or expense as period costs. To the extent these items stem from contingencies that existed at the balance sheet date, but are contingent upon the realization of future events, the cost is charged to expense at the time the future event becomes known. (continued)
Inventory
We record inventory at the lower of cost or net realizable value. Inventories are valued using the first-in first-out (FIFO) method. Fixed costs related to excess manufacturing capacity are evaluated and expensed in the period, to insureensure that inventory is properly capitalized. Inventory quantities are regularly reviewed and provisions for excess or obsolete inventory are recorded primarily based on our forecast of future demand and our estimates regarding current and future market conditions. Significant unanticipated variances to our forecasts could require a change in the provision for excess or obsolete inventory, resulting in a charge to net income during the period of the change.
During the year ended October 31, 2019, we changed the method of inventory costing for certain inventory in two plants located in our NA Fenestration reportable business segment to the first-in first-out (FIFO) method from the last-in first-out method. We utilize the FIFO method to determine costs at all of our other operating locations. We believe that the FIFO method is preferable as it provides uniformity of inventory valuation across our global operations, aligns with how we internally manage inventory, and provides better matching of revenues and expenses. The impact of this change in accounting principle on the financial statements for each period presented is further explained in Note 3, “Inventories.”
Long-Lived Assets
Property, Plant and Equipment and Intangible Assets with Defined Lives
We make judgments and estimates related to the carrying value of property, plant and equipment, intangible assets with defined lives, and long-lived assets, which include determining when to capitalize costs, the depreciation and amortization methods to use and the useful lives of these assets. We evaluate these assets for impairment when there are indicators that the carrying values of these assets might not be recoverable. Such indicators of impairment may include changes in technology, significant market fluctuations, historical losses or loss of a significant customer, or other changes in circumstance that could affect the assets’ ability to generate future cash flows. When we evaluate these assets for impairment, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset to its carrying value. If the carrying value exceeds the sum of the undiscounted cash flows, and there is no alternative use for the asset, we determine that the asset is impaired. To measure the impairment charge, we compare the carrying amount of the long-lived asset to its fair value, as determined by quoted market prices in active markets, if available, or by discounting the projected future cash flows using our incremental borrowing rate.flows. This calculation of fair value requires us to develop and employ long-term forecasts of future operating results related to these assets. These forecasts are based on assumptions about demand for our products and future market conditions. Future events and unanticipated changes to these assumptions could require a provision for impairment, resulting in a charge to net income during the period of the change.
We monitor relevant circumstances, including industry trends, general economic conditions, and the potential impact that such circumstances might have on the valuation of our identifiable intangible assets with finite lives. Events and changes in circumstance that may cause a triggering event and necessitate such a review include, but are not limited to: a decrease in sales for certain customers, improvements or changes in technology, and/or a decision to discontinue the use of a trademark or trade name, or to allow a patent to lapse. Such events could negatively impact the fair value of our identifiable intangible assets. In such circumstances, we may evaluate the underlying assumptions and estimates made by us in order to assess the appropriate valuation of these identifiable intangible assets and compare to the carrying value of the assets. We may be required to write down these identifiable intangible assets and record a non-cash impairment charge. When we originally value our intangible assets, we use a variety of techniques to establish the carrying value of the assets, including the relief from royalty method, excess current year earnings method and income method.
ChangesThe World Health Organization's (WHO), declaration of COVID-19 as a global pandemic also created significant changes in market conditions throughout 2019 and 2017 impacted our long-term forecasts of future operating results with regard to the reduction of significant sales volume to a large customer of our United States (U.S.) vinyl operations, and lower-than-expected operating performance of our North American Cabinet Components business.2020 that have continued into 2021. We determined that these conditions were indicators of a triggering eventsevent in 2020 which necessitated an evaluation of certain long-term assets utilizedused in these businesses for potential impairment. We compared the projected undiscounted cash flows we expected to realize associated with these assets over the remaining useful lives of the primary operating assets to the net book value of the long-term assets, including goodwill, and determined that these assets were not impaired.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the year ended October 31, 2022, our North American vinyl extrusion operations in our NA Fenestration segment experienced lower-than-expected operating results due to the continued impact of inflation and historical customer contracts which prevent us from passing on the full impact of higher costs to our customers. We determined that this condition was an indicator of a triggering event which necessitated an evaluation of certain long-term assets used in this business for potential impairment. We compared the projected undiscounted cash flows we expected to realize associated with these assets over the remaining useful lives of the primary operating assets to the net book value of the long-term assets and determined that these assets were not impaired. Should we be unable to successfully increase prices to offset inflation, it is possible that we could incur an impairment in the future.
There were no indicators of triggering events noted for any period in the year ended October 31, 2021. Therefore, we did not record an impairment charge related to property, plant and equipment or intangible assets with defined lives during the years ended October 31, 20192022, 2021 and 2017. There were no indicators of triggering events noted for the year ended October 31, 2018.2020.
Software development costs, including costs incurred to purchase third-party software, are capitalized when we have determined that the technology is capable of meeting our performance requirements, and we have authorized funding for the project. We cease capitalization of software costs when the software is substantially complete and is ready for its intended use.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The software is then amortized over its estimated useful life. When events or circumstances indicate the carrying value of internal use software might not be recoverable, we assess the recoverability of these assets by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated from the asset’s use, consistent with the methodology to test other property, plant and equipment for impairment.
Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. We capitalize betterments which extend the useful lives or significantly improve the operational efficiency of assets. We expense repair and maintenance costs as incurred.
The estimated useful lives of our primary asset categories at October 31, 20192022 were as follows:
|
| | | | |
| Useful Life (in Years) |
Land improvements | 7 to 25 |
Buildings | 25 to 40 |
Building improvements | 5 to 20 |
Machinery and equipment | 2 to 15 |
Leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the lease.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill
We use the acquisition method to account for business combinations and, to the extent that the purchase price exceeds the fair value of the net assets acquired, we record goodwill. In accordance with U.S. GAAP, we are required to evaluate our goodwill at least annually. We perform our annual goodwill assessment as of August 31, or more frequently if indicators of impairment exist. Qualitative factors that indicate impairment could include, but are not limited to, (i) macroeconomic conditions, (ii) industry and market considerations, (iii) cost factors, (iv) overall financial performance of the reporting unit, and (v) other relevant entity-specific events. The first step in our annual goodwill assessment is to perform the optional qualitative assessment allowed by ASC Topic 350 “Intangibles - Goodwill and Other” (ASC 350). In our qualitative assessment, we evaluate relevant events or circumstances to determine whether it is more likely than not (i.e., greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, ASC 350 requires us to compare the fair value of such reporting unit to its carrying value including goodwill. To determine the fair value of our reporting units, we use multiple valuation techniques including a discounted cash flow analysis, using the applicable weighted average cost of capital, in combination with a market approach that utilizesuses market multiples and a selection of guideline public companies. This test requires us to make assumptions about the future growth of our business and the market in general, as well as other variables such as the level of investment in capital expenditure, growth in working capital requirements and the terminal or residual value of our reporting units beyond the periods of estimated annual cash flows. We use a third-party valuation firm to assist us with this analysis. If the fair value of each reporting unit exceeds its carrying value, no action is required. Otherwise, an impairment loss is recorded to the extent that the carrying amount of the reporting unit including goodwill exceeds the fair value of that reporting unit. We believe the estimates and assumptions used in our impairment assessment are reasonable based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated during current or future periods.
During the second quarter of 2019, our reporting unit included in our NA Cabinet Components segment experienced financial performance for the year to date period ended March 31, 2019 that was below our budget. As a result, we developed a new long-range forecast for this reporting unit that was below its previous long-range forecast as a result of an industry-wide shift from semi-custom cabinets to stock cabinets. We determined that the combination of i) actual financial results below planned performance, ii) a downward revision of the long-range forecast, and iii) the historical narrow margin of fair value over carrying value in previous annual and interim goodwill assessments represented a triggering event that would more likely than not indicate that the carrying value of this reporting unit was greater than its fair value. Therefore, we performed a quantitative impairment test of the goodwill balance at March 31, 2019. The quantitative impairment test was conducted using multiple valuation techniques, including a discounted cash flow analysis, which utilizes Level 3 fair value inputs, and resulted in an asset impairment charge of $30.0 million during the second quarter of 2019.
At our annual testing date, August 31, 2019,2022, we had 5five reporting units with goodwill balances: 2two reporting units included in our NA Fenestration operating segment, 2two reporting units included in our EU Fenestration operating segment, and 1one reporting unit included in our NA Cabinet Components operating segment. We performed a qualitative assessment of one of the two reporting units in the NA Fenestration segment and two of the two reporting units in the EU Fenestration segment. This review included an analysis of historical goodwill test results, operating results relative to forecast, projected results over the next five years, and other measures and concluded that there were no indicators of potential impairment associated with these reporting units. Therefore, no additional testing was deemed necessary for thethese three reporting units in the NA Fenestration segment and the EU Fenestration segment.units. Also, at
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
our annual testing date, we performed a quantitative assessment of the reporting unit in our NA Cabinet Components segment primarily due to the recent impairment of goodwill during the second quarterand fourth quarters of 2019 and the history of a narrow margin of fair value above carrying value in quantitative assessments performed in prior years. We determined that the fair value of this reporting unit exceeded itstheir carrying values by approximately 12.0%. We also elected to update the quantitative assessment of the other reportable unit in the NA Fenestration operating segment. We determined that the fair value of this reporting unit exceeded their carrying values by approximately 5%approximately 384.9%. At that date, weWe concluded that no impairment was necessary.
After the annual assessment date and prior to our fiscal year end of October 31, 2019, the reporting unit in our NA Cabinet Components segment was notified about a change in strategy at one of our large customers that may result in lower sales volumes in the future. In addition, we continued to experience lower-than-expected volumes as a result of the ongoing shift in demand from semi-custom cabinets to stock cabinets. Based on this information, we updated our long-range forecast for this reporting unit to reflect the expected volume declines. This revised long-range forecast was utilized to perform another quantitative impairment test of this reporting unit as of October 31, 2019, which resulted in an asset impairment charge of $44.6 million during the fourth quarter of 2019. As a result of the quantitative assessments performed in the second and fourth quarters of 2019, we recorded impairment charges totaling $74.6 million during the year ended October 31, 2019, reducing the goodwill balance applicable to the reporting unit included in our NA Cabinet Components operating segment from $113.7 million to $39.1 million.
Restructuring
We accrue one-time severance costs pursuant to an approved plan of restructuring at the communication date, when affected employees have been notified of the potential severance and sufficient information has been provided for the employee to calculate severance benefits, in the event the employee is involuntarily terminated. In addition, we accrue costs associated with the termination of contractual commitments including operating leases at the time the lease is terminated pursuant to the lease provisions or in accordance with another agreement with the landlord. Otherwise, we continue to recognize operating lease expense through the cease-use date. After the cease-use date, we determine if our operating lease payments are at market. We assume sublet of the facility at the market rate. To the extent our lease obligations exceed the fair value rentals, we discount to arrive at the present value and record a liability. If the facility is not sublet, we expense the amount of the assumed sublet in the current period. For other costs directly related to the restructuring effort, such as equipment moving costs, we expense in the period incurred.
In September 2017, we closed a kitchen and bathroom cabinet door plant in Lansing, Kansas. We expensed $4.6 million associated with our restructuring efforts for the year ended October 31, 2017, including cost
In addition, we evaluated the remaining depreciable lives of property, plant and equipment that has been abandoned, displaced or otherwise disposed as a result of the plant closures. We recorded a change in estimate associated with the remaining useful lives of these assets which resulted in an increase in depreciation expense of $4.3 million for the year ended October 31, 2017. Furthermore, we evaluated the remaining service lives of intangible assets with defined lives associated with our U.S. vinyl extrusion business and recorded a change in estimate associated with the remaining useful lives of a customer relationship intangible and a utility process intangible asset resulting in an increase in amortization expense of $1.9 million for the year ended October 31, 2017. We did not incur similar increases in depreciation or amortization expenses related to restructuring activities during the years ended October 31, 2019 and 2018.QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Insurance
We manage our exposure to losses for workers’ compensation, group medical, property, casualty and other insurance claims through a combination of self-insurance retentions and insurance coverage with third-party carriers. We record undiscounted liabilities associated with our portion of these exposures, which we estimate by considering various factors such as our historical claims experience, severity factors and estimated claims incurred but not reported, for which we have developed loss development factors, which are estimates as to how claims will develop over time until closed. While we consider a number of factors in preparing the estimates, sensitive assumptions using significant judgment are made in determining the amounts that are accrued in the financial statements. Actual claims could differ significantly from these estimated liabilities, depending on future claims experience. We do not record insurance recoveries until any contingencies relating to the claim have been resolved.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Retirement Plans
We sponsor a defined benefit pension plan and an unfunded postretirement plan that provides health care and life insurance benefits for a limited pool of eligible retirees and dependents. To measure our liabilities associated with these plans, we make assumptions related to future events, including expected return on plan assets, rate of compensation increases, and healthcare cost trend rates. The discount rate reflects the rate at which benefits could be effectively settled on the measurement date. We determine our discount rate using a RATE: Link ModelFTSE Above Median pension discount curve whereby target yields are developed from bonds across a range of maturity points, and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the curve and used to discount benefit payments associated with each future year. Actual pension plan asset investment performance, as well as other economic experience such as discount rate and demographic experience, will either reduce or increase unamortized pension losses at the end of any fiscal year, which ultimately affects future pension costs.
Warranty Obligations
We accrue warranty obligations when we recognize revenue for certain products. Our provision for warranty obligations is based on historical costs incurred for such obligations and is adjusted, where appropriate, based on current conditions and factors. Our ability to estimate our warranty obligations is subject to significant uncertainties, including changes in product design and our overall product sales mix.
Income Taxes
We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and the amounts reported in our consolidated balance sheets, as well as net operating losses and tax credit carry forwards. We evaluate the carrying value of the net deferred tax assets and determine whether we will be able to generate sufficient future taxable income to realize our deferred tax assets. We perform this review for recoverability on a jurisdictional basis, whereby we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence can be objectively verified. Cumulative losses in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. Thus, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. We recorded a net loss for the year ended October 31, 2019 and net income for the years ended October 31, 2018 and 2017. We have recorded pre-tax cumulative income from operations of $43.2 million for the three-year period ended October 31, 2019. We believe we will fully realize our deferred tax assets, net of a recorded valuation allowance. We project future taxable income using the same forecasts used to test long-lived assets and intangibles for impairment, scheduling out the future reversal of existing taxable temporary differences and reviewing our most recent financial operations. In the event the estimates and assumptions indicate we will not generate sufficient future taxable income to realize our deferred tax assets, we record a valuation allowance against a portion of our deferred tax assets.
We evaluate our on-goingongoing tax positions to determine if it is more-likely-than-not we will be successful in defending such positions if challenged by taxing authorities. To the extent that our tax positions do not meet the more-likely-than-not criteria, we record a liability for uncertain tax positions. We have recorded a liability for uncertain tax positions which stem from certain federal and state tax items related to the interpretation of tax laws and regulations. We continue to evaluate our positions regarding various state tax interpretations at each reporting date, until the applicable statute of limitations lapse.
On December 22, 2017,August 16, 2022, the Tax Cuts and JobsInflation Reduction Act (the Act)of 2022 was signedenacted into U.S. law. The Act reducedWe are continuing to evaluate the regulation but do not anticipate a material impact to our federal income tax statutory rate from 35.0% to 21.0% and 23.3% for the fiscal years ended October 31, 2019 and 2018, respectively. We have re-measured our deferred income tax assets and liabilities and have recorded tax expense for the one-time mandatory transition tax on deemed repatriationconsolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Instruments
We have historically used financial and commodity-based derivative contracts to manage our exposure to fluctuations in foreign currency exchange rates and aluminum prices. All derivatives are measured at fair value on a recurring basis and the methodology and classifications are discussed further in Note 13, "Derivative Instruments."basis. We have not designated the derivative instruments we use as cash flow hedges under ASC Topic 815 "Derivatives“Derivatives and Hedging”Hedging” (ASC 815). Therefore, all gains and losses, both realized and unrealized, are recognized in the consolidated statements of income (loss) in the period of the change as the underlying assets and liabilities are marked-to-market. We do not enter into derivative instruments for speculative or trading purposes. As such, these instruments are considered economic hedges, and are reflected in the operating activities section of the consolidated statements of cash flow.
Foreign Currency Translation
Our consolidated financial statements are presented in our reporting currency, the United States Dollar. Our German and U.K. operations are measured using the local currency as the functional currency. The assets and liabilities of our foreign operations which are denominated in other currencies are translated to United States Dollars using the prevailing exchange rates as of the balance sheet date. Revenues and expenses are translated at the average exchange rates for the applicable period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss on the consolidated balance sheets.
Occasionally, we enter into transactions that are denominated in currencies other than our functional currency. At each balance sheet date, we translate these asset or liability accounts to our functional currency and record unrealized transaction gains or losses. When these assets or liabilities settle, we record realized transaction gains or losses. These realized and unrealized gains or losses are included in the accompanying consolidated statements of (loss) income under the caption, “Other, net.”
Stock–Based Compensation
We have issued stock-based compensation in the form of stock options to directors, employees and officers, and non-vested restricted stock awards to certain key employees and officers. We apply the provisions of ASC Topic 718 “Compensation“Compensation - Stock Compensation”Compensation” (ASC 718), to determine the fair value of stock option awards on the date of grant using the Black-Scholes valuation model. We recognize the fair value as compensation expense on a straight-line basis over the requisite service period of the award based on awards ultimately expected to vest. Stock options granted to directors vest immediately while the stock options granted to our employees and officers typically vest ratably over a three-year period with service and continued employment as the vesting conditions. For new option grants to retirement-eligible employees, we recognize expense and vest immediately upon grant, consistent with the retirement vesting acceleration provisions of these grants. For employees near retirement age, we amortize such grants over the period from the grant date to the retirement-eligibility date if such period is shorter than the standard vesting schedule. For grants of non-vested restricted stock, we calculate the compensation expense at the grant date as the number of shares granted multiplied by the closing stock price of our common stock on the date of grant. This expense is recognized ratably over the vesting period. Our non-vested restricted stock grants to officers and employees cliff vest over a three-year period with service and continued employment as the only vesting criteria. Our fair value determination of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behavior over the expected term, our dividend rate, risk-free rate and expectation with regards to forfeitures. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, the valuation models may not provide an accurate measure of the fair value of our employee stock options. Accordingly, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
We have granted other awards which are linked to the performance of our common stock, but will settle in cash rather than the issuance of shares of our common stock. The value of these awards fluctuates with changes in our stock price, with the resulting gains or losses reflected in the period of the change. We have recorded current and non-current liabilities related to these awards reflected in the accompanying consolidated balance sheets at October 31, 20192022 and 2018.2021. See Note 15,13, “Stock-based Compensation.”
In addition, we have granted performance share unitsawards which settle in cash and shares upon vesting. The awards granted during the years ended October 31, 2018 and 2017 have vesting criteria based on a market condition (relative total shareholder return) and an internal performance condition (earnings per share growth). The award granted during the year ended October 31, 2019 utilizesuse return on net assets as the vesting condition and settlesthe awards settle in cash. We utilizeuse a Monte Carlo simulation model to value the market condition and our stock price on the date of grant to value the internal performance condition.condition and recognize expense ratably over the vesting period of three years. We bifurcateestimate that the liabilityperformance measures will be met and shares will vest at target until the year of settlement (third year of cliff
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
vesting). As of October 31, 2022, we have deemed 101,200 performance share awards related to the December 2019 grants as probable to vest.
and equity portion of the awards (amounts expected to settle in cash and shares, respectively) and recognize expense ratably over the vesting period of three years.
We have also granted performance restricted stock units which settle in shares upon vesting. These awards cliff vest upon a three-year service period with the absolute performance of our common stock as the vesting criteria. We utilizedThe number of performance restricted stock units earned is variable depending on the metric achieved, and the settlement method is 100% in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the shares had been outstanding throughout the performance period. To value the performance restricted stock units, we use a Monte Carlo simulation model to arrive at a grant-date value of these performance restricted stock units.fair value. This amount which is settled in our common stock, iswill be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Similar to performance shares, the performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares. As of October 31, 2022, we have deemed 32,680 shares related to the December 2019 grants of performance restricted stock units as probable to vest.
Treasury Stock
We use the cost method to record treasury stock purchases whereby the entire cost of the acquired shares of our common stock is recorded as treasury stock (at cost). When we subsequently reissue these shares, proceeds in excess of cost upon the issuance of treasury shares are credited to additional paid in capital,paid-in-capital, while any deficiency is charged to retained earnings.
Earnings per Share Data
We calculate basic earnings per share based on the weighted average number of our common shares outstanding for the applicable period. We calculate diluted earnings per share based on the weighted average number of our common shares outstanding for the period plus all potentially dilutive securities using the treasury stock method, whereby we assume that all such shares are converted into common shares at the beginning of the period, if deemed to be dilutive. If we incur a loss from continuing operations, the effects of potentially dilutive common stock equivalents (stock options and unvested restricted stock awards) are excluded from the calculation of diluted earnings per share because the effect would be anti-dilutive. Performance shares and performance restricted stock units are excluded from contingent shares for purposes of calculating diluted weighted average shares until the performance measure criteria is probable and shares are likely to be issued.
Supplemental Cash Flow Information
The following table summarizes our supplemental cash flow information for the years ended October 31, 2019, 20182022, 2021 and 2017:2020 (in thousands):
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Cash paid for interest | $ | 9,020 |
| | $ | 7,890 |
| | $ | 9,019 |
|
Cash paid for income taxes | 5,081 |
| | 4,217 |
| | 3,334 |
|
Cash received from income tax refunds | 1,020 |
| | 95 |
| | 1,167 |
|
Noncash investing and financing activities: | | | | | |
Investment in capital leases | 567 |
| | 799 |
| | 16,846 |
|
Increase in capitalized expenditures in accounts payable and accrued liabilities | 2,897 |
| | 264 |
| | 392 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Cash paid for interest | $ | 1,982 | | | $ | 1,993 | | | $ | 4,715 | |
Cash paid for income taxes | 26,410 | | | 22,160 | | | 12,118 | |
Cash received from income tax refunds | 2,235 | | | 381 | | | 352 | |
Noncash investing and financing activities: | | | | | |
(Decrease) increase in capitalized expenditures in accounts payable | $ | (1,692) | | | $ | 1,124 | | | $ | 2,370 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Related Party Transactions
During the years ended October 31, 2018 and 2017, we leased several operating facilities from a company that was directly owned by the former owner of our U.K.-based vinyl extrusion business, who was our employee until his retirement in October 2018. We recorded rent expense of $1.3 million and $1.2 million related to the related party leasesNet sales for the years ended October 31, 2018 and 2017. We did not participate in any related party transactions during the year ended October 31, 2019.2022 included approximately $1.9 million of transactions with a customer which is a related party with one of our non-employee directors. We performed a review of these transactions, of which no single transaction or series of related transactions exceeded $120,000 in amount, and determined that these transactions were enacted independently of each other in fair transactions. We are not aware of any other related party transactions with any of our current non-employee directors or officers outside of their normal business functions or expected contractual duties.
Subsequent Events
We have evaluated events occurring after the balance sheet date for possible disclosure as a subsequent event through the
date the financial statements were issued. For additional discussion of our subsequent events, see Note 20, “Subsequent Events.”
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Accounts Receivable and Allowance for Doubtful AccountsCredit Losses
Accounts receivable consisted of the following as of October 31, 20192022 and 2018:2021 (in thousands): |
| | | | | | | |
| October 31, |
| 2019 | | 2018 |
| (In thousands) |
Trade receivables | $ | 82,745 |
| | $ | 83,828 |
|
Other | 594 |
| | 511 |
|
Total | $ | 83,339 |
| | $ | 84,339 |
|
Less: Allowance for doubtful accounts | 393 |
| | 325 |
|
Accounts receivable, net | $ | 82,946 |
| | $ | 84,014 |
|
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
Trade receivables | $ | 95,851 | | | $ | 107,725 | |
Other | 456 | | | 924 | |
Total | 96,307 | | | 108,649 | |
Less: Allowance for credit losses | 289 | | | 340 | |
Accounts receivable, net | $ | 96,018 | | | $ | 108,309 | |
The changes in our allowance for doubtful accountscredit losses were as follows:follows (in thousands): |
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Beginning balance as of November 1, 2018, 2017 and 2016, respectively | $ | 325 |
| | $ | 333 |
| | $ | 251 |
|
Bad debt expense | 700 |
| | 46 |
| | 131 |
|
Amounts written off | (916 | ) | | (54 | ) | | (49 | ) |
Recoveries | 284 |
| | — |
| | — |
|
Balance as of October 31, | $ | 393 |
| | $ | 325 |
| | $ | 333 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Beginning balance as of November 1, 2021, 2020 and 2019 | $ | 340 | | | $ | 161 | | | $ | 393 | |
Current period provision for expected credit losses | 314 | | | 267 | | | 262 | |
Amounts written off | (299) | | | (88) | | | (494) | |
Recoveries | 10 | | | — | | | — | |
Foreign currency translation adjustments | (76) | | | — | | | — | |
Balance as of October 31, 2022, 2021 and 2020 | $ | 289 | | | $ | 340 | | | $ | 161 | |
3. Inventories
Inventories consisted of the following at October 31, 20192022 and 2018:2021 (in thousands):
|
| | | | | | | |
| October 31, |
| 2019 | | 2018 |
| (In thousands) |
Raw materials | $ | 32,818 |
| | $ | 41,584 |
|
Finished goods and work in process | 35,538 |
| | 31,727 |
|
Supplies and other | 2,593 |
| | 1,794 |
|
Total | $ | 70,949 |
| | $ | 75,105 |
|
Less: Inventory reserves | 3,790 |
| | 4,375 |
|
Inventories, net | $ | 67,159 |
| | $ | 70,730 |
|
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
Raw materials | $ | 68,455 | | | $ | 49,867 | |
Finished goods and work in process | 54,013 | | | 43,499 | |
Supplies and other | 1,551 | | | 2,099 | |
Total | 124,019 | | | 95,465 | |
Less: Inventory reserves | 3,129 | | | 2,936 | |
Inventories, net | $ | 120,890 | | | $ | 92,529 | |
The changes in our inventory reserve accounts were as follows for the years ended October 31, 2019, 2018 and 2017:(in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Beginning balance as of November 1, 2021, 2020 and 2019 | $ | 2,936 | | | $ | 6,484 | | | $ | 3,790 | |
Charged to cost of sales | 494 | | | (568) | | | 2,713 | |
Write-offs | (133) | | | (3,060) | | | — | |
Other | (168) | | | 80 | | | (19) | |
Balance as of October 31, 2022, 2021 and 2020 | $ | 3,129 | | | $ | 2,936 | | | $ | 6,484 | |
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Beginning balance as of November 1, 2018, 2017 and 2016, respectively | $ | 4,375 |
| | $ | 4,620 |
| | $ | 3,929 |
|
Charged to cost of sales | 341 |
| | 1,201 |
| | 1,296 |
|
Write-offs | (939 | ) | | (1,415 | ) | | (661 | ) |
Other | 13 |
| | (31 | ) | | 56 |
|
Balance as of October 31, | $ | 3,790 |
| | $ | 4,375 |
| | $ | 4,620 |
|
As described in Note 1, “Nature
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
statements of net income for the three months and year ended October 31, 2018 was adjusted as follows (there was no impact to the corresponding three months and year ended October 31, 2017):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended October 31, 2018 | | Year ended October 31, 2018 |
| As Reported (1) | | Impact of change to FIFO | | As Adjusted | | As Reported (1) | | Impact of change to FIFO | | As Adjusted |
| (In thousands, except per share amounts) |
Cost of sales | $ | 187,960 |
| | $ | (300 | ) | | $ | 187,660 |
| | $ | 697,322 |
| | $ | (300 | ) | | $ | 697,022 |
|
Operating income | 11,396 |
| | 300 |
| | 11,696 |
| | 35,397 |
| | 300 |
| | 35,697 |
|
Income before income taxes | 8,153 |
| | 300 |
| | 8,453 |
| | 25,453 |
| | 300 |
| | 25,753 |
|
Income tax (expense) benefit | (1,661 | ) | | (75 | ) | | (1,736 | ) | | 875 |
| | (75 | ) | | 800 |
|
Net income | 6,492 |
| | $ | 225 |
| | 6,717 |
| | 26,328 |
| | $ | 225 |
| | 26,553 |
|
Basic earnings per common share | $ | 0.19 |
| | $ | — |
| | $ | 0.19 |
| | $ | 0.76 |
| | $ | 0.01 |
| | $ | 0.77 |
|
Diluted earnings per common share | $ | 0.19 |
| | $ | — |
| | $ | 0.19 |
| | $ | 0.75 |
| | $ | 0.01 |
| | $ | 0.76 |
|
(1) As reported cost of sales and operating income have been updated to reflect the adoption of accounting standards update 2017-07. See Note 20, "New Accounting Guidance " for further details.
The consolidated balance sheet for the year ended October 31, 2018 was adjusted as follows:
|
| | | | | | | | | | | |
| As of October 31, 2018 |
| As Reported | | Impact of change to FIFO | | As Adjusted |
| (In thousands) |
Inventories, net | $ | 69,365 |
| | $ | 1,365 |
| | $ | 70,730 |
|
Deferred income taxes | 17,215 |
| | 295 |
| | 17,510 |
|
Retained earnings | 242,834 |
| | 1,070 |
| | 243,904 |
|
The consolidated statement of cash flow for the year ended October 31, 2018 was adjusted as follows (there was no impact to the corresponding year ended October 31, 2017):
|
| | | | | | | | | | | |
| As of October 31, 2018 |
| As Reported | | Impact of change to FIFO | | As Adjusted |
| (In thousands) |
Net income | $ | 26,328 |
| | $ | 225 |
| | $ | 26,553 |
|
Deferred income tax | (5,631 | ) | | 75 |
| | (5,556 | ) |
Decrease in inventory | 17,530 |
| | (300 | ) | | 17,230 |
|
During the fourth quarter of 2019, we updated our assessment of the impact of the change in method of inventory costing and noted the impact would have not changed significantly.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at October 31, 20192022 and 2018:2021 (in thousands): | | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
Land and land improvements | $ | 10,702 | | | $ | 10,285 | |
Buildings and building improvements | 105,696 | | | 101,740 | |
Machinery and equipment | 384,023 | | | 386,996 | |
Construction in progress | 28,507 | | | 16,102 | |
Property, plant and equipment, gross | 528,928 | | | 515,123 | |
Less: Accumulated depreciation | 348,528 | | | 336,493 | |
Property, plant and equipment, net | $ | 180,400 | | | $ | 178,630 | |
|
| | | | | | | |
| October 31, |
| 2019 | | 2018 |
| (In thousands) |
Land and land improvements | $ | 10,298 |
| | $ | 10,366 |
|
Buildings and building improvements | 101,569 |
| | 98,212 |
|
Machinery and equipment | 386,953 |
| | 371,106 |
|
Construction in progress | 12,348 |
| | 10,293 |
|
Property, plant and equipment, gross | 511,168 |
| | 489,977 |
|
Less: Accumulated depreciation | 317,568 |
| | 288,607 |
|
Property, plant and equipment, net | $ | 193,600 |
| | $ | 201,370 |
|
Depreciation expense for the years ended October 31, 2019, 2018,2022, 2021, and 20172020 was $34.3$26.9 million $35.6, $28.8 million and $39.1$31.8 million, respectively.
Assets recorded under capital leases had a historical cost of $16.6 million and $22.2 million, respectively, and accumulated depreciation of $3.7 million and $3.4 million, respectively as of October 31, 2019 and 2018. Depreciation expense related to these assets totaled $0.2 million, $1.1 million and $2.0 million for the periods ended October 31, 2019, 2018, and 2017, respectively. Refer to Note 7, ""Debt and Capital Lease Obligations"" for additional information on capital leases.
If there are indicators of potential impairment, we evaluate our property, plant and equipment for recoverability over the remaining useful lives of the assets. We did not incur impairment losses associated with these assets for the years ended October 31, 2019, 2018,2022, 2021, and 2017.2020. See further discussion at Note 1, "Nature“Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Property, Plant and Equipment and Intangible Assets with Defined Lives."”
5. Leases
We recognize a right-of-use (ROU) asset and lease liability for each operating and finance lease with a contractual term greater than 12 months at the time of lease inception. We include ROU assets and lease liabilities for leases that exist within other contracts. Leases with an original term of 12 months or less are not recognized on the balance sheet, and the rent expense related to those short-term leases is recognized over the lease term. We do not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class.
5.We lease certain manufacturing plants, warehouses, office space, vehicles and equipment under finance and operating leases. Lease commencement occurs on the date we take possession or control of the property or equipment. Original terms for our real estate-related leases are generally between five and twenty years. Original terms for equipment-related leases, primarily manufacturing equipment and vehicles, are generally between one and ten years. Some of our leases also include rental escalation clauses. Renewal options are included in the determination of lease payments when management determines the options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital.
If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of our leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable, our estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on information available at lease commencement.
Total lease costs recorded include fixed operating lease costs and variable lease costs. Most of our real estate leases require we pay certain expenses, such as common area maintenance costs, of which the fixed portion is included in operating lease costs. We recognize operating lease costs on a straight-line basis over the lease term. In addition to the above costs, variable lease costs are recognized when probable and are not included in determining the present value of our lease liability.
The ROU asset is measured at the initial amount of the lease liability (calculated as the present value of lease payments over the term of the lease) adjusted for lease payments made at or before the lease commencement date and initial direct costs. For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each finance lease liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as long-lived assets and we determined there have been no triggering events for impairment. Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below presents the lease-related assets and liabilities recorded on the balance sheet at October 31, 2022 and 2021 (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | | | October 31, |
Leases | | Classification | | 2022 | | 2021 |
Assets | | | | | | |
Operating lease assets | | Operating lease right-of-use assets | | $ | 56,000 | | | $ | 52,708 | |
Finance lease assets | | Property, plant and equipment (less accumulated depreciation of $3,726 and $2,300) | | 22,003 | | | 16,921 | |
Total lease assets | | | | $ | 78,003 | | | $ | 69,629 | |
| | | | | | |
Liabilities | | | | | | |
Current | | | | | | |
Operating | | Current operating lease liabilities | | $ | 7,727 | | | $ | 8,196 | |
Finance | | Current maturities of long-term debt | | 1,336 | | | 1,114 | |
Noncurrent | | | | | | |
Operating | | Noncurrent operating lease liabilities | | 49,286 | | | 45,367 | |
Finance | | Long-term debt | | 17,816 | | | 14,335 | |
Total lease liabilities | | | | $ | 76,165 | | | $ | 69,012 | |
The table below presents the components of lease costs for the year ended October 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 |
Operating lease cost | $ | 9,934 | | | $ | 10,125 | |
Finance lease cost | | | |
Amortization of leased assets | 1,332 | | | 1,165 | |
Interest on lease liabilities | 583 | | 561 |
Variable lease costs | 977 | | 983 |
Total lease cost | $ | 12,826 | | | $ | 12,834 | |
The table below presents supplemental cash flow information related to leases for the year ended October 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Finance leases - financing cash flows | $ | 1,162 | | | $ | 1,003 | |
Finance leases - operating cash flows | $ | 583 | | | $ | 561 | |
Operating leases - operating cash flows | $ | 9,955 | | | $ | 9,621 | |
| | | |
Right-of-use assets obtained in exchange for lease liabilities: | | | |
Operating leases | $ | 13,872 | | | $ | 8,737 | |
Finance leases | $ | 6,467 | | | $ | 469 | |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below presents the weighted average remaining lease terms and weighted average discount rates for the Company's leases as of October 31, 2022 and 2021:
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
Weighted average remaining lease term (in years) | | | |
Operating leases | 10.8 | | 7.7 |
Financing leases | 13.7 | | 15.1 |
| | | |
Weighted average discount rate | | | |
Operating leases | 3.84 | % | | 3.23 | % |
Financing leases | 3.78 | % | | 3.72 | % |
The table below presents the maturity of the lease liabilities as of October 31, 2022 (in thousands):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2023 | $ | 9,668 | | | $ | 2,027 | |
2024 | 8,920 | | | 1,980 | |
2025 | 7,213 | | | 1,922 | |
2026 | 6,229 | | | 1,807 | |
2027 | 5,589 | | | 1,709 | |
Thereafter | 33,769 | | | 15,123 | |
Total lease payments | 71,388 | | | 24,568 | |
Less: present value discount | 14,378 | | | 5,418 | |
Total lease liabilities | $ | 57,010 | | | $ | 19,150 | |
6. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the years ended October 31, 20192022 and 20182021 was as follows:follows (in thousands):
|
| | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 |
| (In thousands) |
Beginning balance as of November 1, 2018 and 2017 | $ | 219,627 |
| | $ | 222,194 |
|
Goodwill impairment charge | (74,600 | ) | | — |
|
Foreign currency translation adjustment | 536 |
| | (2,567 | ) |
Balance as of October 31, | $ | 145,563 |
| | $ | 219,627 |
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 |
Beginning balance as of November 1, 2021 and 2020 | $ | 149,205 | | | $ | 146,154 | |
| | | |
| | | |
| | | |
Foreign currency translation adjustment | (11,350) | | | 3,051 | |
Balance as of October 31, 2022 and 2021 | $ | 137,855 | | | $ | 149,205 | |
At our annual testing date, August 31, 2019,2022, we had 5had five reporting units with goodwill balances. NaNTwo of these units were included in our NA Fenestration segment and had goodwill balances of $35.9 million and $2.8 million, 2two units were included in our EU Fenestration segment with goodwill balances of $50.9$45.1 million and $16.8$14.9 million, and our NA Cabinet Components segment had one unit with a goodwill balance of $83.8$39.2 million. During The details of the results of our goodwill assessments during the year ended October 31, 2019, we recorded impairment charges of $74.6 million associated with our NA Cabinet Components segment. The details of the impairment charges, as well as the results of our goodwill assessment as of August 31, 20192022 are more fully described at Note 1, "Nature“Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Goodwill."” For a summary of the change in the carrying amount of goodwill by segment, see Note 16, “Segment Information.”
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of October 31, 20192022 and 2018:
|
| | | | | | | | | | | | | | | | | |
| October 31, 2019 | | October 31, 2019 | | October 31, 2018 |
| Remaining Weighted Average Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| | | (In thousands) |
Customer relationships | 10 years | | $ | 153,950 |
| | $ | 70,103 |
| | $ | 153,704 |
| | $ | 59,332 |
|
Trademarks and trade names | 10 years | | 55,745 |
| | 35,210 |
| | 55,583 |
| | 32,668 |
|
Patents and other technology | 3 years | | 22,386 |
| | 19,471 |
| | 22,278 |
| | 17,646 |
|
Total | | | $ | 232,081 |
| | $ | 124,784 |
| | $ | 231,565 |
| | $ | 109,646 |
|
2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2022 | | October 31, 2022 | | October 31, 2021 |
| Remaining Weighted Average Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Customer relationships | 8 years | | $ | 139,607 | | | $ | 88,646 | | | $ | 146,207 | | | $ | 81,086 | |
Trademarks and trade names | 7 years | | 54,389 | | | 40,610 | | | 56,437 | | | 39,589 | |
Patents and other technology | 5 years | | 22,390 | | | 22,095 | | | 22,525 | | | 22,084 | |
| | | | | | | | | |
Total | | | $ | 216,386 | | | $ | 151,351 | | | $ | 225,169 | | | $ | 142,759 | |
We do not estimate a residual value associated with these intangible assets. During the year ended October 31, 2017, we determined that triggering events occurred which necessitated a review of our long-term assets. Based on an undiscounted cash flow analysis, we determined that our defined-lived intangible assets were not impaired. In addition, we shortened the life of several defined-lived intangible assets, which resulted in the recognition of incremental amortization expense of $1.9 million for the year ended October 31, 2017. We did not incur any corresponding incremental amortization expense during the years ended October 31, 2019 and 2018. See additional disclosure at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring."
During each of the years ended October 31, 20192022 and 2018,2021, we retired fully amortized identifiable intangible assets of $0.3zero and $9.9 million, respectively, related to customer relationships and patents and other technology, respectively.relationships.
The aggregate amortization expense associated with identifiable intangible assets for the years ended October 31, 2019, 2018,2022, 2021, and 20172020 was $15.3$11.9 million $16.2, $12.8 million and $18.4$14.3 million, respectively.
Estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for future fiscal years endingas of October 31, is as follows2022 (in thousands): |
| | | |
| Estimated Amortization Expense |
2020 | $ | 14,284 |
|
2021 | 12,562 |
|
2022 | 11,941 |
|
2023 | 11,194 |
|
2024 | 10,464 |
|
Thereafter | 46,852 |
|
Total | $ | 107,297 |
|
| | | | | |
| Estimated Amortization Expense |
2023 | $ | 10,908 | |
2024 | 10,156 | |
2025 | 8,930 | |
2026 | 8,855 | |
2027 | 8,856 | |
Thereafter | 17,330 | |
Total | $ | 65,035 | |
We did not incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2019, 2018,2022, 2021, and 2017.2020.
7. Accrued Liabilities
Accrued liabilities consisted of the following at October 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
Payroll, payroll taxes and employee benefits | $ | 23,878 | | | $ | 30,039 | |
Accrued insurance and workers compensation | 7,232 | | | 6,340 | |
Sales allowances | 7,456 | | | 8,590 | |
Deferred compensation (current portion) | — | | | 395 | |
Deferred revenue | 792 | | | 627 | |
Warranties | 13 | | | 77 | |
Audit, legal, and other professional fees | 3,136 | | | 1,886 | |
Accrued taxes | 2,864 | | | 3,258 | |
| | | |
Other | 6,743 | | | 4,944 | |
Accrued liabilities | $ | 52,114 | | | $ | 56,156 | |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Accrued Liabilities
Accrued liabilities consisted of the following at October 31, 2019 and 2018:
|
| | | | | | | |
| October 31, |
| 2019 | | 2018 |
| (In thousands) |
Payroll, payroll taxes and employee benefits | $ | 19,637 |
| | $ | 28,202 |
|
Accrued insurance and workers compensation | 3,514 |
| | 3,095 |
|
Sales allowances | 6,323 |
| | 6,514 |
|
Deferred compensation (current portion) | 1,231 |
| | 153 |
|
Deferred revenue | 1,251 |
| | 287 |
|
Warranties | 136 |
| | 148 |
|
Audit, legal, and other professional fees | 2,561 |
| | 2,170 |
|
Accrued taxes | 2,403 |
| | 2,286 |
|
Other | 2,165 |
| | 3,113 |
|
Accrued liabilities | $ | 39,221 |
| | $ | 45,968 |
|
7. Debt and Capital Lease Obligations
Long-term debt consisted of the following at October 31,
20192022 and
2018:2021 (in thousands): | | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
Revolving Credit Facility | $ | 13,000 | | | $ | 38,000 | |
| | | |
Finance lease obligations and other | 19,202 | | | 15,537 | |
Unamortized deferred financing fees | (1,528) | | | (597) | |
Total debt | 30,674 | | | 52,940 | |
Less: Current maturities of long-term debt | 1,046 | | | 846 | |
Long-term debt | $ | 29,628 | | | $ | 52,094 | |
|
| | | | | | | |
| October 31, |
| 2019 | | 2018 |
| (In thousands) |
Revolving Credit Facility | $ | 142,500 |
| | $ | 195,000 |
|
Capital lease obligations | 15,865 |
| | 17,043 |
|
Unamortized deferred financing fees | $ | (1,205 | ) | | $ | (1,487 | ) |
Total debt | $ | 157,160 |
| | $ | 210,556 |
|
Less: Current maturities of long-term debt | 746 |
| | 1,224 |
|
Long-term debt | $ | 156,414 |
| | $ | 209,332 |
|
Revolving Credit Facility
On July 29, 2016,6, 2022, we entered into a $450.0 million credit agreement comprising a $150.0 million Term Loan Aour Second Amended and a $300.0 million revolving credit facility (collectively, the “2016Restated Credit Agreement”Agreement (the “Credit Facility”), with Wells Fargo Bank, National Association,Securities, LLC, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A.BofA Securities, Inc. serving as Syndication Agent. The 2016We capitalized $1.2 million of deferred financing fees related to the Credit Agreement hadFacility during the year ended October 31, 2022. This $325.0 million revolving credit facility has a five-yearfive-year term, maturing on July 29, 2021,6, 2027, and required interestreplaced our previous credit facility we entered into on October 18, 2018. Our previous credit facility is more fully described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
Interest payments for the Credit Facility are calculated, at our election and depending upon ourthe Consolidated Net Leverage Ratio, at either a Base Rate plus an applicable margin (0.50% to 1.25%) or the LIBOR Rate plus an applicable margin (1.50% to 2.25%). At the time of the initial borrowing, the applicable rate was LIBOR + 2.00%. In addition, we were subject to commitment fees for the unused portion of the 2016 Credit Agreement (0.20% to 0.30%).
On October 18, 2018, we amended and extended the 2016 Credit Agreement by entering into a $325.0 million revolving credit facility (the “2018 Credit Facility”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A. serving as Syndication Agent. The 2018 Credit Facility has a five-year term, maturing on October 18, 2023, and required interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin or at the LIBORsame rate as Risk-Free Rate (“RFR”) Loans for domestic borrowings or Eurocurrency Rate Loans plus an applicable margin. At the time of the initial borrowing, the applicable rate was LIBOR + 1.50%. In addition, we are subject to commitment fees for the unused portion of the 2018 Credit Facility.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of October 31, 2022, the applicable rate was RFR + 1.25%.
The applicable margin and commitment fees are outlined in the following table:
|
| | | | | | | | |
Pricing Level | | Consolidated Leverage Ratio | | Commitment Fee | | LIBOR Rate Loans | | Base Rate Loans |
I | | Less than or equal to 1.50 to 1.00 | | 0.200% | | 1.25% | | 0.25% |
II | | Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00 | | 0.225% | | 1.50% | | 0.50% |
III | | Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00 | | 0.250% | | 1.75% | | 0.75% |
IV | | Greater than 3.00 to 1.00 | | 0.300% | | 2.00% | | 1.00% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Pricing Level | | Consolidated Leverage Ratio | | Commitment Fee | | Eurocurrency Rate Loans and RFR Loans | | Base Rate Loans |
I | | Less than or equal to 1.50 to 1.00 | | 0.150% | | 1.25% | | 0.25% |
II | | Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00 | | 0.175% | | 1.50% | | 0.50% |
III | | Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00 | | 0.200% | | 1.75% | | 0.75% |
IV | | Greater than 3.00 to 1.00 | | 0.250% | | 2.00% | | 1.00% |
In the event of default, outstanding borrowings accrue interest at the Default Rate, as defined, whereby the obligations will bear interest at a per annum rate equal to 2% above the total per annum rate otherwise applicable.
The 2018 Credit Facility provides for incremental revolving credit commitments for a minimum principal amount of $10.0 million, up to an aggregate amount of $150.0 million or 100% of Consolidated EBITDA, subject to the lender's discretion to elect or decline the incremental increase. We can also borrow up to the lesser of $15.0 million or the revolving credit commitment, as defined, under a Swingline feature of the Credit Agreement.
The 2018 Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than 2.253.00 to 1.00, and (2) Consolidated Net Leverage Ratio requirement whereby we must not permit the Consolidated Net Leverage Ratio, as defined, must be greater than 3.25 to 1.00.
In addition to maintaining these financial covenants, the 2018 Credit Facility also limits our ability to enter into certain business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted payments, pay dividends (limited to $20.0$25.0 million per year) and other transactions as further defined in the 2018 Credit Facility. Some of these limitations, however, do not take effect so long as total leverage is less than or equal to 2.75 to 1.00 and available liquidity exceeds $25$25.0 million. Substantially all of our domestic assets, with the exception of real property were utilizedused as collateral for the Credit Agreement.
We utilized initial borrowings of $205.0 million from the 2018 Credit Facility, along with additional funding of $10.0 million of cash on hand, to repay outstanding borrowings under the 2016 Credit Agreement of $213.5 million, to settle outstanding interest accrued and loan fees under the prior facility, and to pay loan fees associated with the 2018 Credit Agreement which totaled $1.0 million. We expensed $1.1 million of unamortized deferred financing fees associated with the 2016 Credit Agreement, while deferring the remaining $0.5 million of unamortized deferred financing fees attributable to the remaining lenders from the previous facility over the life of the 2018 Credit Facility.
As of October 31, 2019,2022, we had $142.5$13.0 million of borrowings outstanding under the 2018 Credit Facility (reduced by unamortized debt issuance costs of $1.2$1.5 million), $4.8$5.0 million of outstanding letters of credit and $15.9$19.2 million outstanding
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
under capitalfinance leases. We had $177.7$307.0 million available for use under the 2018 Credit Facility at October 31, 2019.2022. The borrowings outstanding as of October 31, 20192022 under the 2018 Credit Facility accrue interestinterest at 3.30%5.08% per annum, and our weighted average borrowing rate for borrowings outstanding during the years ended October 31, 20192022 and 20182021 was 4.07%2.16% and 3.76%1.42%, respectively. We were in compliance with our debt covenants as of October 31, 2019.
Other Debt Instruments2022.
We maintain certain capitalfinance lease obligations related to equipment purchases, vehicles, and warehouse space. The cost and accumulated depreciation of property, plant and equipment under capital leases at October 31, 2019 was $16.6 million and $3.7 million. These obligations accrue interest at an average rate of 3.60%, and extend through the year 2037.
QUANEX BUILDING PRODUCTS CORPORATIONRefer to Note 5 “Leases” for further information regarding our finance leases.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below presents the scheduled maturity dates of our long-term debt outstanding (excluding deferred
loan costsfinancing fees of
$1.2 million )$1.5 million) at October 31,
20192022 (in thousands):
| | | | | | | | | | | | | | | | | |
| Revolving Credit Facility | | Finance Leases and Other Obligations | | Aggregate Maturities |
2023 | $ | — | | | $ | 2,065 | | | $ | 2,065 | |
2024 | — | | | 1,992 | | | 1,992 | |
2025 | — | | | 1,922 | | | 1,922 | |
2026 | — | | | 1,807 | | | 1,807 | |
2027 | 13,000 | | | 1,709 | | | 14,709 | |
Thereafter | — | | | 15,125 | | | 15,125 | |
Total debt payments | 13,000 | | | 24,620 | | | 37,620 | |
Less: present value discount of finance leases | — | | | (5,418) | | | (5,418) | |
Total | $ | 13,000 | | | $ | 19,202 | | | $ | 32,202 | |
|
| | | | | | | | | | | |
| Revolving Credit Facility | | Capital Leases and Other Obligations | | Aggregate Maturities |
2020 | $ | — |
| | $ | 1,050 |
| | $ | 1,050 |
|
2021 | — |
| | 842 |
| | 842 |
|
2022 | — |
| | 849 |
| | 849 |
|
2023 | 142,500 |
| | 1,008 |
| | 143,508 |
|
2024 | — |
| | 728 |
| | 728 |
|
Thereafter | — |
| | 11,388 |
| | 11,388 |
|
Total | $ | 142,500 |
| | $ | 15,865 |
| | $ | 158,365 |
|
8.9. Retirement Plans
We have a number of retirement plans covering substantially all employees. We provide both defined benefit and defined contribution plans. In general, an employee’s coverage for retirement benefits depends on the location of employment.
Defined Benefit Plan
We have aOur non-contributory, single employer defined benefit pension plan that covers the majoritycertain of our domestic employees excludingin the Woodcraft employees who are not currently participating. EffectiveU.S. On January 1, 2007,2020 we amended this defined benefitenacted changes to our pension plan to include a cash balance formulawhereby the benefits for all new salaried employees hired on or after January 1, 2007participants were frozen and for any non-union employees who were not participatingthereafter those participants will receive increased benefits in the Company sponsored defined contribution plan in lieu of participation in a defined benefit plan. As a result of freezing the plan prior toon January 1, 2007. All participating salaried employees hired after January 1, 2007, are eligible to receive credits equivalent to 4% of their annual eligible wages. Some of the employees at the time of the amendment were “grandfathered” and are eligible to receive credits ranging up to 6.5% based upon a percentage of benefits received under our defined benefit plan prior to this amendment of2020, we remeasured the pension plan. Additionally, every yearassets and obligations for the pension plan, which resulted in a decrease to our projected benefit obligation and a corresponding net actuarial gain that was recorded in accumulated other comprehensive income.
During the three months ended October 31, 2022, we notified participants that our pension plan will be terminated effective November 1, 2022, with final settlement expected to occur in fiscal 2024. Until such time that the termination is complete, the participants will receive an interest related credit on their respective balance equivalent to the prevailing 30-year Treasury rate. The majority of our pension plan participants have their benefit determined pursuant to the cash balance formula. For employees who were participating in this plan prior to January 1, 2007,the remaining participants, the benefit formula is a more traditional formula for retirement benefits, whereby the plan pays benefits to employees upon retirement, using a formula which considers years of service and pensionable compensation prior to retirement. Of our pension plan participants, 99% have their benefit determined pursuant to the cash balance formula.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law on December 8, 2003. This Act introduces a Medicare prescription-drug benefit beginning in 2006 as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit at least “actuarially equivalent” to the Medicare benefit. We concluded that our plans are at least “actuarially equivalent” to the Medicare benefit. For those who are otherwise eligible for the subsidy, we have not included this subsidy per the Act in our benefit calculations. The impact to net periodic benefit cost and to benefits paid did not have a material impact on the consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Funded Status and Net periodic Benefit Cost
The changes in benefit obligation and plan assets, and our funded status (reported in deferred pension and postretirement benefits on the consolidated balance sheets) were as follows:follows (in thousands):
|
| | | | | | | |
| October 31, |
| 2019 | | 2018 |
Change in Benefit Obligation: | (In thousands) |
Beginning balance as of November 1, 2018 and 2017, respectively | $ | 35,959 |
| | $ | 38,323 |
|
Service cost | 3,629 |
| | 3,908 |
|
Interest cost | 1,456 |
| | 1,130 |
|
Actuarial loss (gain) | 7,690 |
| | (4,296 | ) |
Benefits paid | (3,581 | ) | | (2,551 | ) |
Administrative expenses | (830 | ) | | (555 | ) |
Projected benefit obligation at October 31, | $ | 44,323 |
| | $ | 35,959 |
|
Change in Plan Assets: | | | |
Beginning balance as of November 1, 2018 and 2017, respectively | $ | 32,064 |
| | $ | 34,340 |
|
Actual return on plan assets | 2,869 |
| | 66 |
|
Employer contributions | 690 |
| | 764 |
|
Benefits paid | (3,581 | ) | | (2,551 | ) |
Administrative expenses | (830 | ) | | (555 | ) |
Fair value of plan assets at October 31, | $ | 31,212 |
| | $ | 32,064 |
|
Non current liability - Funded Status | $ | (13,111 | ) | | $ | (3,895 | ) |
| | | | | | | | | | | |
| October 31, |
Change in Benefit Obligation: | 2022 | | 2021 |
Beginning balance as of November 1, 2021 and 2020 | $ | 42,379 | | | $ | 44,825 | |
Service cost | 860 | | | 850 | |
Interest cost | 806 | | | 756 | |
Actuarial loss | (6,944) | | | (849) | |
Benefits paid | (349) | | | (359) | |
Administrative expenses | (604) | | | (732) | |
| | | |
Settlements | (3,619) | | | (2,112) | |
Projected benefit obligation at October 31, 2022 and 2021 | $ | 32,529 | | | $ | 42,379 | |
Change in Plan Assets: | | | |
Beginning balance as of November 1, 2021 and 2020 | $ | 37,642 | | | $ | 34,120 | |
Actual return on plan assets | (4,458) | | | 6,225 | |
Employer contributions | — | | | 500 | |
Benefits paid | (349) | | | (359) | |
Administrative expenses | (604) | | | (732) | |
Settlements | (3,619) | | | (2,112) | |
Fair value of plan assets at October 31, 2022 and 2021 | $ | 28,612 | | | $ | 37,642 | |
Noncurrent liability - Funded Status | $ | (3,917) | | | $ | (4,737) | |
As of October 31, 20192022 and 2018,2021, included in our accumulated comprehensive loss was a net actuarial loss of $6.7$3.6 million and $3.0$4.5 million, respectively. There were no net prior service costs or transition obligations for the years ended October 31, 20192022 and 2018.2021.
As of October 31, 20192022 and 2018,2021, the accumulated benefit obligation was $43.3$32.5 million and $35.4$42.4 million, respectively. The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date, and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels.
The net periodic benefit cost for the years ended October 31, 2019, 20182022, 2021 and 2017,2020, was as follows:follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Service cost | $ | 860 | | | $ | 850 | | | $ | 1,262 | |
Interest cost | 806 | | | 756 | | | 1,139 | |
Expected return on plan assets | (1,991) | | | (1,960) | | | (2,006) | |
Amortization of net loss | 6 | | | 143 | | | 162 | |
Settlements | 396 | | | 222 | | | 462 | |
Net periodic benefit cost | $ | 77 | | | $ | 11 | | | $ | 1,019 | |
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Service cost | $ | 3,629 |
| | $ | 3,908 |
| | $ | 3,794 |
|
Interest cost | 1,456 |
| | 1,130 |
| | 859 |
|
Expected return on plan assets | (1,977 | ) | | (2,172 | ) | | (1,863 | ) |
Amortization of net loss | 125 |
| | 64 |
| | 574 |
|
Net periodic benefit cost | $ | 3,233 |
| | $ | 2,930 |
| | $ | 3,364 |
|
56
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The changes in plan assets and projected benefit obligations which were recognized in our other comprehensive loss for the years ended October 31, 2019, 20182022, 2021 and 20172020 were as follows:follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Net loss (gain) arising during the period | $ | 6,697 |
| | $ | (2,189 | ) | | $ | (2,888 | ) |
Less: Amortization of net loss | $ | 125 |
| | $ | 64 |
| | $ | 574 |
|
Total recognized in other comprehensive loss | $ | 6,572 |
| | $ | (2,253 | ) | | $ | (3,462 | ) |
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Net (gain) loss arising during the period | $ | (495) | | | $ | (5,112) | | | $ | 2,141 | |
Less: Amortization of net loss | 6 | | | 143 | | | 162 | |
Less: Curtailments | — | | | — | | | 1,141 | |
Less: Settlements | 396 | | | 222 | | | 462 | |
Total recognized in other comprehensive (income) loss | $ | (897) | | | $ | (5,477) | | | $ | 376 | |
Measurement Date and Assumptions
We generally determine our actuarial assumptions on an annual basis, with a measurement date of October 31. The following table presents our assumptions for pension benefit calculations for the years ended October 31, 2019, 20182022, 2021 and 2017:2020:
|
| | | | | | | | | | | |
| For the Year Ended October 31, |
| 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
Weighted Average Assumptions: | Benefit Obligation | | Net Periodic Benefit Cost |
Discount rate | 3.10% | | 4.44% | | 3.68% | | 4.44% | | 3.68% | | 3.66% |
Rate of compensation increase | 3.00% | | 3.00% | | 3.00% | | 3.00% | | 3.00% | | 3.00% |
Expected return on plan assets | n/a | | n/a | | n/a | | 6.50% | | 6.50% | | 6.50% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended October 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Weighted Average Assumptions: | Benefit Obligation | | Net Periodic Benefit Cost |
Discount rate | 5.36% | | 2.77% | | 3.22% | | 2.77% | | 2.60% | | 3.10% |
Rate of compensation increase | —% | | —% | | —% | | —% | | —% | | —% |
Expected return on plan assets | n/a | | n/a | | n/a | | 5.50% | | 6.00% | | 6.50% |
The discount rate was used to calculate the present value of the projected benefit obligation for pension benefits. The rate reflects the amount at which benefits could be effectively settled on the measurement date. We used a RATE: Linkthe FTSE Above Median Model whereby target yields are developed from bonds across a range of maturity points, and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the curve and used to discount benefit payments associated with each future year. This model assumes spot rates will remain level beyond the 30-year point. We determine the present value of plan benefits by applying the discount rates to projected benefit cash flows.
The expected return on plan assets was used to determine net periodic pension expense. The rate of return assumptions were based on projected long-term market returns for the various asset classes in which the plans were invested, weighted by the target asset allocations. We review the return assumption at least annually. The rate of compensation increase represents the long-term assumption for expected increases in salaries.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Plan Assets
The following tables provide our target allocation for the year ended October 31, 2019,2022, as well as the actual asset allocation by asset category and fair value measurements as of October 31, 20192022 and 2018:2021:
| | | | | | | | | | | | | | | | | |
| Target Allocation | | Actual Allocation |
| October 31, 2022 | | October 31, 2022 | | October 31, 2021 |
Equity securities | — | % | | — | % | | 51.0 | % |
Fixed income | 100.0 | % | | 100.0 | % | | 49.0 | % |
| | | | | | | | | | | |
| Fair Value Measurements at |
| October 31, 2022 | | October 31, 2021 |
| (In thousands) |
Money market fund | $ | 22,508 | | | $ | 300 | |
| | | |
Large capitalization | — | | | 8,231 | |
Small capitalization | — | | | 1,493 | |
International equity | — | | | 6,992 | |
Other | — | | | 2,236 | |
Equity securities | $ | — | | | $ | 18,952 | |
| | | |
High-quality core bond | 4,980 | | | 13,787 | |
High-quality government bond | 547 | | | 2,301 | |
High-yield bond | 577 | | | 2,302 | |
Fixed income | $ | 6,104 | | | $ | 18,390 | |
Total securities(1) | $ | 28,612 | | | $ | 37,642 | |
|
| | | | | | | | |
| Target Allocation | | Actual Allocation |
| October 31, 2019 | | October 31, 2019 | | October 31, 2018 |
Equity securities | 60.0 | % | | 61.0 | % | | 61.0 | % |
Fixed income | 40.0 | % | | 39.0 | % | | 39.0 | % |
|
| | | | | | | |
| Fair Value Measurements at |
| October 31, 2019 | | October 31, 2018 |
| (In thousands) |
Money market fund | $ | 574 |
| | $ | 597 |
|
| | | |
Large capitalization | $ | 8,092 |
| | $ | 8,362 |
|
Small capitalization | 2,489 |
| | 2,559 |
|
International equity | 6,219 |
| | 6,385 |
|
Other | 1,848 |
| | 1,913 |
|
Equity securities | $ | 18,648 |
| | $ | 19,219 |
|
| | | |
High-quality core bond | $ | 9,525 |
| | $ | 9,736 |
|
High-quality government bond | 1,228 |
| | 1,251 |
|
High-yield bond | 1,237 |
| | 1,261 |
|
Fixed income | $ | 11,990 |
| | $ | 12,248 |
|
Total securities(1) | $ | 31,212 |
| | $ | 32,064 |
|
(1)Quoted prices in active markets for identical assets (Level 1). | |
(1)
| Quoted prices in active markets for identical assets (Level 1). |
Inputs and valuation techniques used to measure the fair value of plan assets vary according to the type of security being valued. All of the equity and debt securities held directly by the plans were actively traded and fair values were determined based on quoted market prices.
Our investment objective for defined benefit plan assets is to meet the plans’ benefit obligations, while minimizing the potential for future required plan contributions. The investment strategies focus on asset class diversification, liquidityAs steps were initiated to meet benefit payments and an appropriate balance of long-term investment return and risk. Target ranges for asset allocations are determined by matchingimplement the actuarial projectionstermination of the plans’ future liabilities anddefined benefit payments with expected long-term ratesplan, the investments were transitioned to more liquid assets in order to reflect the upcoming settlement charges which will be incurred upon finalization of return on the assets, taking into account investment return volatility and correlations across asset classes. Plan assets are diversified across several investment managers and are generally invested in liquid funds that are selected to track broad market equity and bond indices. Investment risk is carefully controlled with plan assets rebalanced to target allocations on a periodic basis and monitoring of performance of investment managers relative to the investment guidelines established with each investment manager.
termination plan.
Expected Benefit Payments and Funding
Our pension funding policy is to make the minimum annual contributions required pursuant to the plan. We accelerated contributions to target a 100% funding threshold. Additionally, we consider funding annual requirements early in the fiscal year to potentially maximize the return on assets. For the fiscal years ended October 31, 2019, 20182022, 2021 and 2017,2020, we made total pension contributionscontributions of $0.7 million, $0.8zero, $0.5 million and $3.6$3.7 million, respectively.
During fiscal 2020,year 2024, we expect to contribute approximately $3.7 million tomake a contribution which will fully fund the remaining liability and complete the pension plan to reach targeted funding levels and meet minimum contribution requirements.termination process. This expected contribution level will be dependent on many variables, including the market value of the assets compared to the obligation, as well as other market or regulatory conditions. In addition, we consider the cash requirements of our business investment opportunities. Accordingly, actual funding amounts and the timing of such funding may differ from current estimates.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the total benefit payments expected to be paid to participants by year, which includes payments funded from our assets, as well as payments paid from the plan for the year ended October 31, (in thousands):
| | | | | |
| Pension Benefits |
2023 | $ | 22,880 | |
2024 | 729 | |
2025 | 770 | |
2026 | 750 | |
2027 | 704 | |
2028 - 2032 | 3,415 | |
Total | $ | 29,248 | |
|
| | | |
| Pension Benefits |
2020 | $ | 3,211 |
|
2021 | 3,227 |
|
2022 | 3,181 |
|
2023 | 3,187 |
|
2024 | 3,322 |
|
2025 - 2029 | 17,098 |
|
Total | $ | 33,226 |
|
Defined Contribution Plan
We also sponsor atwo defined contribution planplans into which we and our employees make contributions. We merged a predecessor plan sponsored by Woodcraft into our defined contribution plan effectiveAs of January 1, 2017. We2020, we match 50%100% up to the first 5% of employee annual salary deferrals under our existing plan. Beginningplan for all employees excluding NA Cabinet Components participants, who receive a 100% match up to 4% of employee annual salary deferrals. Between January 1, 2018 the plan was amended to provide the same match to Woodcraft employees. Prior toand January 1, 2018,2020, we matched 35%50% up to the first 5% of employee deferrals for employees who participated in the predecessor Woodcraft plan.salary deferrals. We do not offer our common stock as a direct investment option under these plans. For the years ended October 31, 2019, 20182022, 2021 and 2017,2020, we contributed approximately $2.7$6.8 million $2.6, $6.3 million and $2.4$4.8 million for these plans, respectively.
Other Plans
Under our postretirement benefit plan, we provide certain healthcare and life insurance benefits for a small number of eligible retired employees who were employed prior to January 1, 1993. Certain employees may become eligible for those benefits if they reach normal retirement age while working for us. We continue to fund benefit costs on a pay-as-you-go basis. The table below indicates the amount of these liabilities included in the accompanying consolidated balance sheets:
|
| | | | | | | |
| October 31, 2019 | | October 31, 2018 |
| (In thousands) |
Accrued liabilities | $ | 49 |
| | $ | 49 |
|
Deferred pension and postretirement benefits | 311 |
| | 323 |
|
Total | $ | 360 |
| | $ | 372 |
|
We also have supplemental benefit plans covering certain executive officers and a non-qualified deferred compensation plan covering members of the Board of Directors and certain key employees. Our liability under the supplemental benefit plan was approximately $4.2$1.9 million and $3.4$2.9 million as of October 31, 20192022 and 2018,2021, and our liability under the deferred compensation plan was approximately $3.8$3.3 million and $3.5and $3.4 million, respectively. As of October 31, 20192022 and 2018,2021, the current portion of these liabilities was recorded under the caption "Accrued“Accrued Liabilities,"” and the long-term portion was included under the caption "Other Liabilities"“Other Liabilities” in the accompanying balance sheets.
9. Warranty Obligations
We accrue warranty obligations as we recognize revenue associated with certain products. We make provisions for our warranty obligations based upon historical experience of costs incurred for such obligations adjusted, as necessary, for current conditions and factors. There are significant uncertainties and judgments involved in estimating our warranty obligations, including changing product designs, differences in customer installation processes and future claims experience which may vary from historical claims experience. Therefore, the ultimate amount we incur as warranty costs in the near and long-term may not be consistent with our current estimate.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of the activity related to our accrued warranty, including both the current and long-term portions (reported in accrued liabilities and other liabilities, respectively, on the accompanying consolidated balance sheets) follows:
|
| | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 |
| (In thousands) |
Beginning balance as of November 1, 2018, and 2017, respectively | $ | 295 |
| | $ | 323 |
|
Provision for warranty expense | — |
| | 4 |
|
Change in accrual for preexisting warranties | (20 | ) | | (16 | ) |
Warranty costs paid | (15 | ) | | (16 | ) |
Total accrued warranty | $ | 260 |
| | $ | 295 |
|
Less: Current portion of accrued warranty | 136 |
| | 148 |
|
Long-term portion at October 31, | $ | 124 |
| | $ | 147 |
|
10. Income Taxes
The provision or benefit for income taxes includes U.S. federal income taxes (determined on a consolidated return basis), foreign income taxes and state income taxes. We provide for income taxes on taxable income at the applicable statutory rates. The following table summarizes the components of income tax expense (benefit) for the years ended October 31, 2019, 20182022, 2021 and 2017:2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Current | | | | | |
Federal | $ | 11,553 | | | $ | 10,993 | | | $ | 6,043 | |
State and local | 740 | | | 3,447 | | | 1,505 | |
Non-United States | 7,037 | | | 6,889 | | | 4,445 | |
Total current | 19,330 | | | 21,329 | | | 11,993 | |
Deferred | | | | | |
Federal | 2,127 | | | (842) | | | (64) | |
State and local | (229) | | | (277) | | | (315) | |
Non-United States | 199 | | | 2,904 | | | 190 | |
Total deferred | 2,097 | | | 1,785 | | | (189) | |
Total income tax expense | $ | 21,427 | | | $ | 23,114 | | | $ | 11,804 | |
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Current | | | | | |
Federal | $ | 3,338 |
| | $ | 983 |
| | $ | 1,991 |
|
State and local | 299 |
| | 417 |
| | 873 |
|
Non-United States | 3,879 |
| | 3,356 |
| | 4,067 |
|
Total current | 7,516 |
| | 4,756 |
| | 6,931 |
|
Deferred | | | | | |
Federal | 1,497 |
| | (5,828 | ) | | 1,860 |
|
State and local | 1,087 |
| | 670 |
| | (450 | ) |
Non-United States | 676 |
| | (398 | ) | | (1,522 | ) |
Total deferred | 3,260 |
| | (5,556 | ) | | (112 | ) |
Total income tax expense (benefit) | $ | 10,776 |
| | $ | (800 | ) | | $ | 6,819 |
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For financial reporting purposes, (loss) income before income taxes for the years ended October 31, 2019, 20182022, 2021 and 20172020 includes the following components:components (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Domestic | $ | 64,850 | | | $ | 36,879 | | | $ | 26,229 | |
Foreign | 44,913 | | | 43,215 | | | 24,071 | |
Total income before income taxes | $ | 109,763 | | | $ | 80,094 | | | $ | 50,300 | |
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Domestic | $ | (58,247 | ) | | $ | 9,721 |
| | $ | 9,189 |
|
Foreign | 22,293 |
| | 16,032 |
| | 16,313 |
|
Total (loss) income before income taxes | $ | (35,954 | ) | | $ | 25,753 |
| | $ | 25,502 |
|
The following table reconciles our effective income tax rate to the federal statutory rate for the years ended October 31, 2019, 20182022, 2021 and 2017:2020:
QUANEX BUILDING PRODUCTS CORPORATION | | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
United States tax at statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State and local income tax | 0.4 | % | | 3.1 | % | | 1.7 | % |
Non-United States income tax | (0.8) | % | | 2.3 | % | | 1.2 | % |
U.K. patent box benefit | (1.2) | % | | (1.4) | % | | (2.0) | % |
U.S. income tax credits | (3.2) | % | | (4.2) | % | | (2.3) | % |
| | | | | |
| | | | | |
| | | | | |
Net U.S. tax on non-United States earnings | 3.2 | % | | 4.2 | % | | 2.5 | % |
| | | | | |
| | | | | |
| | | | | |
Non-cash compensation | (1.7) | % | | 1.9 | % | | (0.3) | % |
Other | 1.8 | % | | 2.0 | % | | 1.7 | % |
Effective tax rate | 19.5 | % | | 28.9 | % | | 23.5 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
United States tax at statutory rate | 21.0 | % | | 23.3 | % | | 35.0 | % |
State and local income tax | 3.1 |
| | 3.4 |
| | 1.7 |
|
Non-United States income tax | (0.5 | ) | | (1.6 | ) | | (9.1 | ) |
Deferred rate impact | — |
| | — |
| | (4.1 | ) |
General business credits | (4.7 | ) | | (0.4 | ) | | (0.5 | ) |
Change in valuation allowance | (1.5 | ) | | (0.1 | ) | | (0.6 | ) |
Other permanent differences | 3.0 |
| | — |
| | 3.3 |
|
Deferred rate impact of enactment of tax reform | — |
| | (30.5 | ) | | — |
|
Foreign tax positions under the Act (GILTI and FDII) | 3.3 |
| | — |
| | — |
|
Tax impact of stock based compensation | (1.6 | ) | | (0.5 | ) | | — |
|
Impact of deemed repatriation | (1.1 | ) | | 4.8 |
| | — |
|
Asset impairment charges | (50.7 | ) | | — |
| | — |
|
Return to actual adjustments | (0.3 | ) | | (1.5 | ) | | 1.0 |
|
Effective tax rate | (30.0 | )% | | (3.1 | )% | | 26.7 | % |
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. The Act reduced our federal income tax statutory rate from 35.0% to 21.0% for the fiscal year ending October 31, 2019 and 23.3% for the fiscal year ended October 31, 2018, which reflects the period November 1, 2017 to December 31, 2017 at the previous 35.0% rate and the period January 1, 2018 to October 31, 2018 at the new 21.0% rate. The Act also imposed additional tax law changes that became effective during fiscal 2019, which include new requirements for a global intangible low-taxed income provision (GILTI) and a deduction for foreign-derived intangible income (FDII). We elected to account for the tax on GILTI as a period cost and therefore have not recorded deferred taxes related to GILTI on our foreign subsidiaries.
The October 31, 2019 effective rate was primarily impacted by a net charge of $1.2 million related to GILTI and FDII, as well as discrete charge of $0.4 million for the adjustment of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings and $0.6 million related to the vesting or exercise of equity-based compensation awards. Additionally, during the year ended October 31, 2019, we recorded a $74.6 million asset impairment charge, which was primarily non-deductible, in the NA Cabinet Components segment, as further explained in Note 5, "Goodwill and Intangible Assets."
Discrete items contributing to the October 31, 2018 income tax benefit included $7.7 million for the re-measurement of our deferred income tax assets and liabilities due to the decrease in the federal corporate income tax rate, a benefit of $0.2 million for the true up of our accruals and related deferred taxes from prior year filings and settled tax audits, and a benefit of $0.2 million related to the vesting or exercise of equity-based compensation awards, partially offset by a tax expense of $1.2 million for the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings.
The decrease in the October 31, 2017 effective tax rate is due primarily to a greater proportion of U.S. taxable income in relation to foreign taxable income for the year. The U.S. tax rate is generally higher than the foreign tax rate. The effective rate is also lower due to a change over a period of three years in the deferred tax rate, primarily in the U.K., from 19% to 17%.
Given the significance of the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period”. As of October 31, 2019, we have completed the accounting for the tax effects of the Act.
In light of the Act, we repatriated $24.2 million and $2.8 million of foreignOur earnings from our international operations duringforeign subsidiaries are not subject to significant withholding taxes upon remittances to the years ended October 31, 2019 and 2018, respectively. This was repatriation of excess cash that wasU.S.. As a portion of the one-time mandatory transition tax discussed above. We will continue to evaluate our foreign cash position and may repatriate additional foreign earnings in the future. With the exception of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings,result, we do not anticipate any materialsignificant future tax impactimpacts from any potential repatriation of previously unremitted foreign earnings. IfThe amount of undistributed foreign earnings from international operations as of the investment in our foreign subsidiaries were completely realized, we could incur an estimated residual U.S. tax liability of $0.1years ended October 31, 2022 and 2021, respectively, was $19.8 million and $15.1 million.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The decrease in the 2017 effective tax rate is due primarily to a greater proportion of U.S. taxable income in relation to foreign taxable income for the year. The U.S. tax rate is generally higher than the foreign tax rate. The effective rate is also lower due to a change over a period of three years in the deferred tax rate, primarily in the U.K., from 19% to 17%.
Significant components of our net deferred tax liabilities and assets were as follows:follows (in thousands): |
| | | | | | | |
| October 31, |
| 2019 | | 2018 |
| (In thousands) |
Deferred tax assets: | | | |
Employee benefit obligations | $ | 7,227 |
| | $ | 9,910 |
|
Accrued liabilities and reserves | 1,646 |
| | 1,609 |
|
Pension and other benefit obligations | 4,365 |
| | 1,872 |
|
Inventory | 632 |
| | 548 |
|
Loss and tax credit carry forwards | 2,915 |
| | 3,716 |
|
Other | 110 |
| | 119 |
|
Total gross deferred tax assets | 16,895 |
| | 17,774 |
|
Less: Valuation allowance | 1,560 |
| | 1,275 |
|
Total deferred tax assets, net of valuation allowance | 15,335 |
| | 16,499 |
|
Deferred tax liabilities: | | | |
Property, plant and equipment | 11,075 |
| | 10,577 |
|
Goodwill and intangibles | 23,623 |
| | 23,432 |
|
Total deferred tax liabilities | 34,698 |
| | 34,009 |
|
| | | |
Net deferred tax liabilities | $ | 19,363 |
| | $ | 17,510 |
|
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
Deferred tax assets: | | | |
Employee benefit obligations | $ | 8,046 | | | $ | 7,591 | |
Accrued liabilities and reserves | 1,430 | | | 1,425 | |
Pension and other benefit obligations | 1,426 | | | 1,934 | |
Inventory | 1,409 | | | 894 | |
Loss and tax credit carry forwards | 1,589 | | | 1,857 | |
Other | — | | | 107 | |
Total gross deferred tax assets | 13,900 | | | 13,808 | |
Less: Valuation allowance | 534 | | | 1,174 | |
Total deferred tax assets, net of valuation allowance | 13,366 | | | 12,634 | |
Deferred tax liabilities: | | | |
Property, plant and equipment | 15,467 | | | 11,187 | |
Goodwill and intangibles | 20,162 | | | 23,412 | |
Other | 14 | | | — | |
Total deferred tax liabilities | 35,643 | | | 34,599 | |
Net deferred tax liabilities | $ | 22,277 | | | $ | 21,965 | |
| | | |
| | | |
| | | |
| | | |
At October 31, 2019,2022, state operating loss carry forwards totaled $37.5 million.$31.3 million. The majority of these losses begin to expire in 2025. Tax credits available to offset future tax liabilities totaled $1.4 million and are expected to be utilized within the next twelve months.2033. We evaluate tax benefits of operating losses and tax credit carry forwards on an ongoing basis, including a review of
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
historical and projected future operating results, the eligible carry forward period and other circumstances. We have recorded a valuation allowance for certain state net operating losses as of October 31, 20192022 and 2018,2021, totaling $1.6$0.5 million and $1.3$1.2 million, respectively ($1.2respectively. During the year ended October 31, 2022, we recorded a net $0.7 million decrease in our state valuation allowances. The valuation allowances can be affected in future periods by changes to tax laws, changes to statutory tax rates, and $1.0 million, respectively,changes in estimates of future taxable income. To fully realize these net deferred tax assets, we will need to generate sufficient future taxable income in the countries where these tax attributes exist during the periods in which the attributes can be utilized. As of federal taxes) foreach reporting date, management considers the respective periods. In assessing the need for a valuation allowance, we considerweight of all evidence, both positive and negative, evidence related to the likelihood of realization of thedetermine if a valuation allowance is necessary for each jurisdiction’s net deferred tax assets. We place greater weight on historical evidence over future predictions of our ability to utilize net deferred tax assets. We consider future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income in prior carryback year(s) if carryback is permitted under applicable law.
The following table reconcilesshows the change in the unrecognized income tax benefit associated with uncertain tax positions for the years ended October 31, 2019, 20182022, 2021 and 20172020 (in thousands):
| | | | | |
| Unrecognized Income Tax Benefits |
| |
| |
| |
| |
Balance at October 31, 2019 | $ | 556 | |
| |
Additions for tax positions related to the prior year | 15 | |
Reassessment of position | (49) | |
Balance at October 31, 2020 | $ | 522 | |
| |
Additions for tax positions related to the prior year | 953 | |
Reassessment of position | (87) | |
Balance at October 31, 2021 | $ | 1,388 | |
| |
| |
Reassessment of position | (27) | |
Balance at October 31, 2022 | $ | 1,361 | |
|
| | | | |
| | Unrecognized Income Tax Benefits |
Balance at October 31, 2016 | | $ | 579 |
|
Additions for tax positions related to the current year | | — |
|
Additions for tax positions related to the prior year | | 12 |
|
Balance at October 31, 2017 | | $ | 591 |
|
Additions for tax positions related to the current year | | — |
|
Additions for tax positions related to the prior year | | 15 |
|
Balance at October 31, 2018 | | $ | 606 |
|
Additions for tax positions related to the current year | | — |
|
Additions for tax positions related to the prior year | | 16 |
|
Reassessment of position | | (66 | ) |
Balance at October 31, 2019 | | $ | 556 |
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of October 31, 2019,2022, our liability for unrecognized tax benefit (UTB) relatesbenefits of $1.4 million related to certain U.S. federal and state tax items regarding the interpretation of tax laws and regulations. At October 31, 2019, $0.6 million is recordedregulations, including a minimal amount of interest and penalties. We include all interest and penalties related to uncertain tax benefits within our income tax provision account. To the extent interest and penalties are not assessed with respect to uncertain tax positions or the uncertainty of deductions in the future, amounts accrued will be reduced and reflected as a liability for uncertain tax positions. The disallowancereduction of the UTB would not materially affect the annual effectiveoverall income tax rate.provision.
We, along with our subsidiaries,subsidiaries, file income tax returns in the U.S. and various state jurisdictions as well as in the U.K., Germany and Canada. In certain jurisdictions, the statute of limitations has not yet expired. We generally remain subject to examination of our U.S. income tax returns for 20162018 and subsequent years. We generally remain subject to examination of our various state and foreign income tax returns for a period of four to five years from the date the return was filed. The state impact of any federal changes remains subject to examination by various statesstates for a period of up to one year after formal notification to the state of the federal change.
Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. The final outcome of the future tax consequences of legal proceedings, if any, as well as the outcome of competent authority proceedings, changes in regulatory tax laws or interpretation of those tax laws could impact our financial statements. We are subject to the effect of these matters occurring in various jurisdictions. We doOur total unrecognized tax benefits, if recognized, would not believe anymaterially affect our effective tax rate. The recorded amount of the UTB at October 31, 2019 will be recognized withinunrecognized tax benefits may decrease by approximately $1.0 million with in the next twelve months.months as a result of the upcoming closing of a statute of limitations.
11. Commitments and Contingencies
Operating Leases and Purchase Obligations
We have operating leases for certain real estate and equipment used in our business. Rental expense for the years ended October 31, 2019, 2018 and 2017 was $9.9 million, $9.5 million and $10.5 million, respectively.
We are a party to non-cancelable purchase obligations primarily for door hardware, primary and secondary steel and primary and secondarysecondary aluminum used in our manufacturing processes, as well as expenditures related to capital projects in progress. We paid $11.1$11.0 million and $5.2$9.9 million pursuant to these arrangements for the years ended October 31, 20192022 and 2018,2021, respectively. These obligations total $18.7$7.6 million and $16.7$23.4 million at October 31, 20192022 and 2018,2021, respectively, and extend through fiscal 2018.2023. Future amounts paid pursuant to thesethese arrangements will depend, to some extent, on our usage.
The following table presents future minimum rental payments under operating leases with remaining terms in excess of one year at October 31, 2019 (in thousands):
|
| | | |
| Operating Leases |
2020 | $ | 9,121 |
|
2021 | 6,981 |
|
2022 | 6,012 |
|
2023 | 5,506 |
|
2024 | 4,699 |
|
Thereafter | 15,220 |
|
Total | $ | 47,539 |
|
61
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Asset Retirement Obligation
We maintain an asset retirement obligation associated with a leased facility in Kent, Washington. We have estimated our future cash flows associated with this asset retirement obligation and recorded an asset and corresponding liability. We are depreciating the asset and accreting the liabilityliability over a seven yearseven-year term, to culminate in an asset retirement obligation of $2.2$2.3 million as of February 2025.2025, which is located in Other Liabilities on the Consolidated Balance Sheets.
Remediation and Environmental Compliance Costs
Under applicable state and federal laws, we may be responsible for, among other things, all or part of the costs required to remove or remediate wastes or hazardous substances at locations we, or our predecessors, have owned or operated. From time to time, we also have been alleged to be liable for all or part of the costs incurred to clean up third-party sites where there might have been an alleged improper disposal of hazardous substances. At present, we are not involved in any such matters.
From time to time, we incur routine expenses and capital expenditures associated with compliance with existing environmental regulations, including control of air emissions and water discharges, and plant decommissioning costs. We have not incurred any
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
material expenses or capital expenditures related to environmental matters during the past three fiscal years, and do not expect to incur a material amount of such costs in fiscal 2020. Whilefiscal 2023. While we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows.
Litigation
From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal injury, environmental matters, product performance or warranties, product liability, insurance coverage and personnel and employment disputes.
We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks to the extent deemed prudent by our management and to the extent such insurance is available. However, there is no assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations.
We have been and are currently party to multiple claims, some of which are in litigation, relating to alleged defects in a commercial sealant product that was manufactured and sold during the 2000's. During the years ended October 31, 2018 and 2017, our insurance carrier reimbursed fees and expenses originally incurred as part of our defense of these various commercial sealant claims totaling $0.5 million and $4.0 million, respectively. There were no corresponding reimbursements during 2019.2000’s. While we believe that our product was not defective and that we would prevail in these commercial sealant product claims if taken to trial, the timing, ultimate resolution and potential impact of these claims is not currently determinable. Nevertheless, after taking into account all currently available information, including our defenses, the advice of our counsel, and the extent and currently-expected availability of our existing insurance coverage, we believe that the eventual outcome of these commercial sealant claims will not have a material adverse effect on our overall financial condition, results of operations or cash flows, and we have not recorded any accrual with regard to these claims.
12. Derivative Instruments
Our derivative activities are subject to the management, direction, and control of the Chief Financial Officer and Chief Executive Officer. Certain transactions in excess of specified levels require further approval from the Board of Directors.
The nature of our business activities requires the management of various financial and market risks, including those related to changes in foreign currency exchange rates and aluminum scrap prices. We have historically used foreign currency forwards and options to mitigate or eliminate certain of those risks at our subsidiaries. We use foreign currency contracts to offset fluctuations in the value of accounts receivable and payable balances that are denominated in currencies other than the United States Dollar, including the Euro, British Pound Sterling and Canadian Dollar. Currently, we do not enter into derivative transactions for speculative or trading purposes. We are exposed to credit loss in the event of nonperformance by the counterparties to our derivative transactions. We attempt to mitigate this risk by monitoring the creditworthiness of our counterparties and limiting our exposure to individual counterparties. In addition, we have established master netting agreements in certain cases to facilitate the settlement of gains and losses on specific derivative contracts.
We have not designated any of our derivative contracts as hedges for accounting purposes in accordance with the provisions under the Accounting Standards Codification topic 815, Derivatives and Hedging (ASC 815). Therefore, changes in the fair value of these contracts and the realized gains and losses are recorded in the consolidated statements of (loss) income for the years ended October 31, 2019, 2018 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended October 31, |
Derivatives Not Designated as Hedging Instruments | Location of (Loss) or Gain: | 2019 | | 2018 | | 2017 |
Foreign currency derivatives | Other, net | $ | (10 | ) | | $ | (11 | ) | | $ | (88 | ) |
We have chosen not to offset any of our derivative instruments in accordance with the provisions of ASC 815. Therefore, the assets and liabilities are presented on a gross basis on our accompanying consolidated balance sheets. Less than $0.1 million of fair value related to foreign currency derivatives was included in prepaid and other current assets as of the years ended October 31, 2019 and 2018, and less than $0.1 million of fair value related to foreign currency derivatives was included in accrued liabilities as of October 31, 2019.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the notional amounts and fair value of outstanding derivative contracts at October 31, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | |
| | Notional as indicated | | Fair Value in $ |
| | October 31, 2019 | | October 31, 2018 | | October 31, 2019 | | October 31, 2018 |
Foreign currency derivatives: | | | | | | | | |
Buy EUR, Sell USD | EUR | 301 |
| | 455 |
| | $ | 1 |
| | $ | 1 |
|
Sell CAD, Buy USD | CAD | 405 |
| | 229 |
| | 2 |
| | — |
|
Sell GBP, Buy USD | GBP | 73 |
| | 22 |
| | — |
| | — |
|
Buy EUR, Sell GBP | EUR | 57 |
| | 34 |
| | — |
| | — |
|
Buy USD, Sell EUR | USD | 13 |
| | 12 |
| | — |
| | — |
|
For the classification in the fair value hierarchy, see Note 13, "Fair Value Measurements of Assets and Liabilities", included herewith.
13. Fair Value Measurements of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to Level 1 and the lowest priority to Level 3. The three levels of the fair value hierarchy are described below:
•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
•Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
asset or liability (e.g., interest rates) and inputs that are derived principally from or corroborated by observable market data byby correlation or other means.
•Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
As of October 31, 2019 and 2018, foreign currency derivatives were the only instruments being measured on a recurring basis. Less than $0.1 million of foreign currency derivatives were included in total assets as of October 31, 2019 and less than $0.1 million of foreign currency derivatives were included in total assets and total liabilities as of October 31, 2018. All of our derivative contracts are valued using quoted market prices from brokers or exchanges and are classified within Level 2 of the fair value hierarchy.
As of October 31, 2019 and 2018, we had approximately $2.4 million of certain property, plant and equipment located in our NA Fenestration segment that was recorded at fair value on a non-recurring basis and classified as Level 3. The fair value was based on broker opinions.
Carrying amounts reported on the balance sheetsheets for cash, cash equivalents,equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Our outstanding debt is variable rate debt that re-prices frequently, thereby limiting our exposure to significant changes in interest rate risk. As a result, the fair value of our debt instruments approximates carrying value at October 31, 20192022 and 20182021 (Level 2 measurement).
The liability portion of ourOur restricted stock units and performance share awards are marked-to-market on a quarterly basis during a three-year vesting period based on market data (Level 2 measurement). For further information refer to Note 14, "Stock-Based13. Stock-Based Compensation - Performance Share Awards."
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14.13. Stock-Based Compensation
We have established and maintain an Omnibus Incentive Plan (2008(2020 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards, performance restricted stock units, and other stock-based and cash-based awards. The 20082020 Plan is administered by the Compensation and Management Development Committee of the Board of Directors.
The aggregate number of shares of common stock authorized for grant under the 20082020 Plan is 7,650,0003,139,895 as approved by the shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 20082020 Plan. We grant restricted stock units to non-employee directors on the first business day of each fiscal year. Annually, pending approvalAs approved by the Compensation & Management Development Committee of our Board of Directors in December,annually, we grant a mix of restricted stock awards, performance shares and/or performance restricted stock units to officers, management and key employees. We also historically granted stock options to certain officers, directors and key employees. Occasionally, we may make additional grants to key employees at other times during the year.
Restricted Stock Awards
Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a three-year period with service and continued employment as the only vesting criteria. The recipient of thea restricted stock awardsaward is entitled to all of the rights of a shareholder, except that the awards are nontransferable during the vesting period. The fair value of the restricted stock award is established on the grant date and then expensed over the vesting period resulting in an increase in additional paid-in-capital. Shares are generally issued from treasury stock at the time of grant.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of non-vested restricted stock awardsaward activity during the years ended October 31, 2019, 20182022, 2021 and 2017,2020, follows:
|
| | | | | | |
| Restricted Stock Awards | | Weighted Average Grant Date Fair Value per Share |
Non-vested at October 31, 2016 | 266,700 |
| | $ | 19.19 |
|
Granted | 93,800 |
| | 19.46 |
|
Vested | (73,100 | ) | | 17.67 |
|
Forfeited | (3,100 | ) | | 19.65 |
|
Non-vested at October 31, 2017 | 284,300 |
| | 19.66 |
|
Granted | 73,400 |
| | 20.70 |
|
Vested | (111,800 | ) | | 20.16 |
|
Forfeited | (28,700 | ) | | 19.66 |
|
Non-vested at October 31, 2018 | 217,200 |
| | 19.76 |
|
Granted | 124,800 |
| | 13.78 |
|
Vested | (42,500 | ) | | 17.87 |
|
Forfeited | (69,400 | ) | | 19.19 |
|
Non-vested at October 31, 2019 | 230,100 |
| | $ | 17.02 |
|
| | | | | | | | | | | |
| Restricted Stock Awards | | Weighted Average Grant Date Fair Value per Share |
Non-vested at October 31, 2019 | 230,100 | | | $ | 17.02 | |
Granted | 63,400 | | | 18.82 | |
Vested | (55,000) | | | 19.45 | |
Forfeited | (51,000) | | | 17.30 | |
Non-vested at October 31, 2020 | 187,500 | | | 16.82 | |
Granted | 73,300 | | | 20.68 | |
Vested | (44,400) | | | 20.70 | |
Forfeited | — | | | — | |
Non-vested at October 31, 2021 | 216,400 | | | 17.28 | |
Granted | 84,400 | | | 22.54 | |
Vested | (88,700) | | | 13.74 | |
Forfeited | — | | | — | |
Non-vested at October 31, 2022 | 212,100 | | | $ | 20.86 | |
The total weighted average grant-date fair value of restricted stock awards that vested during the years ended October 31, 2019, 20182022, 2021 and 2017 was $1.32020 was $1.2 million, $2.3$0.9 million and $1.3$1.1 million, respectively. As of October 31, 2019,2022, total unrecognized compensation cost related to unamortized restricted stock awards totaled $1.5$1.9 million. We expect to recognize this expense over the remaining weighted average period of 1.8 years.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Options
Historically, stock options have been awarded to key employees, officers and non-employee directors. Effective May 2015, the director compensation structure was revised to eliminate the grant of stock options to non-employee directors. In December 2017, the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted stock units as further described below. As a result, stock options were not granted during the years ended October 31, 2020, 2019, and 2018. Stock options typically vestvested ratably over a three-year period with service and continued employment as the vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of the stock options iswas determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital. We used the Black-Scholes pricing model to estimate the grant date fair value. The inputs to this model included expected volatility, expected term, a risk-free rate and expected dividend rate at the time of grant. For employees who arewere nearing retirement-eligibility, we recognizerecognized stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date.
We use the Black-Scholes pricing model to estimate the fair value
| |
• | Expected Volatility – For stock options granted prior to July 1, 2013, we used an estimate of the historical volatility of a selected peer group. Effective July 1, 2013, we determined that we had sufficient historical data to calculate the volatility of our common stock since our spin-off in April 2008. We believe there has been uncertainty in the U.S. equities market over the past several years and that uncertainty has contributed to volatility in equities in general. We expect this volatility to continue over the foreseeable future. Therefore, we believe that our historical volatility is a proxy for expected volatility. We have not excluded any of our historical data from the volatility calculation, and we are not aware of any specific significant factors which might impact our future volatility.
|
| |
• | Expected Term – For stock options granted prior to July 1, 2013, we determined the expected term using historical information of our former parent company prior to the spin-off in 2008, with regards to option vesting, exercise behavior and contractual expiration, as we believed that this employee group was the most similar to our employee group. Separate groups of employees that have similar historical exercise behavior were considered separately. Effective July 1, 2013, we determined that we had sufficient historical data to estimate our expected term using our own data with regards to the exercise behavior, cancellations, retention patterns and remaining contractual terms. When analyzing these patterns and variables, we considered the stratification of the awards (large grants to relatively few employees versus smaller grants to many others), the age of certain employees with larger grants, the historical exercise behavior of the employee group, and fluctuations/volatility of our underlying common stock, as to whether the stock options are expected to be out-of-the-money. For our directors, stock options vested immediately, and, as such, the expected term approximated the contractual term, after adjusting for historical forfeitures. We believe our estimates are reasonable given these factors.
|
| |
• | Risk-Free Rate – We base the risk-free rate on the yield at the date of grant of a zero-coupon United States Treasury bond whose maturity period equals the option’s expected term.
|
| |
• | Expected Dividend Yield – We base the expected dividend yield on our historical dividend payment of approximately $0.16 per share.
|
The following table summarizes the assumptions used to estimate the fair value of our stock options granted during the year ended October 31, 2017.
|
| |
| Year Ended October 31, 2017 |
Weighted-average expected volatility | 34.7% |
Weighted-average expected term (in years) | 5.7 |
Risk-free interest rate | 2.0% |
Expected dividend yield over expected term | 1.0% |
Weighted average grant date fair value | $6.25 |
ContentsQUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our stock option activity for the years ended October 31, 2019, 20182022, 2021 and 2017.2020.
|
| | | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (000s) |
Outstanding at October 31, 2016 | 2,386,220 |
| | $ | 16.84 |
| | 5.1 | | $ | 2,384 |
|
Granted | 292,600 |
| | 19.45 |
| | | | |
Exercised | (507,660 | ) | | 15.67 |
| | | | |
Forfeited/Expired | (18,402 | ) | | 19.90 |
| | | | |
Outstanding at October 31, 2017 | 2,152,758 |
| | 17.44 |
| | 5.2 | | $ | 9,700 |
|
Granted | — |
| | — |
| | | | |
Exercised | (377,218 | ) | | 12.58 |
| | | | |
Forfeited/Expired | (21,884 | ) | | 19.28 |
| | | | |
Outstanding at October 31, 2018 | 1,753,656 |
| | 18.47 |
| | 5.0 | | $ | 51 |
|
Granted | — |
| | — |
| | | | |
Exercised | (204,770 | ) | | 15.76 |
| | | | |
Forfeited/Expired | (132,700 | ) | | 20.01 |
| | | | |
Outstanding at October 31, 2019 | 1,416,186 |
| | 18.71 |
| | 4.2 | | $ | 1,449 |
|
Vested or expected to vest at October 31, 2019 | 1,416,186 |
| | 18.71 |
| | 4.2 | | $ | 1,449 |
|
Exercisable at October 31, 2019 | 1,334,714 |
| | $ | 18.67 |
| | 4.0 | | $ | 1,449 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (000s) |
Outstanding at October 31, 2019 | 1,416,186 | | | $ | 18.71 | | | 4.2 | | $ | 1,449 | |
Granted | — | | | — | | | | | |
Exercised | (215,733) | | | 17.09 | | | | | |
Forfeited/Expired | (105,124) | | | 20.28 | | | | | |
Outstanding at October 31, 2020 | 1,095,329 | | | $ | 18.88 | | | 3.6 | | $ | 561 | |
Granted | — | | | — | | | | | |
Exercised | (865,393) | | | 18.80 | | | | | |
Forfeited/Expired | (11,632) | | | 18.22 | | | | | |
Outstanding at October 31, 2021 | 218,304 | | | $ | 19.37 | | | 3.4 | | $ | 297 | |
Granted | — | | | — | | | | | |
Exercised | (35,600) | | | 19.36 | | | | |
Forfeited/Expired | (7,587) | | | 19.04 | | | | |
Outstanding at October 31, 2022 | 175,117 | | | $ | 19.39 | | | 2.9 | | $ | 485 | |
Vested at October 31, 2022 | 175,117 | | | $ | 19.39 | | | 2.9 | | $ | 485 | |
Exercisable at October 31, 2022 | 175,117 | | | $ | 19.39 | | | 2.9 | | $ | 485 | |
Intrinsic value is the amount by which the market price of the common stock on the date of exercise exceeds the exercise price of the stock option. For the years ended October 31, 2019, 20182022, 2021 and 2017,2020, the total intrinsic value of our stock options that were exercised totaled $0.4totaled $0.2 million, $2.9$4.2 million and $3.1$0.5 million, respectively. The total fair value of stock options vested during the years ended October 31, 2019, 20182022, 2021 and 2017,2020, was $1.1zero, zero and $0.6 million, $1.5 million and $1.8 million, respectively. As of October 31, 2019, substantially all compensation cost related to stock options has been recognized.
Restricted Stock Units
Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee directors. The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date. Restricted stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued employment as the vesting conditions. Restricted stock units are not considered outstanding shares and do not have voting rights, although the holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares. Once the vesting criteria is met, each restricted stock unit is payable to the holder in cash based on the market value of one share of our common stock. Accordingly, we record a liability for the restricted stock units on our balance sheet and recognize any changes in the market value during each reporting period as compensation expense.
During the years ended October 31, 2019, 20182022, 2021 and 2017, 34,050, 18,0502020, 36,669, 28,826 and 24,56025,621 restricted stock units, respectively, were granted and immediately vested with corresponding weighted average grant date fair value of $15.51, $21.85$22.52, $18.79, and $15.65,$18.18, respectively. As of October 31, 2019,2022 there were 4,616 non-vested21,774 unvested restricted stock units from the fiscal 20192020 grant which will vest in December 2020. Aswith corresponding weighted average grant date fair value of $17.08. During the years ended October 31, 20182022, 2021 and 2017, there were 0 non-vested2020, we paid $1.0 million, $0.8 million and $0.2 million to settle restricted stock units. During
Performance Share Awards
We have awarded annual grants of performance shares to key employees and officers. Beginning with the fiscal year ended October 31, 2019, we paid less than $0.4 million to settle restricted stock units. We did not make any payments to settle restricted stock units during the years ended October 31, 2018 and 2017.
Performance Share Awards
We have granted performance share awards to key employees and officers annually in December. In addition, we awarded performance shares in January 2016 to a new officer. These awards cliff vest after a three-year period with service and performance measures such as relative total shareholder return (R-TSR) and earnings per share (EPS) growth as vesting conditions. The number of performance share awards earned is variable depending on the metrics achieved. The settlement method is 50% in cash and 50% in our common stock. Performance share awards issued during the year ended October 31, 2019 vest with return on net assets (RONA) as the vesting condition, and pay out 100% in cash.cash, and are accounted for as liability.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
To account for these awards, we have bifurcated the portion subject to a market condition (R-TSR) and the portion subject to an internal performance measure (EPS or RONA). We have further bifurcated these awards based on theThe expected cash settlement method, as the portion expected to settle in stock (equity component) and the portion expected to settle in cash (liability component).
To value the shares subject to the market condition, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be expensed over the three-year term of the award with a credit to additional paid-in-capital. To value the shares subject to the EPS and RONA performance measures, we used the value of our common stock on the date of grant as the grant-date fair value per share. This amount will be expensed over the three-year term of theshare award with a credit to additional paid-in-capital, and could fluctuate depending on the number of shares ultimately expected to vest based on our assessment of the probability that the performance conditions will be achieved. The portion of the awards expected to settle in cash is recorded as a liability and is being marked to market over the three-year term of the award, and could fluctuate depending on the number of shares ultimately expected to vest. Depending on the achievement of the performance conditions, 0% to 200% of the awarded performance shares may ultimately vest.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our performance share grants and the grant date fair value for the EPS, R-TSR, and RONA performance metrics:metric:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
Grant Date | Shares Awarded | | | | | | Grant Date Fair Value | | Shares Forfeited | | |
December 5, 2019 | 55,900 | | | | | | | $ | 19.40 | | | 5,300 | | | |
December 2, 2020 | 65,300 | | | | | | | $ | 20.68 | | | — | | | |
December 9, 2021 | 80,900 | | | | | | | $ | 22.54 | | | — | | | |
|
| | | | | | | | | | | | | | | | |
| | | Grant Date Fair Value | | |
Grant Date | Shares Awarded | | EPS | | R-TSR | | RONA | | Forfeited |
November 30, 2016 | 186,500 |
| | $ | 19.45 |
| | $ | 26.61 |
| | — |
| | 42,230 |
|
December 7, 2017 | 146,500 |
| | 20.70 |
| | 21.81 |
| | — |
| | 33,208 |
|
December 5, 2018 | 131,500 |
| | — |
| | — |
| | 13.63 |
| | 18,100 |
|
OnIn December 3, 2018 and January 25, 2019, 139,1642021, 183,000 shares vested pursuant to the December 20132018 grant, andwhich were settled with a totalcash payment of 4,300 shares vested pursuant to$3.8 million. In December 2020, the January 2016 grant, however, performance conditions resulted in no share issuances or cash payments for either of these awards. The November 2016 and December 2017 grants include a return on invested capital (ROIC) metric which, if achieved, could enhance the number ofgrant vested, however, no shares that are ultimately issued but cannot exceed the maximum (200%). Due to the uncertainty with regard to achieving this metric, no value has been assigned. In the event and at such timewere awarded as the metric is deemed achievable, compensation expense will begin to be recognized through the remaining vesting period. For the years ended October 31, 2019 and 2017, we recorded $1.1 million and $3.0 million, respectively, of compensation expense related to performance share awards. For the year ended October 31, 2018, we recorded a decrease in compensation expense of $0.9 million, which reflected a decrease in the number of shares expected to vest in November 2019 associated with the November 30, 2016 performance share grant.criteria were not met.
Performance share awards are not considered outstanding shares and do not have voting rights, although dividends are accrued over the performance period and will be payable in cash based upon the number of performance shares ultimately earned.
Performance sharesearned, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingenttherefore not considered outstanding shares. We evaluate the probability of the performance share vesting within one year of the vesting date. As of October 31, 2019, we have deemed 56,103 performance share awards from our November 30, 2016 grant to vest, of which 28,051 will be paid in our common stock and 28,051, along with accrued dividends, will settle in cash. For the years ended October 31, 2019 and 2017, there were 28,051 and 23,175 shares, respectively, related to performance shares that were potentially dilutive and considered in the diluted weighted average shares calculations. No contingent shares related to performance shares are included in diluted weighted average shares for the year ended October 31, 2018.
Performance Restricted Stock Units
We awarded performance restricted stock units to key employees and officers beginning in December 2017.officers. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of performance restricted stock units earned is variable depending on the metric achieved, and the settlement method is 100% in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the shares had been outstanding throughout the performance period.
To value the performance restricted stock units, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Depending on the achievement of the performance conditions, a minimum of 0% and a maximum of 150% of the
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
awarded performance restricted stock units may vest. Specifically, the awards vest on a continuum with the following Absolute Total Shareholder Return (A-TSR) milestones:
|
| | | | | | | | | | | | | |
Vesting Level | | Vesting Criteria | | Percentage of Award Vested |
Level 1 | | A-TSR greater than or equal to 50% | | 150% |
Level 2 | | A-TSR less than 50% and greater than or equal to 20% | | 100% |
Level 3 | | A-TSR less than 20% and greater than or equal to -20% | | 50% |
Level 4 | | A-TSR less than -20% | | —% |
The following table summarizes our performance restricted stock unit grants and the grant date fair value for the A-TSR performance metric:
| | | | | | | | | | | | | | | | | | | | |
Grant Date | | Shares Awarded | | Grant Date Fair Value | | Shares Forfeited |
December 5, 2019 | | 35,000 | | | $ | 19.40 | | | — | |
December 2, 2020 | | 38,400 | | | $ | 20.68 | | | — | |
December 9, 2021 | | 50,900 | | | $ | 21.06 | | | — | |
|
| | | | | | | | | | |
Grant Date | | Shares Awarded | | Grand Date Fair Value | | Shares Forfeited |
December 7, 2017 | | 78,200 |
| | $ | 17.76 |
| | 17,754 |
|
December 5, 2018 | | 89,200 |
| | $ | 13.63 |
| | 13,800 |
|
During the years ended October 31, 2019 and 2018, we recorded compensation expense of approximately $0.7 million and $0.4 million related to our performance share restricted units.
Similar to performance shares, theThe performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes amounts expensed as selling, general and administrative expense related to restricted stock awards, stock options, restricted stock units, performance share awards and performance restricted stock units for the years ended October 31, 2019, 20182022, 2021 and 20172020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Restricted stock awards | $ | 1,452 | | | $ | 1,235 | | | $ | 625 | |
Stock options | — | | | — | | | 10 | |
Restricted stock units | 1,167 | | | 1,197 | | | 186 | |
Performance share awards | 2,373 | | | 4,039 | | | (170) | |
Performance restricted stock units | 840 | | | 729 | | | 515 | |
Total compensation expense | 5,832 | | | 7,200 | | | 1,166 | |
Income tax effect | 1,138 | | | 2,078 | | | 274 | |
Net compensation expense | $ | 4,694 | | | $ | 5,122 | | | $ | 892 | |
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
Restricted stock awards | $ | 1,018 |
| | $ | 1,462 |
| | $ | 1,810 |
|
Stock options | 158 |
| | 467 |
| | 1,820 |
|
Restricted stock units | 950 |
| | (364 | ) | | 855 |
|
Performance share awards | 1,131 |
| | (944 | ) | | 3,001 |
|
Performance restricted stock units | 708 |
| | 401 |
| | — |
|
Total compensation expense | 3,965 |
| | 1,022 |
| | 7,486 |
|
Income tax effect | 997 |
| | (35 | ) | | 1,999 |
|
Net compensation expense | $ | 2,968 |
| | $ | 1,057 |
| | $ | 5,487 |
|
14. Stockholders' Equity
15. Stockholders' Equity
As of October 31, 2019,2022, our authorized capital stock consists of 125,000,000 shares of common stock, at par value of $0.01 per share,share, and 1,000,000 shares of preferred stock, with no par value. As of October 31, 20192022 and 2018,2021, we had 37,370,40237,211,056 and 37,433,81737,273,510 shares of common stock issued, respectively, and 33,021,78933,129,250 and 33,339,03233,274,785 shares of common stock outstanding, respectively. ThereThere were no shares of preferred stock issued or outstanding at October 31, 20192022 and 2018.2021.
Stock Repurchase Program and Treasury Stock
On August 30, 2018, our Board of Directors approved a stock repurchase program that authorized the repurchase of up to $60.0 million worth of shares of our common stock. As of October 31, 2021, this share repurchase authorization was exhausted and the program was complete. During December 2021, our Board of Directors approved a new stock repurchase program that authorized the repurchase of up to $75.0 million worth of shares of our common stock. Repurchases under the new program will beare 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. During the years ended October 31, 20192022 and 2018,2021, we purchased 583,398purchased 291,000 shares and 1,900,000478,311 shares, respectively, at a cost of $9.6$6.6 million and $32.0$11.2 million respectively, under this program.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSthese programs. (continued)
We record treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Shares are generally issued from treasury stock at the time of grant of restricted stock awards, upon the exercise of stock options, and upon the vesting of performance shares and performance restricted stock units. On the subsequent issuance of treasury shares, we record proceeds in excess of cost as an increase in additional paid in capital.paid-in-capital. A deficiency of such proceeds relative to costs would be applied to reduce paid-in-capital associated with prior issuances to the extent available, with the remainder recorded as a charge to retained earnings. We recorded a charge to retained earnings of $0.3 millionzero, zero and $2.1$0.1 million, in the years ended October 31, 20192022, 2021, and 2018,2020, respectively.
For a summary of treasury stock activity for the years ended October 31, 2019, 20182022, 2021 and 2017,2020, refer to the Consolidated Statement of Stockholders' Equity located elsewhere herein.
QUANEX BUILDING PRODUCTS CORPORATION
16.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Other, Income (Expense)net
Other income included under the caption "Other, net"“Other, net” on the accompanying consolidated statements of income (loss) income,, consisted of the following (in thousands): |
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
Foreign currency transaction (losses) gains | $ | (187 | ) | | $ | 113 |
| | $ | 713 |
|
Foreign currency exchange derivative losses | (197 | ) | | (11 | ) | | (88 | ) |
Pension service benefit | 396 |
| | 978 |
| | 430 |
|
Interest income | 63 |
| | 69 |
| | 86 |
|
Other | 41 |
| | 7 |
| | 19 |
|
Other income | $ | 116 |
| | $ | 1,156 |
| | $ | 1,160 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Foreign currency transaction gains (losses) | $ | 386 | | | $ | (98) | | | $ | (42) | |
Foreign currency exchange derivative gains (losses) | 19 | | | — | | | (15) | |
Pension service benefit | 783 | | | 839 | | | 243 | |
Interest income | 19 | | | 5 | | | 28 | |
Other | (166) | | | 8 | | | 66 | |
Other income | $ | 1,041 | | | $ | 754 | | | $ | 280 | |
Other income for the years ended October 31, 2018 and 2017 has been updated to reflect the adoption of Accounting Standards Update 2017-07. For further information, see Note 21, "New Accounting Guidance".
17. Segment Information
We present 3three reportable business segments: (1) NA Fenestration, comprising 3three operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens & other fenestration components; (2) EU Fenestration, comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles & conservatories, and the European insulating glass business manufacturing insulating glass spacers; and (3) NA Cabinet Components, comprising our cabinet door and components operations.segment. We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance and legal costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. Other general and administrative costs associated with the corporate office are allocated to the reportable segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as those used to prepare the accompanying consolidated financial statements. Corporate general and administrative expenses allocated during the years ended October 31, 2019, 20182022, 2021 and 20172020 were $18.3$24.5 million $18.7, $21.6 million and $17.0$21.7 million, respectively.
ASC Topic 280-10-50, “Segment Reporting”“Segment Reporting” (ASC 280) permits aggregation of operating segments based on factors including, but not limited to: (1) similar nature of products serving the building products industry, primarily the fenestration business; (2) similar production processes, although there are some differences in the amount of automation amongst operating plants; (3) similar types or classes of customers, namely the primary OEMs; (4) similar distribution methods for product delivery, although the extent of the use of third-party distributors will vary amongst the businesses; (5) similar regulatory environment; and (6) converging long-term economic similarities.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Segment information for the years ended October 31, 2019, 20182022, 2021 and 20172020 was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NA Fenestration | | EU Fenestration | | NA Cabinet Comp. | | Unallocated Corp. & Other | | Total |
Year Ended October 31, 2022 | | | | | | | | | |
Net sales | $ | 687,458 | | | $ | 262,058 | | | $ | 275,704 | | | $ | (3,718) | | | $ | 1,221,502 | |
Depreciation and amortization | 16,253 | | | 9,674 | | | 13,830 | | | 352 | | | 40,109 | |
Operating income (loss) | 74,570 | | | 40,270 | | | 3,245 | | | (6,804) | | | 111,281 | |
Capital expenditures | 18,758 | | | 7,810 | | | 6,454 | | | 99 | | | 33,121 | |
Total assets | $ | 279,139 | | | $ | 223,729 | | | $ | 176,154 | | | $ | 45,595 | | | $ | 724,617 | |
Year Ended October 31, 2021 | | | | | | | | | |
Net sales | $ | 578,332 | | | $ | 251,599 | | | $ | 246,075 | | | $ | (3,857) | | | $ | 1,072,149 | |
Depreciation and amortization | 18,730 | | | 10,373 | | | 13,263 | | | 366 | | | 42,732 | |
Operating income (loss) | 56,248 | | | 39,299 | | | 896 | | | (14,573) | | | 81,870 | |
Capital expenditures | 9,966 | | | 8,155 | | | 5,559 | | | 328 | | | 24,008 | |
Total assets | $ | 268,773 | | | $ | 236,755 | | | $ | 178,671 | | | $ | 33,124 | | | $ | 717,323 | |
Year Ended October 31, 2020 | | | | | | | | | |
Net sales | $ | 483,415 | | | $ | 161,054 | | | $ | 210,099 | | | $ | (2,995) | | | $ | 851,573 | |
Depreciation and amortization | 23,555 | | | 9,468 | | | 13,732 | | | 474 | | | 47,229 | |
Operating income (loss) | 39,909 | | | 20,076 | | | (2,502) | | | (2,218) | | | 55,265 | |
Capital expenditures | $ | 15,761 | | | $ | 5,435 | | | $ | 4,423 | | | $ | 107 | | | $ | 25,726 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| NA Fenestration(1) | | EU Fenestration(1) | | NA Cabinet Comp. | | Unallocated Corp. & Other | | Total |
Year Ended October 31, 2019 | | | | | | | | | |
Net sales | $ | 503,837 |
| | $ | 164,997 |
| | $ | 229,644 |
| | $ | (4,637 | ) | | $ | 893,841 |
|
Depreciation and amortization | 27,054 |
| | 8,845 |
| | 13,178 |
| | 509 |
| | 49,586 |
|
Operating income (loss) | 39,765 |
| | 19,040 |
| | (74,236 | ) | | (10,996 | ) | | (26,427 | ) |
Capital expenditures | 12,984 |
| | 6,365 |
| | 5,383 |
| | 151 |
| | 24,883 |
|
Total assets | $ | 226,243 |
| | $ | 212,239 |
| | $ | 181,416 |
| | $ | 25,212 |
| | $ | 645,110 |
|
Year Ended October 31, 2018 | | | | | | | | | |
Net sales | $ | 485,366 |
| | $ | 159,973 |
| | $ | 249,813 |
| | $ | (5,367 | ) | | $ | 889,785 |
|
Depreciation and amortization | 27,248 |
| | 9,607 |
| | 14,401 |
| | 566 |
| | 51,822 |
|
Operating income (loss) | 30,633 |
| | 12,702 |
| | 3,167 |
| | (10,805 | ) | | 35,697 |
|
Capital expenditures | 13,929 |
| | 5,450 |
| | 6,965 |
| | 140 |
| | 26,484 |
|
Total assets | $ | 239,915 |
| | $ | 214,704 |
| | $ | 272,313 |
| | $ | 16,282 |
| | $ | 743,214 |
|
Year Ended October 31, 2017 | | | | | | | | | |
Net sales | $ | 474,878 |
| | $ | 147,963 |
| | $ | 248,808 |
| | $ | (5,094 | ) | | $ | 866,555 |
|
Depreciation and amortization | 34,308 |
| | 8,833 |
| | 13,811 |
| | 543 |
| | 57,495 |
|
Operating income (loss) | 25,955 |
| | 13,673 |
| | 4,089 |
| | (9,780 | ) | | 33,937 |
|
Capital expenditures | $ | 18,822 |
| | $ | 7,841 |
| | $ | 7,349 |
| | $ | 552 |
| | $ | 34,564 |
|
(1) NA Fenestration and EU Fenestration were previously named "NA Engineered Components" and "EU Engineered Components".
The following table summarizes the change in the carrying amount of goodwill by segment for the years ended October 31, 20192022 and 20182021 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| NA Fenestration | | EU Fenestration | | NA Cabinet Comp. | | Unallocated Corp. & Other | | Total |
Balance as of October 31, 2017 | $ | 38,712 |
| | $ | 69,735 |
| | $ | 113,747 |
| | $ | — |
| | $ | 222,194 |
|
Foreign currency translation adjustment | — |
| | (2,567 | ) | | — |
| | — |
| | (2,567 | ) |
Balance as of October 31, 2018 | $ | 38,712 |
| | $ | 67,168 |
| | $ | 113,747 |
| | $ | — |
| | $ | 219,627 |
|
Asset impairment charge | — |
| | — |
| | (74,600 | ) | | — |
| | (74,600 | ) |
Foreign currency translation adjustment | — |
| | 536 |
| | — |
| | — |
| | 536 |
|
Balance as of October 31, 2019 | $ | 38,712 |
| | $ | 67,704 |
| | $ | 39,147 |
| | $ | — |
| | $ | 145,563 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NA Fenestration | | EU Fenestration | | NA Cabinet Comp. | | Unallocated Corp. & Other | | Total |
| | | | | | | | | |
| | | | | | | | | |
Balance as of October 31, 2020 | $ | 38,712 | | | $ | 68,295 | | | $ | 39,147 | | | $ | — | | | $ | 146,154 | |
| | | | | | | | | |
Foreign currency translation adjustment | — | | | 3,051 | | | — | | | — | | | 3,051 | |
Balance as of October 31, 2021 | $ | 38,712 | | | $ | 71,346 | | | $ | 39,147 | | | $ | — | | | $ | 149,205 | |
Foreign currency translation adjustment | — | | | (11,350) | | | — | | | — | | | (11,350) | |
Balance as of October 31, 2022 | $ | 38,712 | | | $ | 59,996 | | | $ | 39,147 | | | $ | — | | | $ | 137,855 | |
For further details of Goodwill, see Note 5, "Goodwill6, “Goodwill and Intangible Assets"Assets”, located herewith.
We did not allocate non-operating expense or income tax expense to the reportable segments. The following table reconciles operating income (loss) as reported above to net (loss) income for the years ended October 31, 2019, 20182022, 2021 and 2017:2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Operating income | $ | 111,281 | | | $ | 81,870 | | | $ | 55,265 | |
Interest expense | (2,559) | | | (2,530) | | | (5,245) | |
Other, net | 1,041 | | | 754 | | | 280 | |
Income tax expense | (21,427) | | | (23,114) | | | (11,804) | |
Net income | $ | 88,336 | | | $ | 56,980 | | | $ | 38,496 | |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | |
| Year Ended October 31, |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Operating (loss) income | $ | (26,427 | ) | | $ | 35,697 |
| | $ | 33,937 |
|
Interest expense | (9,643 | ) | | (11,100 | ) | | (9,595 | ) |
Other, net | 116 |
| | 1,156 |
| | 1,160 |
|
Income tax (expense) benefit | (10,776 | ) | | 800 |
| | (6,819 | ) |
Net (loss) income | $ | (46,730 | ) | | $ | 26,553 |
| | $ | 18,683 |
|
Geographic Information
Our manufacturing facilities and all long-lived assets are located in the U.S., U.K. and Germany. We attribute our net sales to a geographic region based on the location of the customer. The following tables provide information concerning our net sales for the years ended October 31, 2019, 20182022, 2021 and 2017,2020, and our long-lived assets as of October 31, 20192022 and 20182021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
Net sales | 2022 | | 2021 | | 2020 |
United States | $ | 911,180 | | | $ | 778,486 | | | $ | 654,802 | |
Europe | 255,400 | | | 244,308 | | | 158,831 | |
Canada | 31,442 | | | 25,007 | | | 18,213 | |
Asia | 15,021 | | | 18,445 | | | 11,504 | |
Other foreign countries | 8,459 | | | 5,903 | | | 8,223 | |
Total net sales | $ | 1,221,502 | | | $ | 1,072,149 | | | $ | 851,573 | |
|
| | | | | | | | | | | |
| Year Ended October 31, |
Net sales | 2019 | | 2018 | | 2017 |
United States | $ | 683,204 |
| | $ | 676,776 |
| | $ | 667,063 |
|
Europe | 162,106 |
| | 159,652 |
| | 148,370 |
|
Canada | 20,088 |
| | 23,610 |
| | 24,442 |
|
Asia | 18,360 |
| | 18,584 |
| | 17,028 |
|
Other foreign countries | 10,083 |
| | 11,163 |
| | 9,652 |
|
Total net sales | $ | 893,841 |
| | $ | 889,785 |
| | $ | 866,555 |
|
|
| | | | | | | |
| Year Ended October 31, |
Long-lived assets, net | 2019 | | 2018 |
United States | $ | 288,722 |
| | $ | 384,595 |
|
Germany | 16,899 |
| | 16,507 |
|
United Kingdom | 140,839 |
| | 141,814 |
|
Total long-lived assets, net | $ | 446,460 |
| | $ | 542,916 |
|
| | | | | | | | | | | |
| October 31, |
Long-lived assets, net | 2022 | | 2021 |
United States | $ | 279,616 | | | $ | 291,282 | |
Germany | 41,669 | | | 25,513 | |
United Kingdom | 118,005 | | | 146,158 | |
Total long-lived assets, net | $ | 439,290 | | | $ | 462,953 | |
Long-lived assets, net includes: property, plant and equipment, net; goodwill; andgoodwill, intangible assets, net.net, and operating leases.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18.17. Earnings Per Share
We compute basic (loss) earnings per share by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common shares include the weighted average of additional shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock as determined using the treasury stock method prescribed by U.S. GAAP and contingent shares associated with performance share awards, if dilutive.
The computation of basic and diluted earnings per share for the years ended October 31, 2019, 20182022, 2021 and 20172020 follows (in thousands, except per share data):
| Year Ended October 31, 2022 | | Year Ended October 31, 2022 | Net Income | | Weighted Average Shares | | Per Share |
Basic earnings per common share | | Basic earnings per common share | $ | 88,336 | | | 33,048 | | $ | 2.67 | |
Effect of dilutive securities: | | Effect of dilutive securities: | |
Stock options | | Stock options | | 25 | |
Restricted stock awards | | Restricted stock awards | | 100 | |
Performance restricted stock units | | Performance restricted stock units | | 32 | |
Diluted earnings per common share | | Diluted earnings per common share | $ | 88,336 | | | 33,205 | | $ | 2.66 | |
Year Ended October 31, 2021 | | Year Ended October 31, 2021 | | | | |
Basic earnings per common share | | Basic earnings per common share | $ | 56,980 | | | 33,193 | | $ | 1.72 | |
Effect of dilutive securities: | | Effect of dilutive securities: | |
Stock options | | Stock options | | 82 | |
Restricted stock awards | | Restricted stock awards | | 132 | |
Performance restricted stock units | | Performance restricted stock units | | 88 | |
Diluted earnings per common share | | Diluted earnings per common share | $ | 56,980 | | | 33,495 | | $ | 1.70 | |
Year Ended October 31, 2020 | | Year Ended October 31, 2020 | | | | |
Basic earnings per common share | | Basic earnings per common share | $ | 38,496 | | | 32,689 | | | $ | 1.18 | |
Effect of dilutive securities: | | Effect of dilutive securities: | |
Stock options | | Stock options | | 10 | |
Restricted stock awards | | Restricted stock awards | | 90 | |
Performance restricted stock units | | Performance restricted stock units | | 32 | |
| | | Net (Loss) Income | | Weighted Average Shares | | Per Share | |
Year Ended October 31, 2019 | | | | | | |
Basic loss per common share | $ | (46,730 | ) | | 32,960 |
| | $ | (1.46 | ) | |
Diluted loss per common share (1) | $ | (46,730 | ) | | 32,960 |
| | $ | (1.46 | ) | |
Year Ended October 31, 2018 | | | | | | |
Basic earnings per common share | $ | 26,553 |
| | 34,701 |
| | $ | 0.77 |
| |
Effect of dilutive securities: | | | | | | |
Stock options |
| | 198 |
| | | |
Restricted stock |
| | 126 |
| | | |
| Diluted earnings per common share | $ | 26,553 |
| | 35,025 |
| | $ | 0.76 |
| Diluted earnings per common share | $ | 38,496 | | | 32,821 | | $ | 1.17 | |
Year Ended October 31, 2017 | | | | | | |
Basic earnings per common share | $ | 18,683 |
| | 34,230 |
| | $ | 0.55 |
| |
Effect of dilutive securities: | | | | | | |
Stock options | | | 446 |
| | | |
Restricted stock | | | 138 |
| | | |
Performance shares | | | 23 |
| | | |
Diluted earnings per common share | $ | 18,683 |
| | 34,837 |
| | $ | 0.54 |
| |
(1)
The computation
We do not include equity instruments in our calculation of diluted earnings per share excludes outstanding stock options and other common stock equivalents when their inclusionif those instruments would be anti-dilutive. During the twelve-month period ended October 31, 2019, 39,766 shares of common stock equivalents, 113,383 shares of restricted stock and 28,051 contingent shares related to performance share awards and performance restricted stock units were excluded from the computation of diluted earnings per share.
For the years ended October 31, 2019, 2018 and 2017, we had 1,267,141, 1,000,356, and 686,650 securities, respectively, that were potentially dilutive in future earnings per share calculations.antidilutive. Such dilution will beis dependent on the excess of the market price of our stock over the exercise price and other components of the treasury stock method. The following table shows anti-dilutive instruments for the three years ended October 31, 2022, 2021 and 2020 (shares in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended October 31, |
| 2022 | | 2021 | | 2020 |
Stock options | — | | — | | 1,032 |
Restricted stock awards | — | | — | | — |
Performance share awards | — | | — | | — |
Total | — | | — | | 1,032 |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19.18. Unaudited Quarterly Data
Selected quarterly financial data for the years ended October 31, 20192022 and 20182021 was as follows (amounts in thousands, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
For the Quarter Ended | January 31, 2022 | | April 30, 2022 | | July 31, 2022 | | October 31, 2022 |
Net sales | $ | 267,040 | | | $ | 322,893 | | | $ | 324,037 | | | $ | 307,532 | |
Cost of sales (excluding depreciation and amortization) | 211,834 | | | 249,651 | | | 251,446 | | | 240,073 | |
Depreciation and amortization | 10,257 | | | 10,563 | | | 9,734 | | | 9,555 | |
Operating income | 14,126 | | | 34,550 | | | 34,035 | | | 28,570 | |
Net income | 11,239 | | | 26,522 | | | 25,908 | | | 24,667 | |
Basic earnings per share | 0.34 | | | 0.80 | | | 0.79 | | | 0.75 | |
Diluted earnings per share | 0.34 | | | 0.80 | | | 0.78 | | | 0.75 | |
Cash dividends paid per common share | 0.08 | | | 0.08 | | | 0.08 | | | 0.08 | |
| | | | | | | | | | | | | | | | | | | | | | | |
For the Quarter Ended | January 31, 2021 | | April 30, 2021 | | July 31, 2021 | | October 31, 2021 |
Net sales | $ | 230,147 | | | $ | 270,357 | | | $ | 279,877 | | | $ | 291,768 | |
Cost of sales (excluding depreciation and amortization) | 176,397 | | | 208,460 | | | 219,866 | | | 226,818 | |
Depreciation and amortization | 11,015 | | | 10,845 | | | 10,683 | | | 10,189 | |
Operating income | 11,835 | | | 21,380 | | | 21,562 | | | 27,093 | |
Net income | 7,852 | | | 14,551 | | | 13,679 | | | 20,898 | |
Basic earnings per share | 0.24 | | | 0.44 | | | 0.41 | | | 0.63 | |
Diluted earnings per share | 0.24 | | | 0.43 | | | 0.41 | | | 0.62 | |
Cash dividends paid per common share | 0.08 | | | 0.08 | | | 0.08 | | | 0.08 | |
|
| | | | | | | | | | | | | | | |
For the Quarter Ended | January 31, 2019 | | April 30, 2019 | | July 31, 2019 | | October 31, 2019 |
Net sales | $ | 196,808 |
| | $ | 218,203 |
| | $ | 238,461 |
| | $ | 240,369 |
|
Cost of sales (excluding depreciation and amortization) | 158,557 |
| | 171,378 |
| | 181,357 |
| | 183,128 |
|
Depreciation and amortization | 12,572 |
| | 12,404 |
| | 12,182 |
| | 12,428 |
|
Operating (loss) income | (2,450 | ) | | (19,363 | ) | | 19,110 |
| | (23,724 | ) |
Net (loss) income | $ | (3,649 | ) | | $ | (23,974 | ) | | $ | 11,841 |
| | $ | (30,948 | ) |
Basic earnings per share | (0.11 | ) | | (0.73 | ) | | 0.36 |
| | (0.94 | ) |
Diluted earnings per share | (0.11 | ) | | (0.73 | ) | | 0.36 |
| | (0.94 | ) |
Cash dividends paid per common share | $ | 0.08 |
| | $ | 0.08 |
| | $ | 0.08 |
| | $ | 0.08 |
|
|
| | | | | | | | | | | | | | | |
For the Quarter Ended | January 31, 2018 | | April 30, 2018 | | July 31, 2018 | | October 31, 2018 |
Net sales | $ | 191,666 |
| | $ | 214,212 |
| | $ | 239,821 |
| | $ | 244,086 |
|
Cost of sales (excluding depreciation and amortization) | 154,521 |
| | 169,030 |
| | 185,811 |
| | 187,660 |
|
Depreciation and amortization | 13,273 |
| | 13,310 |
| | 12,691 |
| | 12,548 |
|
Operating (loss) income | (596 | ) | | 7,767 |
| | 16,830 |
| | 11,696 |
|
Net (loss) income | $ | 4,947 |
| | $ | 4,136 |
| | $ | 10,753 |
| | $ | 6,717 |
|
Basic (loss) earnings per share | 0.14 |
| | 0.12 |
| | 0.31 |
| | 0.19 |
|
Diluted (loss) earnings per share | 0.14 |
| | 0.12 |
| | 0.31 |
| | 0.19 |
|
Cash dividends paid per common share | $ | 0.04 |
| | $ | 0.04 |
| | $ | 0.04 |
| | $ | 0.08 |
|
QuQuarterly (loss)arterly earnings per share results may not sum to the consolidated earnings per share results on the accompanying consolidated statements of (loss) income due to roundingrounding and changes in weighted average shares during the respective periods. Results for the 2018 quarters have been updated to reflect the impact of an accounting change from the LIFO inventory method to the FIFO inventory method and for the adoption of Accounting Standards Update 2017-07. See Note 3, "Inventories" and Note 20, "New Accounting Guidance" for further details.
20.19. New Accounting Guidance
Accounting Standards Recently Adopted
In May 2017,From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09, Compensation - Stock Compensation (Topic 718), which provides guidanceor other standards setting bodies that we adopt as to when changes in share-based payment awards under Topic 718 should be accounted for as a modification of the award. Essentially, the changes should be considered a modification unless specific criteria are met.specified effective date. We adopted this guidance as of November 1, 2018 with no impact to the financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update provides explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. We adopted this change retrospectively as of November 1, 2018, resulting in a reclassification fordid not adopt any new accounting pronouncements during the twelve months ended October 31, 2018 and 20172022. As of $0.8 million and $0.3 million of benefit, respectively, from the "Cost of sales" line item and approximately $0.2 million and $0.1 million of benefit for the corresponding periods from the "Selling, general and administrative" line item to the "Other, net" line item on the accompanying condensed consolidated statement of income.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which provides clarity when determining whether a set of assets and activities constitutes a business. Specifically, if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
is not deemed to be a business. We adopted this change prospectively as of November 1, 2018 with no impact to the financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This guidance simplifies the current two-step goodwill impairment test by eliminating the second step. Essentially, the entity compares the fair value of a reporting unit with its carrying value amount and recognizes an impairment charge for the amount by which the carrying value exceeds the fair value. The resulting loss is limited to the amount of goodwill. This guidance also eliminates the requirement for a reporting unit with zero or negative carrying value to perform a qualitative assessment of goodwill and apply step-two of the goodwill impairment test if the qualitative assessment fails. Thus, the same impairment assessment will be applied to all reporting units (even if the carrying value is zero or negative). We prospectively adopted this guidance as of February 1, 2019 with no material impact to the consolidated financial statements. See Note 5, "Goodwill and Intangible Assets," for further details of the goodwill impairment analysis performed during the year ended October 31, 2019.
In August 2016,2022, we believe the FASBimpact of any recently issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. This amendment is intendedstandards that are not yet effective are either not applicable to reduce diversity in practice as to how certain cash receipts and cash payments are presented and classified in the statement of cash flows by providing guidance for several specific cash flow issues. We adoptedus at this change retrospectively as of November 1, 2018 which resulted in a reclassification of $8.5 million of earn-out payments related to a prior period acquisition from investing activities to financing activities within the Statement of Cash Flow for the year ended October 31, 2017.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This guidance prescribes a methodology to determine when revenue is recognizable and constitutes a principles-based approach to revenue recognition based on the consideration to which the entity expects to be entitled in exchange for goodstime or services. In addition, this guidance requires additional disclosure in the notes to the financial statements with regard to the methodology applied. This pronouncement essentially superseded and replaced existing revenue recognition rules in U.S. GAAP, including industry-specific guidance. We adopted this guidance using the modified retrospective approach on November 1, 2018. Based on our evaluation, we have concluded that the adoption of this new guidance didwill not have a material impact on our condensed consolidated financial statements. For additional information, refer to Note 1, “Nature of Operations and Basis of Presentation - Revenue from Contracts with Customers”.statements upon adoption.
20. Subsequent Events
Accounting Standards Not Yet Adopted
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard is effective for us onOn November 1, 2019,2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with early adoption permitted. We plan to adopt using a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application. We expect to adopt the new standard on November 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updatedLMI Custom Mixing, LLC (“LMI”) and the disclosures required underequity owners of LMI, Lauren International, Ltd. and Meteor-US-Beteiligungs GMBH. Under the new standard will not be provided for dates and periods prior to November 1, 2019.
The new standard provides a number of optional practical expedients in transition. We will electPurchase Agreement, we acquired substantially all of the new standard’s available transition practical expedients.
This standard will have a material effect on our financial statements. The most significant effects on our financial statements relateoperating assets comprising LMI’s polymer mixing and rubber compound production business (collectively, the “Purchased Assets”) and also agreed to assume certain liabilities relating to the recognitionPurchased Assets (collectively, the “Acquisition”). As consideration for the Purchased Assets, we agreed to pay LMI $92 million in cash, with $7.1 million of new ROUthis amount funded into escrow substantially as security for the seller parties’ indemnification obligations. To fund the amounts paid in connection with the Acquisition, we used a combination of cash on hand and funds borrowed under our Credit Facility. Subsequent to the acquisition, we had approximately $215 million available for use under the Credit Facility. In connection with the Acquisition, we amended our existing lease with Lauren Real Estate Holding LLC for the purpose of adding an additional lease renewal option and increasing rental space by approximately 60,000 square feet of rental space which was added to the 313,595 square feet of rentable area located in Cambridge, Ohio. The initial accounting for this business combination is in process which includes conducting a valuation analysis to value the assets and lease liabilities on our balance sheet for our operating leases and providing significant new disclosures about our leasing activities. We do not expectassumed as a significant change in our leasing activities between now and adoption.
On adoption, we will recognize additional operating liabilities ranging from $40.0 million to $45.0 million, with corresponding ROU assetsresult of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.
The new standard also provides practical expedients for an entity’s ongoing accounting. We will elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934 (1934 Act) as of October 31, 2019.2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of October 31, 2019,2022, the disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control over Financial Reporting
Refer to Management’s Annual Report on Internal Control over Financial Reporting located in “"Part 2, Item 8. Financial Information"Information” of this Annual Report on Form 10-K.
Auditor's Report Relating to Effectiveness of Internal Control over Financial Reporting
Refer to the Report of Independent Registered Public Accounting Firm located in “"Part 2, Item 8. Financial Information"Information” in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes in internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Pursuant to General Instruction G(3) to Form 10-K, the information on “"Directors, Executive Officers and Corporate Governance"Governance” is incorporated herein by reference from the Registrant's Definitive Proxy Statement relating to the 20202023 Annual Meeting of Stockholders of Quanex Building Products Corporation or an amendment to this Form 10-K, which is to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after the close of the fiscal year ended October 31, 2019.2022.
Item 11. Executive Compensation.
Pursuant to General Instruction G(3) to Form 10-K, the information on “"Executive Compensation"Compensation” is incorporated herein by reference from the Registrant's Definitive Proxy Statement relating to the 20202023 Annual Meeting of Stockholders of Quanex Building Products Corporation or an amendment to this Form 10-K, which is to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after the close of the fiscal year ended October 31, 2019.2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Pursuant to General Instruction G(3) to Form 10-K, the information on “"Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters"Matters” is incorporated herein by reference from the Registrant's Definitive Proxy Statement relating to the 20202023 Annual Meeting of Stockholders of Quanex Building Products Corporation or an amendment to this Form 10-K, which is to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after the close of the fiscal year ended October 31, 2019.2022.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Pursuant to General Instruction G(3) to Form 10-K, the information on “"Certain Relationships and Related Transactions, and Director Independence"Independence” is incorporated herein by reference from the Registrant's Definitive Proxy Statement relating to the 20202023 Annual Meeting of Stockholders of Quanex Building Products Corporation or an amendment to this Form 10-K, which is to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after the close of the fiscal year ended October 31, 2019.2022.
Item 14. Principal Accountant Fees and Services.
Pursuant to General Instruction G(3) to Form 10-K, the information on “"Principal Accountant Fees and Services"Services” is incorporated herein by reference from the Registrant's Definitive Proxy Statement relating to the 20202023 Annual Meeting of Stockholders of Quanex Building Products Corporation or an amendment to this Form 10-K, which is to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after the close of the fiscal year ended October 31, 2019.2022.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
1. Financial Statements
The financial statements included in this report are listed in the Index to Financial Statements located elsewhere in this Annual Report on Form 10-K.
2. Financial Statement Schedules
Schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under the related instructions or inapplicable.
3. Exhibits
The exhibits required to be filed pursuant to Item 15(b) of Form 10-K are listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated herein by reference. ExhibitsCertain of our exhibits as denoted with a † between exhibits 10.1 through 10.5210.40 listed in the Exhibit Index filed herewith, are management or compensatory plans or arrangements required to be filed as exhibits to this Annual Report on Form 10-K pursuant to Item 15(b) thereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | QUANEX BUILDING PRODUCTS CORPORATION |
| | | |
Date: | December 16, 2022 | | QUANEX BUILDING PRODUCTS CORPORATION |
| | | |
Date: | December 12, 2019 | | /s/ Scott M. Zuehlke |
| | | Scott M. Zuehlke |
| | | Senior Vice President - Chief Financial Officer and Treasurer (Principal Financial Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
Name | | Title | | Date |
| | | | |
/s/ William C. Griffiths | | Chairman of the Board | | December 16, 2022 |
William C. Griffiths | | | | |
| | | | |
Name/s/ Susan F. Davis | | TitleDirector | | DateDecember 16, 2022 |
Susan F. Davis | | | | |
| | | | |
/s/ Curtis M. Stevens | | Director | | December 16, 2022 |
Curtis M. Stevens | | | | |
| | | | |
/s/ Donald R. Maier | | Director | | December 16, 2022 |
Donald R. Maier | | | | |
| | | | |
/s/ Meredith W. Mendes | | Director | | December 16, 2022 |
Meredith W. Mendes | | | | |
| | | | |
/s/ William C. GriffithsE. Waltz | | Chairman of the Board,Director | | December 12, 201916, 2022 |
William C. GriffithsE. Waltz | | | | |
| | | | |
/s/ Jason D. Lippert | | Director | | December 16, 2022 |
Jason D. Lippert | | | | |
| | | | |
/s/ Bradley E. Hughes | | Director | | December 16, 2022 |
Bradley E. Hughes | | | | |
| | | | |
/s/ George L. Wilson | | President and Chief Executive Officer | | December 16, 2022 |
George L. Wilson | | (Principal Executive Officer) | | |
/s/ Susan F. Davis | | Director | | December 12, 2019 |
Susan F. Davis | | | | |
| | | | |
/s/ Joseph D. Rupp | | Director | | December 12, 2019 |
Joseph D. Rupp | | | | |
| | | | |
/s/ Curtis M. Stevens | | Director | | December 12, 2019 |
Curtis M. Stevens | | | | |
| | | | |
/s/ Robert R. Buck | | Director | | December 12, 2019 |
Robert R. Buck | | | | |
| | | | |
/s/ Donald R. Maier | | Director | | December 12, 2019 |
Donald R. Maier | | | | |
| | | | |
/s/ Meredith W. Mendes | | Director | | December 12, 2019 |
Meredith W. Mendes | | | | |
| | | | |
/s/ Scott M. Zuehlke | | Senior Vice President - Chief Financial Officer and Treasurer | | December 12, 201916, 2022 |
Scott M. Zuehlke | | (Principal Financial Officer) | | |
| | | | |
/s/ Mark A. Livingston | | Vice President, Chief Accounting Officer and Controller | | December 12, 201916, 2022 |
Mark A. Livingston | | (Principal Accounting Officer) | | |
EXHIBIT INDEX
Exhibit Number Description of Exhibits
|
| | | | | | | |
| | |
| |
| | Agreement and Plan of Merger, dated as of January 31, 2011, by and among Quanex Building Products Corporation, QSB Inc., Lauren Holdco Inc., Lauren International, Inc. and Kevin E. Gray, as agent for the shareholders of Lauren Holdco Inc., filed as Exhibit 2.1 of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on February 2, 2011, and incorporated herein by reference. |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | Agreement and Plan of Merger, dated as of August 30, 2015, by and among Quanex Building Products Corporation, QWMS, Inc., WII Holding, Inc., and Olympus Growth Fund IV, L.P, solely in its capacity as the representative of the stockholders of WII Holding, Inc, filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on August 30, 2015, and incorporated herein by reference. |
| | |
| | Asset Purchase Agreement, dated November 1, 2022, among Quanex IG Systems, Inc., LMI Custom Mixing, LLC, Lauren International, Ltd. and Meteor-US-Beteiligungs GMBH, filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on November 1, 2022 and incorporated herein by reference. |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | Second Amended and Restated Credit Agreement dated as of October 18, 2018,July 6, 2022, by and among the Company; the lenders party thereto; and Wells Fargo Bank, National Association, as Agent; filed as Exhibit 10.1 of the Registrant’sRegistrant's Current Report on Form 8-K (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on October 18, 2018,July 6, 2022, and incorporated herein by reference. |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
EXHIBIT INDEX
Exhibit Number Description of Exhibits
EXHIBIT INDEX
Exhibit Number Description of Exhibits
EXHIBIT INDEX
Exhibit Number Description of Exhibits
EXHIBIT INDEX
Exhibit Number Description of Exhibits
EXHIBIT INDEX
Exhibit Number Description of Exhibits
| | | | | | | | |
| |
|
| | |
| | |
| | |
| | |
| | |
| | Lease Relating to Land and Buildings at Denby Hall Business Park, Denby, Ripley, Derbyshire, DE5 8JX, dated as of October 21, 2022, by and among Garner Holdings Limited, Liniar Limited, and Ryfields Close Management Company Limited, filed as Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on October 26, 2022 and incorporated herein by reference. |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| |
*101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| |
*101.SCH | | XBRL Taxonomy Extension Schema Document |
| |
*101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
*101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| |
*101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| |
*101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith
† Management Compensation or Incentive Plan
EXHIBIT INDEX
Exhibit Number Description of Exhibits
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has not filed with this Annual Report on Form 10-K certain instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries because the total amount of securities authorized under any of such instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.