EDGAR 10-K Filing

Company CIK: 1423221
Filing Year: 2021
Filename: 1423221_10-K_2021_0001423221-21-000018.json

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ITEM 1. BUSINESS
Item 1. Business.
Our Company
Quanex was incorporated in Delaware on December 12, 2007, as Quanex Building Products Corporation. We manufacture components for original equipment manufacturers (OEM) 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. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, vinyl fencing, water retention barriers, and conservatory roof components. 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.
Our History
Our predecessor company, Quanex Corporation, was organized in Michigan in 1927 as Michigan Seamless Tube Company, and was later reincorporated in Delaware in 1968. In 1977, Michigan Seamless Tube Company changed its name to Quanex Corporation. On December 12, 2007, Quanex Building Products Corporation was incorporated as a wholly-owned subsidiary in the state of Delaware, in order to facilitate the separation of Quanex Corporation's vehicular products and building products businesses. This separation became effective on April 23, 2008, through a spin-off of the building products business to Quanex Corporation's then-existing shareholders. Immediately following the spin-off, our former parent company, consisting principally of the vehicular products business and all non-building products related corporate accounts, merged with a wholly-owned subsidiary of Gerdau S.A.
Since the spin-off in 2008, we have evolved our business by making investments in organic growth initiatives and taking a disciplined approach to new business and strategic acquisition opportunities, while disposing of non-core businesses.
As of October 31, 2021, we operated 28 manufacturing facilities located in 15 states in the U.S., two facilities in the U.K., and one in Germany. These facilities feature efficient plant design and flexible manufacturing processes, enabling us to produce a wide variety of custom engineered products and components primarily focused on the window and door segment of the residential building products markets. We are able to maintain minimal levels of finished goods inventories at most locations because we typically manufacture products upon order to customer specifications. We believe the primary drivers of our operating results are residential remodeling and replacement activity and new home construction in the markets we serve.
Our Industry
Our business is largely based in North America and dependent upon the spending and growth activity levels of our customers which include national and regional residential window, door and cabinet manufacturers. Our international presence includes vinyl extruded lineals for large house systems to smaller individual customers. We also have insulating glass businesses in the U.K. and Germany.
We use data related to housing starts and window shipments in the U.S., as published by or derived from third-party sources, to evaluate the fenestration market. We also use data related to cabinet demand in the U.S. to evaluate the residential cabinet market.
The following table presents calendar-year annual housing starts information as of November 2021 from the National Association of Home Builders (NAHB) (units in thousands):
Single-family Units Multi-family Units Manufactured Units
Period Units % Change Units % Change Units % Change Total Units
Annual Data
2017 849 8% 356 (9)% 93 15% 1,298
2018 871 3% 376 6% 96 3% 1,343
2019 889 2% 403 7% 95 (1)% 1,387
2020 1,004 13% 393 (2)% 94 (1)% 1,491
Annual Data - Forecast
2021 1,111 11% 469 19% 106 13% 1,686
2022 1,113 -% 440 (6)% 114 8% 1,667
2023 1,111 -% 440 -% 115 1% 1,666
Ducker Worldwide LLC, a consulting and research firm, indicated in November 2021 that window shipments in the residential remodeling and replacement (R&R) market are expected to increase approximately 4.5% for the calendar-year 2021 and approximately 4% in 2022 and 3% during 2023. Derived from reports published by Ducker, the overall increase in window shipments for the trailing twelve months ended September 30, 2021 was 8.9%. During this period, new construction activity increased 14.2% and R&R replacement increased 4.7% respectively.
According to data from Catalina Research, a consulting and research firm, U.S. residential cabinet demand is expected to increase through 2022. Projections from Catalina Research as of November 2021 include growth rates for the stock, semi-custom (the cabinet market we primarily operate in) and custom cabinet markets, which are presented in the table below:
Cabinet Market Annual Growth Rates
Period Stock Semi-Custom Custom Overall
Annual Data
2017 8.5% 5.7% (0.9)% 6.6%
2018 7.9% (1.6)% 3.8% 4.9%
2019 1.8% (4.9)% 1.1% -%
2020 3.7% (1.3)% 0.3% 2.2%
Annual Data - Forecast
2021 15.2% 13.4% 17.5% 15.0%
2022 7.2% 5.2% 4.7% 6.5%
We have noted the following trends which we believe affect our industry:
•the recent growth in the housing market over the past several years has been predominately in new construction which has outpaced the growth in the residential remodeling and replacement sector;
•programs in the U.S. such as Energy Star have improved customer awareness of the technological advances in window and door energy-efficiency, but the government has been reluctant to enforce stricter energy standards;
•supply chain disruptions and inflationary pressures related to transportation, labor, and raw materials have increased causing delays in production and higher prices;
•foreign currency rates in the U.K. and other European nations have changed significantly relative to the United States Dollar due in part to Brexit in the U.K., as well as other international unrest or uncertainties;
•commodity prices have fluctuated in recent years, and to the extent we cannot pass this cost to our customers, this impacts the cost of critical materials used in our manufacturing processes such as resin, which affects margins related to our vinyl extrusion products; oil products such as butyl, which affects our insulating glass products; and aluminum, wood and silicone products used by our other businesses; and
•higher energy efficiency standards in Europe should favorably impact sales of our insulating glass spacer products in
the short- to mid-term.
Strategy
Our vision is to be the preferred supplier to our customers in each market we serve. Our strategy to achieve this vision includes the following:
•focus on organic growth with our current customer base and expand our market share with national and regional customers by providing: (1) a quality product; (2) a high level of customer service; (3) product choices at different price points; and (4) new products or enhancements to existing product offerings. These enhancements may include higher thermal efficiency, enhanced functionality, improved weatherability, better appearance and best-in-class quality for our fenestration and cabinet door products;
•realize improved profitability in our manufacturing processes through: (1) ongoing preventive maintenance programs; (2) better utilization of our capacity by focusing on operational efficiencies and reducing scrap; (3) marketing our value added products; and (4) focusing on employee safety;
•offer logistics solutions that provide our customers with just-in-time service which can reduce their processing costs;
•recognizing the importance of sustainability and corporate social responsibility by continually looking for ways to reduce our environmental impact, protect the health and safety of our employees and communities, and engage diverse workers and leaders;
•pursue targeted business acquisitions that allow us to expand our existing footprint, enhance our existing product offerings, acquire complementary technology, enhance our leadership position within the markets we serve, and expand into adjacent markets or service lines; and
•exit unprofitable service lines or customer relationships.
Our Strengths
We believe our strengths include design expertise, new technology development capability, high quality manufacturing, just-in-time delivery systems, customer service and the ability to generate unique patented products.
Raw Materials and Supplies
We purchase a diverse range of raw materials, which include PVC resin, epoxy resin, butyl, titanium dioxide (TiO2) desiccant powder, silicone and EPDM rubber compounds, coated and uncoated aluminum sheet and wood (both hardwood and softwood). These raw materials are generally available from several suppliers at market prices. We may enter into sole sourcing arrangements with our suppliers from time to time if we believe we can realize beneficial savings, but only after we have determined that the vendor can reliably supply our raw material requirements. These sole sourcing arrangements generally have termination clauses to protect us if a sole sourced vendor could not provide raw materials timely and on economically feasible terms. We believe there are other qualified suppliers from which we could purchase raw materials and supplies.
Competition
Our products are sold under highly competitive conditions. We compete with a number of companies, some of which have greater financial resources than us. We believe the primary competitive factors in the markets we serve include price, product quality, delivery and the ability to manufacture to customer specifications. The volume of engineered building products that we manufacture represents a small percentage of annual domestic consumption. Similarly, our subsidiaries in the U.K. compete against some larger vinyl producers and smaller window manufacturers. For our kitchen and bathroom cabinet door business, we believe we are the largest supplier to OEMs in the U.S., but we compete with other national and regional businesses, including OEMs who are vertically integrated.
We compete against a range of small and mid-size metal, vinyl and wood products suppliers, wood molding companies, and the in-house operations of customers who have vertically integrated fenestration operations. We also compete against insulating glass (IG) spacer manufacturing firms. IG systems are used in numerous end markets including residential housing, commercial construction, appliances and transportation vehicles, but we primarily serve the residential housing market. Competition is largely based on regional presence, custom engineering, product development, quality, service and price. Primary competitors include, but are not limited to, Veka, Deceuninck, Energi, Vision Extrusions, GED Integrated Solutions, Technoform, Swiss Spacer, Thermix, RiteScreen, Allmetal, Endura, Klinger, Thermoseal and Fenzi Group. Competitors in the vinyl extrusion business in the U.K. include Epwin, Veka, Profine UK Extrustions Ltd., Eurocell and others. Primary competitors in the cabinet door business in the U.S. include Conestoga, Appalachian Wood, Olon, Northern Contours and others.
Sales, Marketing, and Distribution
We sell our products to customers in various countries. Therefore, we have sales representatives whose territories essentially cover the U.S., Canada, Europe, and to a lesser extent, the Middle East, Latin and South America, Australia, New Zealand and Asia. Our sales force is tasked with selling and marketing our complete range of components, products and systems to national and regional OEMs through a direct sales force in North America and Europe, supplemented with the limited use of distributors and independent sales agents.
Customers
Certain of our businesses or product lines are largely dependent on a relatively few large customers. See Note 1, “Nature of Operations, Basis of Presentation and Significant Accounting Policies - Concentration of Credit Risk and Allowance for Credit Losses,” of the accompanying financial statements in this Annual Report on Form 10-K for related disclosure.
Sales Backlog
Given the short lead times involved in our business, we have a backlog of approximately $83 million as of October 31, 2021. The criteria for revenue recognition has not been met with regard to sales backlog, and therefore, we have not recorded revenue or deferred revenue pursuant to these sales orders. If these sales orders result in a sale, we will record revenue during fiscal 2022 in accordance with our revenue recognition accounting policy.
Seasonal Nature of Business
Our business is impacted by seasonality. We have historically experienced lower sales for our products during the first half of our fiscal year as winter weather reduces homebuilding and home improvement activity. Our operating income tends to decline during this period of lower sales because a higher percentage of our operating expenses are fixed overhead. We typically experience more favorable results in the third and fourth quarters of the fiscal year. Our exposure to seasonality was somewhat tempered with the entry into the kitchen and bathroom cabinet door industry, which is focused "inside the house" and less susceptible to inclement weather. Expenses for labor and other costs are generally semi-variable throughout the year.
Working Capital
We fund operations through a combination of available cash and cash equivalents, cash flow generated from our operations, and borrowings from our revolving credit facility. We extend credit to our domestic customers in the ordinary course of business generally for a term of 30 days, while the terms for our international customers vary from cash advances to 90 days. Inventories of raw materials are carried in quantities deemed necessary to ensure a smooth production process, some of which are governed by consignment agreements with suppliers. We strive to maintain minimal finished goods inventories, while ensuring an adequate supply on hand to service customer needs.
Service Marks, Trademarks, Trade Names, and Patents
Our federally registered trademarks or service marks include QUANEX, QUANEX and design, “Q” design, TRUSEAL TECHNOLOGIES, DURASEAL, DURALITE, SOLARGAIN, ENVIROSEALED WINDOWS, EDGETHERM, EDGETECH, ECOBLEND, SUPER SPACER, TSS, TRUE WARM, E & Design, QUIET EDGE, HEALTH SMART WINDOWS, ENERGY WISE WINDOWS, DESI-ROPE, 360 and design, INTELLICLIP, SUSTAINAVIEW, MIKRON, MIKRONWOOD, MIKRONBLEND, MIKRON BLEND and design, ENERGYCORE, FUSION INSULATED SYSTEM, AIRCELL, SUPERCOAT, SUPERCAP, STYLELOCK, STYLELOCK and design, MIKRON and design, HOMESHIELD, HOMESHIELD and design, STORM SEAL, and TENON. We consider the following marks, design marks and associated trade names to be valuable in the conduct of our business: HOMESHIELD, TRUSEAL TECHNOLOGIES, EDGETECH, MIKRON,
WOODCRAFT and QUANEX. Through Liniar, we hold a number of registered designs, patents and trademarks registered in the U.K., which include: MODLOK, LINIAR, SUPER CUT, ENERGY PLUS & Device, FLAMSTEAD HOLDINGS & Device, HL PLASTICS & Device, VINTAGE WINDOWS & Device, RESURGENCE, FUSE, ELEVATE, SWITCHBOARD and various other trademarks and patents which are pending approval. Generally, our business does not depend on patent protection, but patents obtained with regard to our vinyl extrusion products and processes, fabricated metal components and IG spacer products business remain a valuable competitive advantage over other building products manufacturers. We obtain patent protection for various dyes and other tooling created in connection with the production of customer-specific vinyl profile designs and vinyl extrusions. Our fabricated metal components business obtains patent protection for its thresholds. Our window sealant business unit relies on patents to protect the design of several of its window spacer products. Although we hold numerous patents, the proprietary process technology that has been developed is also considered a source of competitive advantage.
Environmental and Employee Safety Matters
We are subject to extensive laws and regulations concerning worker safety, the discharge of materials into the environment and the remediation of chemical contamination. To satisfy such requirements, we must make capital and other expenditures on an ongoing basis. The cost of worker safety and environmental matters has not had a material adverse effect on our operations or financial condition in the past, and we are not currently aware of any existing conditions that we believe are likely to have a material adverse effect on our operations, financial condition, or cash flows.
Safety and Environmental Policies
For many years, we have maintained compliance policies that are designed to help protect our workforce, to identify and reduce the potential for job-related accidents, and to minimize liabilities and other financial impacts related to worker safety and environmental issues. These policies include extensive employee training and education, as well as internal policies embodied in our Code of Business Conduct and Ethics. We have a Director of Environmental, Health and Safety and maintain a company-wide committee, comprising leaders from across the organization, which meets regularly to discuss safety issues and drive safety improvements. We plan to continue to focus on safety in particular as a core strategy to improve our operational efficiency and financial performance.
Remediation
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.
Environmental Compliance Costs
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 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 2022. 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.
Human Capital
We track human capital metrics that we consider to be key to our business, including employee headcount, temporary workers, health and safety, and turnover. As of October 31, 2021, we had 3,860 employees. Of these employees, 3,083 were domiciled in the U.S., 665 in the U.K., and 112 in Germany. Generally, the total number of employees of Quanex and its subsidiaries does not significantly fluctuate throughout the year. Currently, none of our employees are subject to collective bargaining agreements.
Employee turnover rates are monitored monthly at the division and plant levels. Both voluntary and involuntary terminations, including retirements, are used to calculate the turnover rate. Our human capital objectives include attracting, developing, motivating, rewarding, and retaining our existing and new employees. We offer our employees online training courses and on-the-job training on job duties, safety requirements, and leadership skills. The health and safety of our employees is our high priority and in particular, in response to the COVID-19 pandemic. We have taken additional measures to limit possible infections at the workplace. See Part 2 Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations - Notable Items - COVID-19 Impacts,” elsewhere in this Annual Report on Form 10-K for related disclosure.
For Investors
We periodically file or furnish documents to the Securities and Exchange Commission (SEC), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports as required. These reports are also available free of charge from the Investor Relations Section of our website at http://www.quanex.com, as soon as reasonably practicable after we file such material or furnish it to the SEC. As permitted by the SEC rules, we post relevant information on our website. However, the information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
The following risk factors, along with other information contained elsewhere in this Annual Report on Form 10-K and our other public filings with the SEC, should be carefully considered before deciding to invest in our securities. Additional risks and uncertainties that are not currently known to us or that we may view as immaterial could impair our business if such risks were to develop into actual events. Therefore, any of these risks could have a material adverse effect on our financial condition, results of operations and cash flows. This listing of risk factors is not all-inclusive and is not necessarily presented in order of importance.
Industry Risks
Any sustained decline in residential remodeling, replacement activities, or housing starts could have a material adverse effect on our business, financial condition and results of operations.
The primary drivers of our business are residential remodeling, replacement activities and housing starts. The home building and residential construction industry is cyclical and seasonal, and product demand is based on numerous factors such as interest rates, general economic conditions, consumer confidence and other factors beyond our control. Declines in the number of housing starts and remodeling expenditures resulting from such factors could have a material adverse effect on our business, results of operations and financial condition.
If the availability of critical raw materials were to become scarce or if the price of these items were to increase significantly, we might not be able to timely produce products for our customers or maintain our profit levels.
We purchase from outside sources significant amounts of raw materials, such as butyl, titanium dioxide, vinyl resin, aluminum, steel, silicone and wood products for use in our manufacturing facilities. Because we do not have long-term contracts for the supply of many of our raw materials, their availability and price are subject to market fluctuation and may be subject to curtailment or change. Any of these factors could affect our ability to timely and cost-effectively manufacture products for our customers.
Compliance with, or liabilities under, existing or future environmental laws and regulations could significantly increase our costs of doing business.
We are subject to extensive federal, state and local laws and regulations concerning the discharge of materials into the environment and the prevention and/or remediation of chemical contamination. To satisfy such requirements, we must make capital and other expenditures on an ongoing basis. Future expenditures relating to environmental matters will necessarily depend upon whether such regulations and future governmental decisions or interpretations of these regulations apply to us and our facilities. It is likely that we will be subject to increasingly stringent environmental standards, and we will incur additional expenditures to comply with such standards. Furthermore, if we fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.
Our goodwill and indefinite-lived intangible assets may become impaired and could result in a charge to income.
We evaluate our goodwill and indefinite-lived intangible assets at least annually to determine whether we must test for impairment. In making this assessment, we must use judgment to make estimates of future operating results and appropriate residual values. Actual future operating results and residual values associated with our operations could differ significantly from these estimates, which may result in an impairment charge in a future period, resulting in a decrease in net income from operations in the year of the impairment, as well as a decline in our recorded net worth. We recorded goodwill impairment charges in 2019 and could record future impairment charges. Goodwill totaled $149.2 million at October 31, 2021. The results of goodwill impairment testing are described in the accompanying notes to the audited financial statements, Note 6, “Goodwill and Intangible Assets” of the accompanying financial statements in this Annual Report on Form 10-K.
We may not be able to protect our intellectual property.
We rely on a combination of copyright, patent, trade secrets, confidentiality procedures and contractual commitments to protect our proprietary information. However, these measures can only provide limited protection and unauthorized third parties may try to copy or reverse engineer portions of our products or may otherwise obtain and use our intellectual property. If we cannot protect our proprietary information against unauthorized use, we may not be able to retain a perceived competitive advantage and we may lose sales to the infringing sellers, which may have a material adverse effect on our financial condition, results of operations and cash flows.
We are subject to various existing and contemplated laws, regulations and government initiatives that may materially impact the demand for our products, our profitability or our costs of doing business.
Our business may be materially impacted by various governmental laws, regulations and initiatives that may artificially create, deflate, accelerate, or decelerate consumer demand for our products. For example, when the government issues tax credits designed to encourage increased homebuilding or energy-efficient window purchases, the credits may create a spike in demand that would not otherwise have occurred and our production capabilities may not be able to keep pace, which could materially impact our profitability. Likewise, when such laws, regulations or initiatives expire, our business may experience a material loss in sales volume or an increase in production costs as a result of the decline in consumer demand.
Our operations outside the U.S. require us to comply with a number of U.S. and international anti-corruption regulations, violations of which could have a material adverse effect on our consolidated results of operations and consolidated financial condition.
Our international operations require us to comply with a number of U.S. and international regulations, including the Foreign Corrupt Practices Act (FCPA) and the United Kingdom Bribery Act 2010. While we have implemented appropriate training and compliance programs to prevent violations of these anti-bribery regulations, we cannot ensure that our policies, procedures and programs will always protect us from reckless or criminal acts committed by our employees or agents. Allegations of violations of applicable anti-corruption laws, may result in internal, independent, or government investigations, and violations of anti-corruption laws may result in severe criminal or civil sanctions or other liabilities which could have a material adverse effect on our business, consolidated results of operations and financial condition.
Our operations within the U.K. may be negatively affected as a result of the U.K.'s exit from the European Union (E.U.), (commonly referred to as Brexit).
We have operations located within the U.K., and as such, our business and financial results may be negatively impacted as a result of Brexit, resulting primarily from (a) continued depression in the value of the British Pound Sterling as compared to the United States Dollar; and (b) potential price increases or unavailability of supplies purchased by our U.K. businesses from companies located in the E.U. or elsewhere. If the value of the British Pound Sterling continues to fluctuate as a result of Brexit,
unfavorable exchange rate changes may negatively affect the value of our operations and businesses located in the U.K., as translated to our reporting currency, the United States Dollar, in accordance with U.S. GAAP, which may impact the revenue and earnings we report. For more information with respect to Exchange Rate risk applicable to us, please see Part 2 Item 7A. “Market Risk Disclosures,” elsewhere in this Annual Report on Form 10-K. Continued fluctuations in the British Pound Sterling may also result in the imposition of price adjustments by E.U.-based suppliers to our U.K. businesses, as those suppliers seek to compensate for the changes in value of the British Pound Sterling as compared to the European Euro.
Failure to achieve and maintain effective internal controls could have a material adverse effect on our business and on our stock price.
Effective internal controls are necessary for us to effectively monitor our business, prevent fraud or theft, remain in compliance with our credit facility covenants, and provide reliable financial reports, both to the public and to our lenders. If we fail to maintain the adequacy of our internal controls, both in accordance with current standards and as standards are modified over time, we could trigger an event of default under our credit facilities or lose the confidence of the investing community, both of which could result in a material adverse effect on our stock price, limit our ability to borrow funds, or result in the application of unfavorable commercial terms to borrowings then outstanding.
The impact of foreign trade relations and associated tariffs could adversely impact our business.
We currently source a number of raw materials from international suppliers. Import tariffs, taxes, customs duties and/or other trading regulations imposed by the U.S. government on foreign countries, or by foreign countries on the U.S., could significantly increase the prices we pay for certain raw materials, such as aluminum and wood, that are critical to our ability to manufacture our products. In addition, we may be unable to find a domestic supplier to provide the necessary raw materials on an economical basis in the amounts we require. If the cost of our raw materials increases, or if we are unable to procure the necessary raw materials required to manufacture our products, then we could experience a negative impact on our operating results, profitability, customer relationships and future cash flows.
Company Risks
Our business will suffer if we are unable to adequately address potential supplier or customer pricing pressures, both with respect to OEMs that have significant pricing leverage over suppliers, and to large suppliers who have significant pricing leverage over their customers.
Our primary customers are OEMs, who have substantial leverage in setting purchasing and payment terms. In addition, many of our suppliers are large international conglomerates with numerous customers that are much larger than us, which lessens our leverage in pricing and supply negotiations. We attempt to manage this pricing pressure and to preserve our business relationships with suppliers and OEMs by negotiating reasonable price concessions when needed, and by reducing our production costs through various measures, which may include managing our purchase process to control the cost of our raw materials and components, maintaining multiple supply sources where possible, and implementing cost-effective process improvements. However, our efforts in this regard may not be successful and our operating margins could be negatively impacted.
Our revenues could decline or we may lose business if our customers vertically integrate their operations, diversify their supplier base, or transfer manufacturing capacity to other regions.
Certain of our businesses or product lines are largely dependent on a relatively few large customers. Although we believe we have an extensive customer base, if we were to lose one of these large customers or if one such customer were to materially reduce its purchases as a result of vertical integration, supplier diversification, or a shift in regional focus, our revenue, general financial condition and results of operations could be adversely affected.
Our credit facility contains certain operational restrictions, reporting requirements, and financial covenants that limit the aggregate availability of funds.
Our revolving credit facility contains certain financial covenants and other operating and reporting requirements that could present risk to our operating results or limit our ability to access capital for use in the business. For a full discussion of the various covenants and operating requirements imposed by our revolving credit facility and information related to the potential limitations on our ability to access capital, see Item 7, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations-Liquidity and Capital Resources,” included elsewhere in this Annual Report on Form 10-K.
We may not be able to successfully manage or integrate acquisitions, and if we are unable to do so, then our profitability could be adversely affected.
We cannot provide assurance that we will successfully manage or integrate acquisition targets once we have purchased them. If we acquire a business for which we do not fully understand or appreciate the specific business risks, if we overvalue or fail to conduct effective due diligence on an acquisition, or if we fail to effectively and efficiently integrate a business that we acquire, then there could be a material adverse effect on our ability to achieve the projected growth and cash flow goals associated with the new business, which could result in an overall material adverse effect on our long-term profitability or revenue generation.
If our information technology systems fail, or if we experience an interruption in our operations due to an aging information system infrastructure, then our results of operations and financial condition could be materially adversely affected.
The failure of our information technology systems, our inability to successfully maintain, enhance and/or replace our information technology systems when necessary, or a significant compromise of the integrity or security of the data that is generated from our information technology systems, could adversely affect our results of operations and could disrupt business and prevent or severely limit our ability to respond to data requests from our customers, suppliers, auditors, shareholders, employees or government authorities.
We are subject to data security and privacy risks that could negatively affect our results or operations.
In addition to our own sensitive and proprietary business information, we collect transactional and personal information about our customers and employees. Any breach, including ransomware attacks or other cybersecurity breaches, of our or our service providers’ network or other vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers’ or employees’ personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business or our vendor and customer relationships, and could also result in unwanted media attention, reputational damage, or the imposition of fines, lawsuits, or significant legal or remediation expenses.
Epidemics, pandemics or other disease outbreaks could significantly disrupt our operations or those of our customers or suppliers.
If the COVID-19 coronavirus continues to disrupt the worldwide economy, or if similar widespread disease outbreaks occur in the future, our business, financial condition and results of operations could be negatively affected to the extent such event harms the economy or region in which we operate.
Our business could be materially and adversely affected by the occurrence of a widespread health epidemic or pandemic. In particular, any outbreak or resurgence of COVID-19 such as the increased presence and spread of the Omicon variant, Delta variant or any other future variants, or governmental imposition of mandatory or voluntary closures in areas where our manufacturing facilities, suppliers or customers are located, could severely disrupt our operations and result in (a) plant slowdowns or shutdowns, (b) difficulty obtaining necessary supplies, and (c) reduced customer orders and revenues. In addition to this potential direct impact on our facilities and operations, continuing outbreaks of the virus could negatively impact our industry and end markets as a whole, or result in a longer-term economic recession. Any of these factors could negatively affect our business, financial condition, cash flows, profitability, and results of operations.
The COVID-19 pandemic has had and may continue to create inefficiencies or interruptions in the supply chain as our suppliers may be forced to close their own plants or prove unable to obtain their own raw materials. If our suppliers are unable to timely meet our supply needs, it could impact our ability to provide our customers with high quality products on a timely basis, which could result in order cancellations, delivery refusals, price concessions, or other negative customer outcomes, any
of which could negatively impact our business, revenues, financial condition, results of operations and liquidity. We could also be forced to pay higher prices for the supplies we purchase, which could negatively impact our results of operations and profitability.
We may not have the right personnel in place to achieve our operating goals, and the rural location of some of our operations may make it difficult to locate or hire highly skilled employees.
We operate in some rural areas and small towns where the competition for labor can be fierce, and where the pool of qualified employees may be very small. If we are unable to obtain or retain skilled workers and adequately trained professionals to conduct our business, we may not be able to manage our business to the necessary high standards. In addition, we may be forced to pay higher wages or offer other benefits that might impact our cost of labor and thereby negatively impact our profitability.
Equipment failures or catastrophic loss at any of our manufacturing facilities could prevent us from producing our products.
An interruption in production capabilities at any of our facilities due to equipment failure, catastrophic loss, or other reasons could result in our inability to manufacture products, which could severely affect delivery times, return or cancellation rates, and future sales, any of which could result in lower sales and earnings or the loss of customers. Although we have a disaster recovery plan in place, we currently have one plant which is the sole source for our insulating glass spacer business in the U.S. If that plant were to experience a catastrophic loss and our disaster recovery plan were to fail, it could have a material adverse effect on our results of operations or financial condition.
Product liability claims and product replacements could harm our reputation, revenue generation and financial condition, or could result in costs related to litigation, warranty claims, or customer accommodations.
We have, on occasion, found flaws and deficiencies in the manufacturing, design, testing or installation of our products, which may result from a product defect, a defect in a component part provided by our suppliers, or as a result of the product being installed incorrectly by our customer or an end user. The failure of products before or after installation could result in litigation or claims by our customers or other users of the products, or in the expenditure of costs related to warranty coverage, claim settlement, litigation, or customer accommodation. In addition, we are currently party to certain legal claims related to a commercial sealant product, and there is no assurance that we will prevail on those claims. We may be required to expend legal fees, expert costs, and other costs associated with defending the claims and/or lawsuits. We may elect to enter into legal settlements or be forced to pay any judgments that result from an adverse court decision. Any such settlements, judgments, fees and/or costs could negatively impact our profitability, results of operations, cash flows and financial condition.
Our insurance coverage may be inapplicable or inadequate to cover certain liabilities, and our insurance policies may exclude coverage for certain matters.
While we maintain a robust insurance program that is reasonably designed to cover our known and unknown risks, there is no assurance that our insurance carriers will voluntarily agree to cover every potential liability, or that our insurance policies include limits high enough to cover all liabilities associated with our business or products. In addition, coverage under our insurance policies may be unavailable in the future for certain products. For example, during a prior renewal of our insurance program, our insurance carriers excluded future coverage of a product line we no longer manufacture or sell. If our insurers refuse to cover claims, in whole or in part, or if we exhaust our available insurance coverage at some point in the future, then we might be forced to expend legal fees and settlement or judgment costs, which could negatively impact our profitability, results of operations, cash flows and financial condition.
Climate change and related extreme weather events could disrupt our supply chain, decrease customer demand for our products, or damage our manufacturing facilities.
We, along with many of our customers and suppliers, operate manufacturing facilities in areas at risk for extreme weather events such as hurricanes, tornadoes, drought, wildfires, winter storms, or floods. Ongoing climate change has increased the frequency and severity of these events and the related risk of a catastrophic weather event affecting one of our plants, or a plant owned by one of our customers or suppliers. If such an event occurs at a facility belonging to one of our customers, we could see reduced demand for our products. If such an event occurs at a facility belonging to us or one of our suppliers, we may be unable to timely and cost-effectively manufacture products for our customers. These declines in demand or impacts to our ability to manufacture our products could negatively impact our revenues, earnings, cash flow, and other operating results.
Changes in taxation as well as the inherent difficulty in quantifying potential tax effects of business decisions could have a material adverse effect on the results of our operations, financial condition, or cash flows.
We file income tax returns, including tax returns for our subsidiaries, with federal, state, local, and foreign jurisdictions. We consider the United States to be our most significant jurisdiction; however, all tax returns are subject to routine compliance review by the taxing authorities in the jurisdictions in which we file tax returns in the ordinary course of business. We make judgments regarding the utilization of existing deferred tax assets and the potential tax effects of various financial transactions and results of operations to estimate our obligations to taxing authorities. Tax obligations include income, franchise, real estate, sales and use, and employment-related taxes. These judgments include reserves for potential adverse outcomes regarding tax positions that have been taken. Changes in federal, state, or local tax laws, adverse tax audit results, or adverse tax rulings on positions taken could have a material adverse effect on the results of our operations, financial condition, or cash flows.
Risks Associated with Investment in Quanex Securities
Our corporate governance documents and the provisions of Delaware law may delay or preclude a business acquisition or divestiture that stockholders may consider to be favorable, which might result in a decrease in the value of our common shares.
Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions include restrictions on the ability of our stockholders to remove directors and supermajority voting requirements for stockholders to amend our organizational documents and limitations on action by our stockholders by written consent. In addition, our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Although we believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics, and thereby provide for an opportunity for us to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some stockholders.
We have the ability to issue additional equity securities, which would lead to dilution of our issued and outstanding common stock.
We are authorized to issue, without stockholder approval, 1,000,000 shares of preferred stock, no par value, in one or more series, which may give other stockholders dividend, conversion, voting, and liquidation rights, among other rights, which may be superior to the rights of holders of our common stock. The issuance of additional equity securities or securities convertible into equity securities would result in dilution of existing stockholders' equity interests. Our Board of Directors has no present intention to issue any such preferred shares, but has the right to do so in the future. In addition, we were authorized, by prior stockholder approval, to issue up to 125,000,000 shares of our common stock, $0.01 par value per share, of which 37,273,510 were issued at October 31, 2021. These authorized shares can be issued, without stockholder approval, as securities convertible into either common stock or preferred stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
The following table lists our principal properties by location, general character and use as of October 31, 2021.
Location Character & Use of Property
Executive Offices
Houston, Texas* Executive corporate office
North American Fenestration Segment
Akron, Ohio* Segment executive office and R&D facility
Rice Lake, Wisconsin Fenestration products
Cambridge, Ohio* Flexible spacer and solar adhesives
Richmond, Kentucky Vinyl and composite extrusions
Kent, Washington* Vinyl and composite extrusions
European Fenestration Segment
Denby, United Kingdom* Vinyl and composite extrusions
Heinsberg, Germany* Flexible spacer
North American Cabinet Components Segment
St. Cloud, Minnesota Hardwood doors & components for kitchen and bath
* These locations are leased as of October 31, 2021.
In addition to the locations identified above, our North American Fenestration Segment maintains 13 additional facilities for the manufacture and distribution of fenestration, spacer and extrusion products within the continental U.S., our European Fenestration Segment maintains one additional location for the production of spacer in the U.K., and our North American Cabinet Components Segment maintains 10 locations to manufacture hardwood doors and other wood components for kitchen and bath cabinets. See Note 1, “Nature of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We believe our operating properties are in good condition and well maintained, and are generally suitable and adequate to carry on our business. In fiscal 2021, on a consolidated basis, our facilities operated at approximately 62% of machine capacity. This capacity utilization is subject to variability by product line, seasonality, and location.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
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. Several claims were resolved during fiscal 2019, 2020 and 2021, and we continue to defend the remaining claims. 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.
We reserve for litigation loss contingencies that are both probable and reasonably estimable. We do not expect that losses resulting from any current legal proceedings will have a material adverse effect on our consolidated financial statements if or when such losses are incurred.
For discussion of environmental issues, see Item 1, “Business - Environmental and Employee Safety Matters,” discussed elsewhere in this Annual Report on Form 10-K.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been listed on the New York Stock Exchange under the ticker symbol NX since April 24, 2008. Electronic copies of our public filings are available on the Securities and Exchange Commission's website (www.sec.gov). There were approximately 1,742 holders of our common stock (excluding individual participants in securities positions listings) on record as of December 8, 2021.
Equity Compensation Plan Information
The following table summarizes certain information regarding equity compensation to our employees, officers and directors under equity compensation plans as of October 31, 2021:
(a) (b) (c)
Plan Category Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights(1)
Weighted-average
exercise price of
outstanding options,
warrants and rights(2)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders
218,304 $ 19.37 1,164,421
(1) Column (a) includes securities that may be issued upon future vesting of performance share awards that have been previously granted to key employees and officers. The number of securities reflected in this column includes the maximum number of shares that would be issued pursuant to these performance share awards assuming the performance measures are achieved. The performance measures may not be achieved.
(2) The weighted-average exercise price in column (b) does not include the impacts of the performance share awards or any securities that may be issued thereunder. For additional details, see Note 13, “Stock-Based Compensation,” of the accompanying financial statements in this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
Set forth below is a table summarizing the program and the repurchase of shares during the quarter ended October 31, 2021.
Period (a) Total Number of Shares Purchased (1)
(b) Average Price Paid per Share(1)
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
(d) Maximum US Dollars Remaining that May Yet Be Used to Purchase Shares Under the Plans or Programs(1)
August 2021 - $ - - $ 5,441,697
September 2021 199,625 $ 22.10 199,625 $ 1,029,645
October 2021 47,378 $ 21.37 47,378 $ 16
Total 247,003 $ 22.03 247,003
(1) 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. During the years ended October 31, 2021, 2020 and 2019, we purchased 478,311, 450,000 and 583,398 shares, respectively, at a cost of $11.2 million, $7.2 million and $9.6 million, respectively, under this program. As of October 31, 2021, this share repurchase authorization was exhausted and the program is now complete. In December 2021, our Board of Directors approved a 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 be made in open market transactions or privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. The program does not have an expiration date or a limit on the number of shares that may be purchased.
Stock Performance Graph
The following chart represents a comparison of the five year total return of our common stock to the Standard & Poor’s 500 Index (S&P 500 Index), the Russell 2000 Index, and a peer group index selected by us, which includes companies offering similar products and services to ours. The companies in our peer group for the year ended October 31, 2021 are AAON Inc., American Woodmark Corp, Apogee Enterprises Inc., Armstrong Flooring Inc., Cornerstone Building Brands Inc., CSW Industrials Inc., Gibraltar Industries Inc., Griffon Corporation, Insteel Industries Inc., L.B. Foster Company, Masonite International Corp, Mueller Water Products, Inc., Patrick Industries Inc., PGT Innovations, Inc., Simpson Manufacturing Company Inc., and Trex Company Inc.
INDEXED RETURNS For the Years Ended
Company Name / Index 10/31/2016 10/31/2017 10/31/2018 10/31/2019 10/31/2020 10/31/2021
Quanex Building Products Corporation $ 100.00 $ 135.72 $ 92.57 $ 122.92 $ 118.46 $ 136.68
S&P 500 Index $ 100.00 $ 123.63 $ 132.71 $ 151.73 $ 166.46 $ 237.90
Russell 2000 Index $ 100.00 $ 127.83 $ 130.22 $ 136.60 $ 136.42 $ 205.72
Peer Group $ 100.00 $ 127.92 $ 117.12 $ 148.38 $ 174.33 $ 242.10

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements based on our current assumptions, expectations, estimates and projections about our business and the homebuilding industry, and therefore, it should be read in conjunction with our consolidated financial statements and related notes thereto, as well as our “Cautionary Note Regarding Forward-Looking Statements” discussed elsewhere within this Annual Report on Form 10-K. For a listing of potential risks and uncertainties which impact our business and industry, see “Item 1A. Risk Factors.” Actual results could differ from our expectations due to several factors which include, but are not limited to: the impact of the ongoing COVID-19 pandemic, market price and demand for our products, economic and competitive conditions, capital expenditures, new technology, regulatory changes and other uncertainties. Unless otherwise required by law, we undertake no obligation to publicly update any forward-looking statements, even if new information becomes available or other events occur in the future.
Our Business
We manufacture components for original equipment manufacturers 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. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, vinyl fencing, water retention barriers, and conservatory roof components. 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 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.
We continue to invest in organic growth initiatives and we intend to continue evaluating business acquisitions that allow us to expand our existing fenestration and cabinet component footprint, enhance our product offerings, provide new complementary technology, enhance our leadership position within the markets we serve, and expand into new markets or service lines. We have disposed of non-core businesses in the past, and continue to evaluate our business portfolio to ensure that we are investing in markets where we believe there is potential future growth.
We currently have three reportable business segments: (1) North American Fenestration segment (“NA Fenestration”), comprising three operating segments, manufacturing vinyl profiles, IG spacers, screens and other fenestration components; (2) European Fenestration segment (“EU Fenestration”), comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles and conservatories, and the European insulating glass business manufacturing IG spacers; and (3) North American Cabinet Components segment (“NA Cabinet Components”), comprising our North American cabinet door and components business and two wood-manufacturing plants. 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 corporate general and administrative costs have been allocated to the reportable business 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 our accompanying consolidated financial statements. Corporate general and administrative expenses allocated during the years ended October 31, 2021, 2020 and 2019 were $21.6 million, $21.7 million and $18.3 million, respectively.
Notable Items
COVID-19 Impacts
On March 11, 2020, the WHO declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures. Our first priority with regard to the COVID-19 pandemic is to do everything we can to ensure the safety, health and welfare of our employees, customers, suppliers and other partners. With the implementation of health and safety practices at our facilities, we are continuing to supply the industry during this uncertain time, recognizing the essential role the construction industry plays in providing housing and necessary infrastructure.
As federal, state and local governments react to the public health crisis, significant uncertainties have been created in the economy. The COVID-19 pandemic and its related effects continue to have a significant adverse affect on many sectors of the economy and we may be further impacted.
As part of our response to the COVID-19 pandemic, we have taken the following measures:
•We are continuing to provide our products to support critical infrastructure needs while following national, state, and local guidelines required to continue operations during the existence of the pandemic and related local declarations of emergency. However, local or regional hotspots of the pandemic could result in other locations being temporarily idled due to the need to deep clean areas where an employee who has tested positive for COVID-19 worked or any similar impacts in our supply chain. We work with our customers to the extent idling affects fulfillment timing.
•We have taken precautionary measures intended to help minimize the risk of the virus to our employees by implementing social distancing, sanitizing the workspace, and requiring employees to report any COVID-19 symptoms to ensure safety as infection surges dictate.
•We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan.
Market Overview and Outlook
We believe the primary drivers of our operating results continue to be North American residential remodeling and replacement (R&R) and new home construction activity. We believe that housing starts and window shipments are indicators of activity levels in the homebuilding and window industries, and we use this data, as published by or derived from third-party sources, to evaluate the market. We have historically evaluated the market using data from the National Association of Homebuilders (NAHB) with regard to housing starts, and published reports by Ducker Worldwide, LLC (Ducker), a consulting and research firm, with regard to window shipments in the U.S. We obtain market data from Catalina research, a consulting and research firm, for insight into the U.S. residential wood cabinet demand.
In November 2021, the NAHB forecasted calendar-year housing starts (excluding manufactured units) to be 1.6 million in 2021, 2022 and 2023 calendar-years. The November 2021, Ducker forecast indicated that window shipments in the R&R market are expected to increase approximately 4.5%, 4% and 3% in the calendar-years ended 2021, 2022, 2023, respectively, and window shipments in the new construction market are expected to grow 13%, 2%, and 1% in the calendar-years ended 2021, 2022, and 2023, respectively, resulting in overall window shipment improvements of 8% in 2021, 3% in 2022, and 2% in 2023. Derived from reports published by Ducker, the overall increase in window shipments for the trailing twelve months ended September 30, 2021 was 8.9%. During this period, new construction activities increased 14.2% and R&R increased 4.7%. In November 2021, Catalina Research estimated that residential semi-custom cabinet demand in the U.S. is estimated to increase 13.4% in 2021 and 5.2% in 2022.
Our U.K. vinyl business (commonly referred to as “Liniar”) is largely focused on the sale of vinyl house systems under the trade name “Liniar” to smaller window manufacturers in the U.K. Liniar is one of the larger providers of vinyl extruded products in the U.K. in terms of volume shipped. Currently, the U.K. is experiencing a shortage in affordable housing, with rising demand due in part to a growing immigrant population. Liniar’s current primary customers are smaller window fabricators, as opposed to the larger OEMs that comprise a large portion of the North American market. These manufacturers seek the quality and technology of the specific products identified by the Liniar trade name. In addition, Liniar services non-fenestration markets including the manufacture of roofing for conservatories, vinyl decking and vinyl water retention barriers used for landscaping. We believe there are growth opportunities within these markets in the U.K. and potential synergies which may enable us to sell complementary products.
NA Cabinet Components manufactures kitchen and bathroom cabinet doors and components, amongst other products, using a variety of woods from traditional hardwoods to engineered wood products. Currently, most of the revenue in the NA Cabinet Components is earned in the U.S., so domestic housing starts and R&R activity constitute the primary drivers of this business as well. The cabinet door market is stratified as follows: stock (low-cost, low-variations), semi-custom (more customized, just-in-time manufacturing, higher price point) and custom (precise customer specifications, just-in-time manufacturing, high-end price point). NA Cabinet Component's primary market is semi-custom.
Our business is seasonal, particularly our fenestration business, as inclement weather during the winter months tends to slow down construction, particularly as related to “outside of the house” construction. To some extent, we believe our kitchen
and bathroom cabinet door business lessens the impact of seasonality on our operating results, as the cabinet business is “inside of the house” and less susceptible to weather.
We are impacted by regulation of energy standards. Although the U.S. government has been less aggressively pursuing higher energy efficiency standards in recent years, other countries have implemented higher energy efficiency standards which should bode well for our fenestration-related business in these markets, particularly our warm-edge spacer products.
Several commodities in our business are subject to pricing fluctuations, including polyvinyl resin (PVC), titanium dioxide (TiO2), petroleum products, aluminum and wood. For the majority of our customers and critical suppliers, we have price adjusters in place which effectively share the base pass-through price changes for our primary commodities with our customers commensurate with the market at large. Our long-term exposure to these price fluctuations is somewhat mitigated due to the contractual component of the adjuster program. However, these adjusters are not in place with all customers and for all commodities, and there is a level of exposure to such volatility due to the lag associated with the timing of price updates in accordance with our customer agreements, particularly with regard to hardwoods. In addition, some of these commodities, such as silicone, are in high demand, particularly in Europe, which can affect the cost of the raw materials, a portion of which we may not be able to fully recover. We also began to experience some supply disruptions as high demand reduced availability of raw materials.
The global economy remains uncertain due to global supply chain interruptions, inflationary pressures, currency devaluations, political unrest, terror threats, global pandemics such as COVID-19, and even the political landscape in the U.S. These and other macro-economic factors have impacted the global financial markets, which may have contributed to significant changes in foreign currencies. We continue to monitor our exposure to changes in exchange rates.
Comparison of the fiscal years ended October 31, 2021 and 2020
This table sets forth our consolidated results of operations for the twelve-month periods ended October 31, 2021 and 2020.
For the Years Ended October 31,
2021 2020 2021 vs. 2020
Amounts % of Sales Amounts % of Sales $ Change Variance %
(Dollars in millions)
Net sales $ 1,072.1 100% $ 851.6 100% $ 220.5 26%
Cost of sales (excluding depreciation and amortization) 831.6 78% 658.8 77% 172.8 (26)%
Selling, general and administrative 116.0 11% 89.7 11% 26.3 (29)%
Restructuring charges - -% 0.6 -% (0.6) 100%
Depreciation and amortization 42.7 4% 47.2 6% (4.5) 10%
Operating income 81.8 8% 55.3 6% 26.5 48%
Interest expense (2.5) -% (5.2) (1)% 2.7 52%
Other, net 0.8 -% 0.2 -% 0.6 300%
Income tax expense (23.1) (2)% (11.8) (1)% (11.3) (96)%
Net income $ 57.0 5% $ 38.5 5% $ 18.5 48%
Our year-over-year results by reportable segment follow. Our comparison of the results for the fiscal years ended October 31, 2020 and 2019 by reportable segment for the prior year comparative periods can be found in the annual report on Form 10-K for the year ended October 31, 2020.
Changes Related to Operating Income by Reportable Segment:
NA Fenestration
For the Years Ended October 31,
2021 2020 $ Change Variance %
(Dollars in millions)
Net sales $ 578.3 $ 483.4 $ 94.9 20%
Cost of sales (excluding depreciation and amortization) 450.4 371.8 78.6 (21)%
Selling, general and administrative 53.0 47.8 5.2 (11)%
Restructuring charges - 0.3 (0.3) 100%
Depreciation and amortization 18.6 23.6 (5.0) 21%
Operating income $ 56.3 $ 39.9 $ 16.4 41%
Operating income margin 10 % 8 %
Net Sales. Net sales increased $94.9 million, or 20%, for the twelve months ended October 31, 2021 compared to the same period in 2020, which was primarily driven by a $74.7 million increase in volumes, including a recovery from prior year COVID-19 impacts, and an increase in price and raw material surcharges of $20.2 million.
Cost of Sales. Cost of sales increased $78.6 million, or 21%, for the twelve months ended October 31, 2021 compared to the same period in 2020. Cost of sales, including labor, increased primarily due to higher volumes and price inflation during the period.
Selling, General and Administrative. Our selling, general and administrative expenses increased by $5.2 million, or 11%, for the twelve months ended October 31, 2021 compared to the same period in 2020. This increase was due primarily to higher compensation, including higher incentive accruals based on financial performance, and benefits year-over-year.
Restructuring Charges. Restructuring charges incurred during the twelve months ended October 31, 2020 relate to facility lease expense for a vinyl extrusion plant in the U.S. which was closed in January 2017. We exited the lease during December 2020.
Depreciation and Amortization. Depreciation and amortization expense decreased $5.0 million, or 21%, for the twelve months ended October 31, 2021 compared to the same period in 2020, reflecting the run-off of depreciation expense related to existing assets and disposals during the period.
EU Fenestration
For the Years Ended October 31,
2021 2020 $ Change Variance %
(Dollars in millions)
Net sales $ 251.6 $ 161.1 $ 90.5 56%
Cost of sales (excluding depreciation and amortization) 172.0 108.8 63.2 (58)%
Selling, general and administrative 29.9 22.7 7.2 (32)%
Depreciation and amortization 10.4 9.5 0.9 (9)%
Operating income $ 39.3 $ 20.1 $ 19.2 96%
Operating income margin 16 % 12 %
Net Sales. Net sales increased $90.5 million, or 56%, when comparing the twelve months ended October 31, 2021 compared to the same period in 2020, which was primarily driven by a $70.7 million increase in volumes, including a recovery from prior year COVID-19 impacts and the reopening of manufacturing facilities in the U.K. which were forced to close for several weeks in the second quarter of 2020, $11.8 million of foreign currency rate changes, and $8.0 million of base price increases.
Cost of Sales. The cost of sales increased $63.2 million, or 58%, for the twelve months ended October 31, 2021 compared to the same period in 2020. Cost of sales increased primarily due to higher volumes and price inflation during the period.
Selling, General and Administrative. Our selling, general and administrative expense increased $7.2 million, or 32%, for the twelve months ended October 31, 2021 compared to the same period in 2020. The increase is primarily due to higher
compensation, including higher incentive accruals based on financial performance, general expenses and foreign currency impacts year-over-year.
NA Cabinet Components
For the Years Ended October 31,
2021 2020 $ Change Variance %
(Dollars in millions)
Net sales $ 246.1 $ 210.1 $ 36.0 17%
Cost of sales (excluding depreciation and amortization) 211.1 179.8 31.3 (17)%
Selling, general and administrative 20.8 18.7 2.1 (11)%
Restructuring charges - 0.3 (0.3) 100%
Depreciation and amortization 13.3 13.7 (0.4) 3%
Operating income (loss) $ 0.9 $ (2.4) $ 3.3 138%
Operating income (loss) margin - % (1) %
Net Sales. Net sales increased $36.0 million, or 17%, for the twelve months ended October 31, 2021 compared to the same period in 2020, which was primarily driven by a $19.8 million increase in price and raw material indexes and a $16.2 million increase in volumes.
Cost of Sales. The cost of sales increased $31.3 million, or 17%, for the twelve months ended October 31, 2021 compared to the same period in 2020 as a primarily as a result of higher volumes and rising lumber prices, which are recovered on a lag.
Selling, General and Administrative. Our selling, general and administrative expense increased $2.1 million, or 11%, for the twelve months ended October 31, 2021 compared to the same period in 2020. The increase is primarily due to higher compensation, including higher incentive accruals based on financial performance, and general expenses year-over-year.
Restructuring Charges. Restructuring charges of $0.3 million in the twelve months ended October 31, 2020 related to severance, equipment moving and other charges incurred for a plant closure.
Unallocated Corporate & Other
For the Years Ended October 31,
2021 2020 $ Change Variance %
(Dollars in millions)
Net sales $ (3.9) $ (3.0) $ (0.9) (30)%
Cost of sales (excluding depreciation and amortization) (1.9) (1.6) (0.3) 19%
Selling, general and administrative 12.3 0.5 11.8 (2,360)%
Depreciation and amortization 0.4 0.4 - -%
Operating loss $ (14.7) $ (2.3) $ (12.4) (539)%
Net Sales. Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the twelve months ended October 31, 2021 and 2020.
Cost of Sales. Cost of sales for Corporate & Other consists of the elimination of inter-segment sales, profit in inventory, and other costs.
Selling, General and Administrative. Our selling, general and administrative expenses increased $11.8 million, or 2,360%, for the twelve months ended October 31, 2021 compared to the same period in 2020. This increase is attributable to $7.3 million of higher compensation expense related to the valuations of our stock based compensation awards and executive bonuses due to financial performance, $4.8 million of medical expenses due to a higher claims experience during the twelve months ended October 31, 2021 compared to the same period in 2020, and $1.4 million of loss on the sale of a plant. These increases were partially offset by a reduction in executive severance and legal charges.
Changes Related to Non-Operating Items:
Interest Expense. Interest expense decreased $2.7 million for the twelve months ended October 31, 2021 compared to the same period in 2020 primarily due to lower interest rates and lower overall debt outstanding. The weighted average interest rate for borrowings outstanding for the twelve months ended October 31, 2021 was 1.42% compared with 2.45% for the twelve months ended October 31, 2020.
Other, net. Other, net increased $0.6 million for the twelve months ended October 31, 2021 compared to the same period in 2020. The increase is primarily due to an increase in pension benefits year-over-year.
Income Taxes. We recorded income tax expense of $23.1 million on pre-tax income of $80.1 million for the twelve months ended October 31, 2021, an effective rate of 28.9%, and income tax expense of $11.8 million on pre-tax income of $50.3 million for the twelve months ended October 31, 2020, an effective rate of 23.5%. The effective rate for the twelve months ended October 31, 2021 was primarily impacted by state income taxes, global intangible low-taxed income, and changes in uncertain tax positions, partially offset by U.S. foreign tax credits. The effective rate for the twelve months ended October 31, 2020 was impacted by the true-up of our accruals and related deferred taxes from prior year filings and settled audits.
Liquidity and Capital Resources
Overview
Historically, our principal sources of funds have been cash on hand, cash flow from operations, and borrowings under our credit facilities. As of October 31, 2021, we had $40.1 million of cash and cash equivalents, $38.0 million outstanding under our credit facilities, $4.5 million of outstanding letters of credit and $15.5 million outstanding under finance leases. We had $282.5 million available for use under a revolving credit facility at October 31, 2021.
On October 18, 2018, we entered into a $325.0 million revolving credit facility (the “Credit Facility”), under which we borrowed $205.0 million. The proceeds from the Credit Facility, along with additional funding of $10.0 million of cash on hand, were used to repay outstanding borrowings under a previous credit agreement of $213.5 million, to settle outstanding interest accrued under the prior facility, and to pay loan fees which totaled $1.0 million. In addition, we expensed $1.1 million to write-off unamortized deferred financing fees associated with the previous credit agreement. The Credit Facility matures in 2023 (5-year term) and requires interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin (0.25% to 1.00%) or the LIBOR Rate plus an applicable margin (1.25% to 2.00%). We included deferred financing fees of $1.5 million as a contra-liability account, and are amortizing this balance straight-line over the term of the facility.
The weighted average interest rate of borrowings outstanding for the twelve-month periods ended October 31, 2021 and 2020 was 1.42% and 2.45%, respectively. We were in compliance with our debt covenants as of October 31, 2021. For additional details of the Credit Agreement, see “Item 1A. Risk Factors,” included elsewhere within this Annual Report on Form 10-K.
We expect to repatriate excess cash moving forward and use the funds to retire debt or meet current working capital needs. We believe our business model, our current cash reserves and the recent steps we have taken to strengthen our balance sheet leave us well-positioned to manage our business and remain in compliance with our debt covenants through the COVID-19 crisis as it continues to unfold.
Analysis of Cash Flow
The following table summarizes our cash flow results for the years ended October 31, 2021, 2020, and 2019:
Year Ended October 31,
2021 2020 2019
(In millions)
Cash flows provided by operating activities $ 78.6 $ 100.8 $ 96.4
Cash flows used for investing activities $ (18.7) $ (25.2) $ (23.6)
Cash flows used for financing activities $ (71.9) $ (55.1) $ (71.3)
Our year-over-year cash flow analysis follows. Our cash flow analysis for the fiscal years ended October 31, 2020 and 2019 for the prior year comparative periods can be found in the annual report on Form 10-K for the year ended October 31, 2020.
Operating Activities
Operating cash flow for the year ended October 31, 2021 decreased $22.2 million while cash flow for the year ended October 31, 2020 increased by $4.4 million. The decrease in cash provided by operating activities is primarily due to an increase in working capital partially offset by higher net income year-over-year due to increased demand. The increase in working capital was largely driven by an inventory build and raw material price inflation and an increase in accounts receivable.
Investing Activities
Cash used for investing activities for the year ended October 31, 2021 decreased $6.5 million compared to the year ended October 31, 2020 due to an increase of $4.8 million in proceeds from the disposition of capital assets and a $1.7 million decrease in capital expenditures.
At October 31, 2021, we had firm purchase commitments of approximately $5.2 million for the purchase or construction of capital assets. We plan to fund these capital expenditures through cash from operations or borrowings under our revolving credit facility.
Financing Activities
In the year ended October 31, 2021, cash used for financing activities was $71.9 million and related primarily to net debt repayments of $65.7 million, share repurchases of $11.2 million and payment of dividends of $10.8 million, partially offset by $16.3 million of proceeds from the exercise of stock options. In the year ended October 31, 2020, cash used for financing activities was $55.1 million and related primarily to net debt repayments of $40.5 million, payment of dividends of $10.5 million, and share repurchases of $7.2 million.
Liquidity Requirements
Our strategy for deploying cash is to invest in organic growth opportunities, develop our infrastructure, and explore strategic acquisitions. Other uses of cash include paying cash dividends to our shareholders and repurchasing our own stock. We maintain cash balances in foreign countries which totaled $10.6 million and $16.8 million as of October 31, 2021 and 2020. During the years ended October 31, 2021 and 2020, we repatriated $28.4 million and $31.9 million, respectively, of foreign earnings from our international divisions.
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.
Senior Credit Facility
We maintain our $325.0 million Credit Facility, which contains a revolving 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 Credit Facility has a five-year term, maturing on October 18, 2023, and requires interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin or the LIBOR Rate 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 Credit Facility. The applicable margin and commitment fees range from 0.45% to 2.30%, depending upon the type of loan and consolidated leverage ratio. The Credit Facility contains appropriate provisions to substitute LIBOR with a replacement rate upon transition away from LIBOR. These provisions include a temporary conversion of applicable interest for all borrowings outstanding to be calculated as base rate loans until such time that the replacement rate is agreed upon.
The Credit Facility provides for revolving credit commitments for a minimum principal amount of $10.0 million, up to an aggregate amount of $150.0 million, 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 Facility.
The 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 2.25 to 1.00, and (2) Consolidated Leverage Ratio requirement, whereby we must not permit the Consolidated Leverage Ratio, as defined, to be greater than 3.25 to 1.00.
In addition to maintaining these financial covenants, the 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 million per year) and to conduct other transactions as further defined in the 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 $25.0 million. Substantially all of our domestic assets, with the exception of real property, are pledged as collateral for the Credit Facility.
Issuer Purchases of Equity Securities
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. Repurchases under the program were made in open market transactions or privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. During the years ended October 31, 2021, 2020 and 2019, we purchased 478,311, 450,000 and 583,398 shares, respectively, at a cost of $11.2 million, $7.2 million and $9.6 million, respectively, under this program. As of October 31, 2021, this share repurchase authorization was exhausted and the program is now complete.
Critical Accounting Policies and Estimates
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.
While there have been no changes in the application of principles, methods, and assumptions used to determine our significant estimates, we may be required to revise certain accounting estimates and judgments related to the economic and business impact of the COVID-19 pandemic, such as, but not limited to, those related to the valuation of goodwill, intangibles, long-lived assets, accounts receivable, and inventory, which could have a material adverse effect on our financial position and results of operations.
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. No impairment charges were incurred with regard to our property, plant and equipment for the years ended October 31, 2021, 2020 and 2019.
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.
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 uses 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.
As a result of quantitative assessments performed during the year ended October 31, 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.
For the year ended October 31, 2020, the World Health Organization's declaration of COVID-19 as a global pandemic also created significant changes in market conditions that were indicators of triggering events which necessitated an evaluation of certain long-term assets, including goodwill, for potential impairment. We performed quantitative assessments based upon 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, including goodwill, were not impaired.
At our annual testing date, August 31, 2021, 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 the two reporting units in the NA Fenestration segment and one 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 the reporting units in the NA Fenestration segment and the EU Fenestration segment that were assessed qualitatively. We also updated the quantitative assessments for the reportable unit in the NA Cabinet Components segment and the second reportable unit in the EU Fenestration segment. We determined the fair value of these reportable units exceeded the carrying value by 17.6% and 113.6%, respectively, and concluded that no impairment was necessary.
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, 2021 and 2020 totaled $1.4 million and $0.5 million, respectively, and 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 deferred tax assets recorded as of October 31, 2021, 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. Our total gross deferred tax assets at October 31, 2021 and 2020 totaled $13.8 million and $14.3 million, respectively, against which we had recorded a valuation allowance of $1.2 million and $1.5 million, respectively.
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 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 provision for excess or obsolete inventory. For the years ended October 31, 2021, 2020 and 2019, our inventory reserves are approximately 3%, 10%, and 5% of gross inventory, respectively.
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. The measurement of liabilities related to these plans is based on our assumptions related to future events, including expected return on plan assets 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 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, 2021, our projected benefit obligation (PBO) and accumulated benefit obligation (ABO) each exceeded the fair value of the plan assets by $4.7 million. As a comparison, our PBO and ABO exceeded the fair value of plan assets by $10.7 million as of October 31, 2020. During fiscal 2021, we contributed $0.5 million to the pension plan to meet minimum contribution requirements. 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.
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, 2021 and 2020, a net actuarial loss of $4.5 million and $9.9 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, 2021 and 2020. The effect on fiscal years after 2021 will depend on the actual experience of the plans.
Mortality assumptions used to determine the obligations for our pension plans are based on the Pri-2012 base mortality table with MP-2020 mortality improvement scale.
Contractual Obligations and Commercial Commitments
Our 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 2022, we do not expect to need to contribute to our pension plan to meet our minimum contribution requirements. Pension contributions beyond 2022 cannot be determined since the amount of any contribution is heavily dependent on the future economic environment and investment returns on pension plan assets. Obligations are based on current and projected obligations of the plans, performance of the plan assets, if applicable, and the timing and amount of funding contributions. At October 31, 2021, we have recorded a long-term liability for deferred pension benefits totaling $4.7 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 changes in the market value of certain equity securities, including our common stock. As of October 31, 2021, our liability under the supplemental benefit plan and the deferred compensation plan was approximately $2.9 million and $3.4 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 we believe would be material to investors and for which it is reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Effects of Inflation
We have experienced the impact of inflation on our cost of raw materials, labor, freight and overhead, particularly during the year ended October 31, 2021. Although we use contractual price indexing along with periodic base price increases to minimize the effect of inflation on our results, we have not been able to fully recover all of the inflationary cost increases. We cannot provide assurance, however, that our results of operations and financial position will not be materially impacted by inflation in the future.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This ASU sets forth a “current expected credit loss” model, which requires the measurement of all expected credit losses for financial instruments or other assets (e.g., trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. We adopted this amendment on November 1, 2020, with no material impact on our condensed consolidated financial statements as pre-existing processes for estimating credit losses for trade receivables aligned with the expected credit loss model.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 2021, a hypothetical 1.0% increase or decrease in interest rates could result in approximately $0.4 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 Credit Facility as of October 31, 2021.
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. There were no derivatives outstanding as of October 31, 2021 or 2020. These foreign currency derivative contracts hedge 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, net in the accompanying consolidated statements of income (loss). To the extent the gain or loss on the derivative instrument offsets the gain or loss from the remeasurement of the underlying foreign currency balance, changes in exchange rates should have no effect.
On June 23, 2016, citizens of the U.K. voted to exit the European Union (E.U.) (referred to as Brexit). Since the 2016 Brexit vote, we have been impacted by foreign currency fluctuations of the British Pound Sterling and delays within the supply chain for the procurement of raw materials. These have caused fluctuations in foreign currency translation impacts, as well as raw material cost increases from upstream suppliers located outside of the U.K.
Commodity Price Risk
We purchase PVC as the significant raw material consumed in the manufacture of vinyl extrusions. We have resin adjusters in place with a majority of our customers and our resin supplier that is adjusted based upon published indices for lagging resin prices. These adjusters effectively share 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. However, there is a level of exposure to short-term volatility due to timing lags.
We adjust the pricing of petroleum-based raw materials for the majority of our customers who purchase products using these materials. This is intended to offset the fluctuating cost of products which are highly correlated to the price of oil including butyl and other oil-based raw materials. This 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 increases in oil-based raw material prices is significantly reduced under this program.
Similarly, NA Cabinet Components includes a price 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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
Quanex Building Products Corporation
Page
Reports of Independent Registered Public Accounting Firm 34
Management's Annual Report on Internal Control over Financial Reporting 37
Consolidated Financial Statements
Consolidated Balance Sheets 38
Consolidated Statements of Income (Loss) 39
Consolidated Statements of Comprehensive Income (Loss) 40
Consolidated Statement of Stockholders’ Equity 41
Consolidated Statements of Cash Flow 42
Notes to Consolidated Financial Statements
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, 2021 and 2020, the related consolidated statements of income (loss), comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2021, 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, 2021, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated December 17, 2021 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 supporting 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 matters
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) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter 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 opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Quantitative goodwill impairment assessment of the reporting unit included in the North American Cabinet Components operating segment
As described in Note 1 to the financial statements, the Company performs its annual goodwill impairment test as of August 31. The Company performed a quantitative assessment of the reporting unit included in the North American Cabinet Components operating segment primarily due to the recent impairment of goodwill during the second and fourth quarters of 2019 and the history of a narrow margin of fair value over carrying value in the quantitative assessments performed in prior years. We identified the estimation of the fair value of this reporting unit as a critical audit matter.
The principal considerations for our determination that the estimation of the fair value of this reporting unit is a critical audit matter relates to the income approach which is one method management uses to estimate the fair value of the reporting 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, including future cash flows related to the reporting unit and 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 this reporting unit 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, cash flows and WACC.
•We evaluated management’s ability to accurately forecast revenues, earnings and cash flows by comparing actual results to management’s historical forecasts.
•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 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.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2014.
Houston, Texas
December 17, 2021
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, 2021, based on criteria established in the 2013 Internal Control-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, 2021, based on criteria established in the 2013 Internal Control-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, 2021, and our report dated December 17, 2021 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 Controls over 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
Houston, Texas
December 17, 2021
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, 2021 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, 2021, 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.
QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of October 31, 2021 and 2020
October 31,
2021 2020
(In thousands, except share
amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 40,061 $ 51,621
Accounts receivable, net of allowance for credit losses of $340 and $161
108,309 88,287
Inventories, net 92,529 61,181
Prepaid and other current assets 8,148 6,217
Total current assets 249,047 207,306
Property, plant and equipment, net of accumulated depreciation of $336,493 and $340,144
178,630 184,104
Operating lease right-of-use assets 52,708 51,824
Goodwill 149,205 146,154
Intangible assets, net 82,410 93,068
Other assets 5,323 9,129
Total assets $ 717,323 $ 691,585
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 86,765 $ 77,335
Accrued liabilities 56,156 38,289
Income taxes payable 6,038 6,465
Current maturities of long-term debt 846 692
Current operating lease liabilities 8,196 7,459
Total current liabilities 158,001 130,240
Long-term debt 52,094 116,728
Noncurrent operating lease liabilities 45,367 44,873
Deferred pension and postretirement benefits 4,737 10,923
Deferred income taxes 21,965 19,116
Liability for uncertain tax positions 1,388 522
Other liabilities 13,989 13,424
Total liabilities 297,541 335,826
Commitments and contingencies
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 37,273,510 and 37,296,166 respectively; outstanding 33,274,785 and 32,804,737, respectively
373 373
Additional paid-in-capital 254,162 253,458
Retained earnings 259,718 213,517
Accumulated other comprehensive loss (21,770) (33,024)
Less: Treasury stock at cost, 3,998,725 and 4,491,429 shares, respectively
(72,701) (78,565)
Total stockholders’ equity 419,782 355,759
Total liabilities and stockholders' equity $ 717,323 $ 691,585
See notes to consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Years Ended October 31, 2021, 2020 and 2019
Year Ended October 31,
2021 2020 2019
(In thousands, except per share amounts)
Net sales $ 1,072,149 $ 851,573 $ 893,841
Cost and expenses:
Cost of sales (excluding depreciation and amortization) 831,541 658,750 694,420
Selling, general and administrative 115,967 89,707 101,292
Restructuring charges 39 622 370
Depreciation and amortization 42,732 47,229 49,586
Asset impairment charges - - 74,600
Operating income (loss) 81,870 55,265 (26,427)
Non-operating income (expense):
Interest expense (2,530) (5,245) (9,643)
Other, net 754 280 116
Income (loss) before income taxes 80,094 50,300 (35,954)
Income tax expense (23,114) (11,804) (10,776)
Net income (loss) $ 56,980 $ 38,496 $ (46,730)
Basic earnings (loss) per common share $ 1.72 $ 1.18 $ (1.42)
Diluted earnings (loss) per common share $ 1.70 $ 1.17 $ (1.42)
Weighted-average common shares outstanding:
Basic 33,193 32,689 32,960
Diluted 33,495 32,821 32,960
Cash dividends per share
$ 0.32 $ 0.32 $ 0.32
See notes to consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended October 31, 2021, 2020 and 2019
Year Ended October 31,
2021 2020 2019
(In thousands)
Net income (loss) $ 56,980 $ 38,496 $ (46,730)
Other comprehensive income (loss):
Foreign currency translation adjustments gain 7,152 1,078 1,864
Change in pension from net unamortized gain (loss) (pretax) 5,477 (376) (6,572)
Change in pension from net unamortized gain (loss) tax (expense) benefit (1,375) 91 1,596
Total other comprehensive income (loss), net of tax 11,254 793 (3,112)
Comprehensive income (loss) $ 68,234 $ 39,289 $ (49,842)
See notes to consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Years Ended October 31, 2021, 2020 and 2019
Common Stock Accumulated Treasury Stock Total
Shares Amount Additional Paid-in
Capital Retained
Earnings Other Comprehensive Loss Shares Amount Stockholders’
Equity
(In thousands, except share amounts)
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 adjustments - - - - 1,864 - - 1,864
Change in pension from net unamortized loss (net of tax benefit of $1,596)
- - - - (4,976) - - (4,976)
Common dividends ($0.32 per share)
- - - (10,644) - - - (10,644)
Treasury shares purchased, at cost - - - - - (583,398) (9,551) (9,551)
Expense related to stock-based compensation - - 2,045 - - - - 2,045
Stock options exercised - 1 - (322) - 204,770 3,609 3,288
Restricted stock awards granted - - (1,720) (505) - 124,800 2,225 -
Other (63,415) (1) (330) - - - - (331)
Balance at October 31, 2019 37,370,402 $ 374 $ 254,673 $ 185,703 $ (33,817) (4,348,613) $ (76,746) $ 330,187
Net income - - - 38,496 - - - 38,496
Foreign currency translation adjustments - - - - 1,078 - - 1,078
Change in pension from net unamortized loss (net of tax of benefit of $91)
- - - - (285) - - (285)
Common dividends ($0.32 per share)
- - - (10,534) - - - (10,534)
Expense related to stock-based compensation - - 879 - - - 879
Treasury shares purchased, at cost - - - - - (450,000) (7,233) (7,233)
Stock options exercised - - 66 (242) - 215,733 3,801 3,625
Restricted stock awards granted - - (1,212) 94 - 63,400 1,118 -
Performance share awards vested - - (495) - - 28,051 495 -
Other (74,236) (1) (453) - - - - (454)
Balance at October 31, 2020 37,296,166 $ 373 $ 253,458 $ 213,517 $ (33,024) (4,491,429) $ (78,565) $ 355,759
Net income - - - 56,980 - - - 56,980
Foreign currency translation adjustments - - - - 7,152 - - 7,152
Change in pension from net unamortized loss (net of tax expense of $1,375)
- - - - 4,102 - - 4,102
Common dividends ($0.32 per share)
- - - (10,779) - - - (10,779)
Treasury shares purchased, at cost - - - - - (478,311) (11,182) (11,182)
Expense related to stock-based compensation - - 1,970 - - - 1,970
Stock options exercised - - 1,073 - - 865,393 15,199 16,272
Restricted stock awards granted - - (1,282) - - 73,300 1,282 -
Performance share awards vested - - (565) - - 32,322 565 -
Other (22,656) - (492) - - - - (492)
Balance at October 31, 2021 37,273,510 $ 373 $ 254,162 $ 259,718 $ (21,770) (3,998,725) $ (72,701) $ 419,782
See notes to consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended October 31, 2021, 2020 and 2019
Year Ended October 31,
2021 2020 2019
(In thousands)
Operating activities:
Net income (loss) $ 56,980 $ 38,496 $ (46,730)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization 42,732 47,229 49,586
Loss on disposition of capital assets 3,039 - 732
Stock-based compensation 1,970 879 2,045
Deferred income tax 1,785 (189) 3,260
Asset impairment charges - - 74,600
Other, net 2,126 1,689 2,176
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (19,017) (5,766) 574
(Increase) decrease in inventory (31,382) 6,119 3,797
(Increase) decrease in other current assets (1,817) 2,896 (2,014)
Increase in accounts payable 7,097 15,922 8,124
Increase (decrease) in accrued liabilities 16,212 (3,156) (6,760)
(Decrease) increase in income taxes payable (378) 237 3,416
(Decrease) increase in deferred pension and postretirement benefits (708) (2,775) 2,531
Increase (decrease) in other long-term liabilities 477 (236) 513
Other, net (528) (549) 522
Cash provided by operating activities 78,588 100,796 96,372
Investing activities:
Capital expenditures (24,008) (25,726) (24,883)
Proceeds from disposition of capital assets 5,300 502 1,324
Cash used for investing activities (18,708) (25,224) (23,559)
Financing activities:
Borrowings under credit facility - 114,500 83,500
Repayments of credit facility borrowings (65,000) (154,000) (136,000)
Repayments of other long-term debt (680) (1,027) (1,526)
Common stock dividends paid (10,779) (10,534) (10,644)
Issuance of common stock 16,272 3,626 3,287
Payroll tax paid to settle shares forfeited upon vesting of stock (492) (454) (330)
Purchase of treasury stock (11,182) (7,233) (9,551)
Cash used for financing activities (71,861) (55,122) (71,264)
Effect of exchange rate changes on cash and cash equivalents 421 303 316
(Decrease) increase in cash and cash equivalents (11,560) 20,753 1,865
Cash and cash equivalents at beginning of period 51,621 30,868 29,003
Cash and cash equivalents at end of period $ 40,061 $ 51,621 $ 30,868
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 three 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 16, “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”, the “Company”, “we”, “us” and “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.
A summary of our significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Revenue from Contracts with Customers
Revenue recognition
We recognize revenue that reflects the consideration we expect to receive for product sales upon transfer to customers. Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we are entitled to consideration in exchange for 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 products, 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.
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 account for product returns related to general returns and product nonconformance.
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 costs
We account for shipping and handling services as fulfillment services; accordingly, freight revenue is 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 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.
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, 2021, 2020, and 2019 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 16, “Segment Information.”
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Year Ended October 31,
2021 2020 2019
(in thousands)
NA Fenestration:
United States - fenestration $ 507,634 $ 427,616 $ 439,536
International - fenestration 34,610 28,585 31,106
United States - non-fenestration 24,534 19,279 17,061
International - non-fenestration 11,554 7,935 16,134
$ 578,332 $ 483,415 $ 503,837
EU Fenestration:
International - fenestration $ 199,511 $ 134,432 $ 139,638
International - non-fenestration 52,088 26,622 25,359
$ 251,599 $ 161,054 $ 164,997
NA Cabinet Components:
United States - fenestration $ 13,326 $ 11,842 $ 13,144
United States - non-fenestration 230,559 196,479 214,211
International - non-fenestration 2,190 1,778 2,289
$ 246,075 $ 210,099 $ 229,644
Unallocated Corporate & Other:
Eliminations $ (3,857) $ (2,995) $ (4,637)
$ (3,857) $ (2,995) $ (4,637)
Net sales $ 1,072,149 $ 851,573 $ 893,841
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 Credit Losses
Certain of our businesses or product lines are largely dependent on a relatively few large customers. Although we believe we have an extensive customer base, the loss of one 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 year ended October 31, 2021, no customers provided more than 10% of our consolidated net sales. For the year ended October 31, 2020, one customer provided more than 10% of our consolidated net sales.
We have established an allowance for credit 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 losses as of October 31, 2021. 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 assets and liabilities as a period cost as incurred. 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 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.
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 insure 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.
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. 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.
Changes in market conditions throughout 2019 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 NA Cabinet Components business. The World Health Organization's (WHO), declaration of COVID-19 as a global pandemic also created significant changes in market conditions throughout 2020 that have continued into 2021. We determined that these conditions were indicators of a triggering event in 2019 and 2020 which necessitated an evaluation of certain long-term assets used 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
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
primary operating assets to the net book value of the long-term assets, including goodwill, and determined that these assets were not impaired. There were no corresponding indicators of a triggering event in 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, 2021, 2020 and 2019.
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. 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, 2021 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.
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 uses 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.
As a result of quantitative assessments performed during the year ended October 31, 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At our annual testing date, August 31, 2021, 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 the two reporting units in the NA Fenestration segment and one of the 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 these three reporting units. Also, at 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 and 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 also elected to update the quantitative assessment of the other reportable unit in the EU Fenestration operating segment. We determined that the fair value of these reporting units exceeded their carrying values by approximately 17.6% and 113.6%, respectively. We concluded that no impairment was necessary.
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 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 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.
COVID-19 Impact
On March 11, 2020, the World Health Organization (WHO) declared the outbreak of COVID-19 as a global pandemic and advised aggressive containment action. The COVID-19 pandemic and its impacts are continuing to have an adverse effect on many sectors of the economy. Measures providing for business shutdowns generally exclude certain essential services commonly including critical infrastructure such as construction and the businesses that support that critical infrastructure. To date, we have not experienced significant challenges or expenses implementing crisis management plans intended for containment and prevention.
The health and safety of our employees are high priority. In response to the COVID-19 pandemic, we have taken additional measures to limit possible infections at the workplace by implementing social distancing, sanitizing the workspace, and requiring employees to report any COVID-19 symptoms to ensure safety as infection surges dictate. We continue to assess and refine these measures on an ongoing basis as public health guidance and applicable laws and regulations continue to evolve.
As a result of the economic and business impact of COVID-19, we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of goodwill, intangibles, right-of-use assets, long-lived assets, accounts receivable (including allowances for credit losses), and inventory, which could have a material adverse effect on our financial position and results of operations.
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.
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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 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. 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 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 ongoing 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.
Final regulations were published by the Internal Revenue Service regarding Uniform Capitalization (UNICAP) that became effective during fiscal 2020. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. In addition, the Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020 and the American Rescue Plan Act of 2021 (American Rescue Plan) was signed into law on March 11, 2021. We evaluated the UNICAP regulations, the CARES Act, the CAA and the American Rescue Plan and determined that there were no material impacts on our condensed consolidated financial statements.
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. We have not designated the derivative instruments we use as cash flow hedges under ASC Topic 815 “Derivatives and 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 income (loss) 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 - Stock 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, 2021 and 2020. See Note 13, “Stock-based Compensation.”
In addition, we have granted performance share awards which use return on net assets as the vesting condition and the awards settle in cash. We use 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 and recognize expense ratably over the vesting period of three years. We estimate that the performance measures will be met and shares will vest at target until the year of settlement (third year of cliff vesting). As of October 31, 2021, we have deemed 183,000 performance share awards related to the December 2018 grants as probable to vest.
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. 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 use a Monte Carlo simulation model to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 result in the issuance of contingent shares. As of October 31, 2021, we have deemed 87,919 shares related to the December 2018 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, 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, 2021, 2020 and 2019 (in thousands):
Year Ended October 31,
2021 2020 2019
Cash paid for interest $ 1,993 $ 4,715 $ 9,020
Cash paid for income taxes 22,160 12,118 5,081
Cash received from income tax refunds 381 352 1,020
Noncash investing and financing activities:
Increase in capitalized expenditures in accounts payable and accrued liabilities $ 1,124 $ 2,370 $ 2,897
Related Party Transactions
We did not participate in any related party transactions during the years ended October 31, 3021, 2020 and 2019.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Accounts Receivable and Allowance for Credit Losses
Accounts receivable consisted of the following as of October 31, 2021 and 2020 (in thousands):
October 31,
2021 2020
Trade receivables $ 107,725 $ 88,287
Other 924 161
Total 108,649 88,448
Less: Allowance for credit losses 340 161
Accounts receivable, net $ 108,309 $ 88,287
The changes in our allowance for credit losses were as follows (in thousands):
Year Ended October 31,
2021 2020 2019
Beginning balance as of November 1, 2020, 2019 and 2018 $ 161 $ 393 $ 325
Current period provision for expected credit
losses 267 262 700
Amounts written off (88) (494) (916)
Recoveries - - 284
Balance as of October 31, 2021, 2020 and 2019 $ 340 $ 161 $ 393
3. Inventories
Inventories consisted of the following at October 31, 2021 and 2020 (in thousands):
October 31,
2021 2020
Raw materials $ 49,867 $ 33,298
Finished goods and work in process 43,499 32,347
Supplies and other 2,099 2,020
Total 95,465 67,665
Less: Inventory reserves 2,936 6,484
Inventories, net $ 92,529 $ 61,181
The changes in our inventory reserve accounts were as follows (in thousands):
Year Ended October 31,
2021 2020 2019
Beginning balance as of November 1, 2020, 2019 and 2018 $ 6,484 $ 3,790 $ 4,375
Charged to cost of sales (568) 2,713 341
Write-offs (3,060) - (939)
Other 80 (19) 13
Balance as of October 31, 2021, 2020 and 2019 $ 2,936 $ 6,484 $ 3,790
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at October 31, 2021 and 2020 (in thousands):
October 31,
2021 2020
Land and land improvements $ 10,285 $ 10,298
Buildings and building improvements 101,740 100,576
Machinery and equipment 386,996 398,950
Construction in progress 16,102 14,424
Property, plant and equipment, gross 515,123 524,248
Less: Accumulated depreciation 336,493 340,144
Property, plant and equipment, net $ 178,630 $ 184,104
Depreciation expense for the years ended October 31, 2021, 2020, and 2019 was $28.8 million, $31.8 million and $34.3 million, respectively.
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, 2021, 2020, and 2019. See further discussion at Note 1, “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.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below presents the lease-related assets and liabilities recorded on the balance sheet at October 31, 2021 and 2020 (in thousands):
October 31,
Leases Classification 2021 2020
Assets
Operating lease assets Operating lease right-of-use assets $ 52,708 $ 51,824
Finance lease assets Property, plant and equipment (less accumulated depreciation of $2,300 and $1,089)
16,921 15,609
Total lease assets $ 69,629 $ 67,433
Liabilities
Current
Operating Current operating lease liabilities $ 8,196 $ 7,459
Finance Current maturities of long-term debt 1,114 962
Noncurrent
Operating Noncurrent operating lease liabilities 45,367 44,873
Finance Long-term debt 14,335 14,236
Total lease liabilities $ 69,012 $ 67,530
The table below presents the components of lease costs for the year ended October 31, 2021 and 2020 (in thousands):
Year Ended October 31,
2021 2020
Operating lease cost
$ 10,125 $ 8,866
Finance lease cost
Amortization of leased assets 1,165 1,181
Interest on lease liabilities 561 557
Variable lease costs
983 748
Total lease cost $ 12,834 $ 11,352
The table below presents supplemental cash flow information related to leases for the year ended October 31, 2021 and 2020 (in thousands):
Year Ended October 31,
2021 2020
Cash paid for amounts included in the measurement of lease liabilities:
Finance leases - financing cash flows $ 1,003 $ 1,092
Finance leases - operating cash flows $ 561 $ 557
Operating leases - operating cash flows $ 9,621 $ 8,681
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases $ 8,737 $ 19,559
Finance leases $ 469 $ 398
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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, 2021 and 2020:
October 31,
2021 2020
Weighted average remaining lease term (in years)
Operating leases 7.7 7.8
Financing leases 15.1 15.3
Weighted average discount rate
Operating leases 3.23 % 3.52 %
Financing leases 3.72 % 3.62 %
The table below presents the maturity of the lease liabilities as of October 31, 2021 (in thousands):
Operating Leases Finance Leases
2022 $ 9,747 $ 1,638
2023 9,337 1,549
2024 8,594 1,466
2025 7,129 1,402
2026 6,140 1,305
Thereafter 19,340 12,311
Total lease payments 60,287 19,671
Less: present value discount
6,724 4,222
Total lease liabilities $ 53,563 $ 15,449
6. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the years ended October 31, 2021 and 2020 was as follows (in thousands):
Year Ended October 31,
2021 2020
Beginning balance as of November 1, 2021 and 2020
$ 146,154 $ 145,563
Foreign currency translation adjustment 3,051 591
Balance as of October 31, 2021 and 2020
$ 149,205 $ 146,154
At our annual testing date, August 31, 2021, we had five reporting units with goodwill balances. Two of these units were included in our NA Fenestration segment and had goodwill balances of $35.9 million and $2.8 million, two units were included in our EU Fenestration segment with goodwill balances of $53.8 million and $17.5 million, and our NA Cabinet Components segment had one unit with a goodwill balance of $39.2 million. 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 assessments during the year ended October 31, 2021 are more fully described at Note 1, “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.”
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of October 31, 2021 and 2020 (in thousands):
October 31, 2021 October 31, 2021 October 31, 2020
Remaining Weighted Average Useful Life Gross Carrying
Amount Accumulated
Amortization Gross Carrying
Amount Accumulated
Amortization
Customer relationships 9 years $ 146,207 $ 81,086 $ 154,004 $ 80,441
Trademarks and trade names 8 years 56,437 39,589 55,745 37,314
Patents and other technology 6 years 22,525 22,084 22,386 21,312
Total $ 225,169 $ 142,759 $ 232,135 $ 139,067
We do not estimate a residual value associated with these intangible assets. See additional disclosure at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring."
During the years ended October 31, 2021 and 2020, we retired fully amortized identifiable intangible assets of $9.9 million and $0.3 million, respectively, related to customer relationships. During the year ended October 31, 2019, we retired fully amortized identifiable intangible assets of $0.3 million related to customer relationships and patents and other technology.
The aggregate amortization expense associated with identifiable intangible assets for the years ended October 31, 2021, 2020, and 2019 was $12.8 million, $14.3 million and $15.3 million, respectively.
Estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for future fiscal years ending October 31, 2021 is as follows (in thousands):
Estimated
Amortization Expense
2022 $ 12,134
2023 11,376
2024 10,626
2025 9,399
2026 9,329
Thereafter 29,546
Total $ 82,410
We did not incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2021, 2020, and 2019.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Accrued Liabilities
Accrued liabilities consisted of the following at October 31, 2021 and 2020 (in thousands):
October 31,
2021 2020
Payroll, payroll taxes and employee benefits $ 30,039 $ 16,000
Accrued insurance and workers compensation 6,340 5,108
Sales allowances 8,590 6,297
Deferred compensation (current portion) 395 192
Deferred revenue 627 763
Warranties 77 81
Audit, legal, and other professional fees 1,886 1,562
Accrued taxes 3,258 4,000
Other 4,944 4,286
Accrued liabilities $ 56,156 $ 38,289
8. Debt
Long-term debt consisted of the following at October 31, 2021 and 2020 (in thousands):
October 31,
2021 2020
Revolving Credit Facility $ 38,000 $ 103,000
Finance lease obligations and other 15,537 15,321
Unamortized deferred financing fees (597) (901)
Total debt 52,940 117,420
Less: Current maturities of long-term debt 846 692
Long-term debt $ 52,094 $ 116,728
Revolving Credit Facility
On October 18, 2018, we entered into a $325.0 million revolving credit facility (the “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 Credit Facility has a five-year term, maturing on October 18, 2023, and requires interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin or the LIBOR Rate plus an applicable margin. As of October 31, 2021, the applicable rate was LIBOR + 1.25%. In addition, we are subject to commitment fees for the unused portion of the Credit Facility.
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%
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 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, subject to the lender's discretion to elect or decline the incremental
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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 2.25 to 1.00, and (2) Consolidated Leverage Ratio requirement whereby the Consolidated Leverage Ratio, as defined, must be greater than 3.25 to 1.00.
In addition to maintaining these financial covenants, the 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 million per year) and other transactions as further defined in the 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 $25.0 million. Substantially all of our domestic assets, with the exception of real property were used as collateral for the Credit Agreement.
Our initial borrowings from the Credit Facility were $205.0 million and along with additional funding of $10.0 million of cash on hand, was used to repay outstanding borrowings under a previous credit agreement of $213.5 million, to settle outstanding interest accrued and loan fees under our prior credit 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 previous 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 Credit Facility.
As of October 31, 2021, we had $38.0 million of borrowings outstanding under the Credit Facility (reduced by unamortized debt issuance costs of $0.6 million), $4.5 million of outstanding letters of credit and $15.5 million outstanding under finance leases. We had $282.5 million available for use under the Credit Facility at October 31, 2021. The borrowings outstanding as of October 31, 2021 under the Credit Facility accrue interest at 1.34% per annum, and our weighted average borrowing rate for borrowings outstanding during the years ended October 31, 2021 and 2020 was 1.42% and 2.45%, respectively. We were in compliance with our debt covenants as of October 31, 2021.
We maintain certain finance lease obligations related to equipment purchases, vehicles, and warehouse space. Refer to Note 5 “Leases” for further information regarding our finance leases.
The table below presents the scheduled maturity dates of our long-term debt outstanding (excluding deferred financing fees of $0.6 million) at October 31, 2021 (in thousands):
Revolving Credit Facility Finance Leases and Other Obligations Aggregate Maturities
2022 $ - $ 1,671 $ 1,671
2023 38,000 1,582 39,582
2024 - 1,489 1,489
2025 - 1,402 1,402
2026 - 1,305 1,305
Thereafter - 12,310 12,310
Total debt payments 38,000 19,759 57,759
Less: present value discount of finance leases - (4,222) (4,222)
Total $ 38,000 $ 15,537 $ 53,537
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.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Defined Benefit Plan
Our non-contributory, single employer defined benefit pension plan covers certain of our employees in the U.S. 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. Every year, the participants will receive an interest related credit on their respective balance equivalent to the prevailing 30-year Treasury rate. The majority our pension plan participants have their benefit determined pursuant to the cash balance formula. For the remaining participants, the benefit formula is a 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.
As a result of this action, we remeasured the pension assets 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 (loss). This remeasurement is included in the tables below, which reflect the full impact of pension plan results and accounting measurements for the year ended October 31, 2020.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 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.
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 (in thousands):
October 31,
Change in Benefit Obligation: 2021 2020
Beginning balance as of November 1, 2020 and 2019
$ 44,825 $ 44,323
Service cost 850 1,262
Interest cost 756 1,139
Actuarial loss (849) 2,823
Benefits paid (359) (712)
Administrative expenses (732) (785)
Curtailments - (1,141)
Settlements (2,112) (2,084)
Projected benefit obligation at October 31, 2021 and 2020
$ 42,379 $ 44,825
Change in Plan Assets:
Beginning balance as of November 1, 2020 and 2019
$ 34,120 $ 31,212
Actual return on plan assets 6,225 2,789
Employer contributions 500 3,700
Benefits paid (359) (712)
Administrative expenses (732) (785)
Settlements (2,112) (2,084)
Fair value of plan assets at October 31, 2021 and 2020
$ 37,642 $ 34,120
Noncurrent liability - Funded Status $ (4,737) $ (10,705)
As of October 31, 2021 and 2020, included in our accumulated comprehensive loss was a net actuarial loss of $4.5 million and $9.9 million, respectively. There were no net prior service costs or transition obligations for the years ended October 31, 2021 and 2020.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of October 31, 2021 and 2020, the accumulated benefit obligation was $42.4 million and $44.8 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, 2021, 2020 and 2019, was as follows (in thousands):
Year Ended October 31,
2021 2020 2019
Service cost $ 850 $ 1,262 $ 3,629
Interest cost 756 1,139 1,456
Expected return on plan assets (1,960) (2,006) (1,977)
Amortization of net loss 143 162 125
Settlements 222 462 -
Net periodic benefit cost $ 11 $ 1,019 $ 3,233
The changes in plan assets and projected benefit obligations which were recognized in our other comprehensive loss for the years ended October 31, 2021, 2020 and 2019 were as follows (in thousands):
Year Ended October 31,
2021 2020 2019
Net (gain) loss arising during the period $ (5,112) $ 2,141 $ 6,697
Less: Amortization of net loss 143 162 125
Less: Curtailments - 1,141 -
Less: Settlements 222 462 -
Total recognized in other comprehensive (income) loss $ (5,477) $ 376 $ 6,572
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, 2021, 2020 and 2019:
For the Year Ended October 31,
2021 2020 2019 2021 2020 2019
Weighted Average Assumptions: Benefit Obligation Net Periodic Benefit Cost
Discount rate 2.77% 3.22% 3.10% 2.60% 3.10% 4.44%
Rate of compensation increase -% -% 3.00% -% -% 3.00%
Expected return on plan assets n/a n/a n/a 6.00% 6.50% 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: Link 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, 2021, as well as the actual asset allocation by asset category and fair value measurements as of October 31, 2021 and 2020:
Target Allocation Actual Allocation
October 31, 2021 October 31, 2021 October 31, 2020
Equity securities 60.0 % 51.0 % 60.0 %
Fixed income 40.0 % 49.0 % 40.0 %
Fair Value Measurements at
October 31, 2021 October 31, 2020
(In thousands)
Money market fund $ 300 $ 3,532
Large capitalization 8,231 7,954
Small capitalization 1,493 2,407
International equity 6,992 6,130
Other 2,236 1,853
Equity securities $ 18,952 $ 18,344
High-quality core bond 13,787 9,743
High-quality government bond 2,301 1,249
High-yield bond 2,302 1,252
Fixed income $ 18,390 $ 12,244
Total securities(1)
$ 37,642 $ 34,120
(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, liquidity to meet benefit payments and an appropriate balance of long-term investment return and risk. Target ranges for asset allocations are determined by matching the actuarial projections of the plans’ future liabilities and benefit payments with expected long-term rates 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.
Expected Benefit Payments and Funding
Our pension funding policy is to make the minimum annual contributions required pursuant to the plan. For the fiscal years ended October 31, 2021, 2020 and 2019, we made total pension contributions of $0.5 million, $3.7 million and $0.7 million, respectively.
During fiscal 2022, we do not expect to need to make a contribution to the pension plan to maintain targeted funding levels and meet minimum contribution requirements. 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
2022 $ 2,899
2023 2,506
2024 2,411
2025 2,427
2026 2,363
2027 - 2031 10,430
Total $ 23,036
Defined Contribution Plan
We also sponsor two defined contribution plans into which we and our employees make contributions. As of January 1, 2020, we match 100% up to the first 5% of employee annual salary deferrals under our plan 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 and January 1, 2020, we matched 50% up to the first 5% of employee salary deferrals. We do not offer our common stock as a direct investment option under these plans. For the years ended October 31, 2021, 2020 and 2019, we contributed approximately $6.3 million, $4.8 million and $2.7 million for these plans, respectively.
Other Plans
We 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 $2.9 million and $2.6 million as of October 31, 2021 and 2020, and our liability under the deferred compensation plan was approximately $3.4 million and $3.3 million, respectively. As of October 31, 2021 and 2020, the current portion of these liabilities was recorded under the caption “Accrued Liabilities,” and the long-term portion was included under the caption “Other Liabilities” in the accompanying balance sheets.
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 for the years ended October 31, 2021, 2020 and 2019 (in thousands):
Year Ended October 31,
2021 2020 2019
Current
Federal $ 10,993 $ 6,043 $ 3,338
State and local 3,447 1,505 299
Non-United States 6,889 4,445 3,879
Total current 21,329 11,993 7,516
Deferred
Federal (842) (64) 1,497
State and local (277) (315) 1,087
Non-United States 2,904 190 676
Total deferred 1,785 (189) 3,260
Total income tax expense $ 23,114 $ 11,804 $ 10,776
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For financial reporting purposes, income (loss) before income taxes for the years ended October 31, 2021, 2020 and 2019 includes the following components (in thousands):
Year Ended October 31,
2021 2020 2019
Domestic $ 36,879 $ 26,229 $ (58,247)
Foreign 43,215 24,071 22,293
Total income (loss) before income taxes $ 80,094 $ 50,300 $ (35,954)
The following table reconciles our effective income tax rate to the federal statutory rate for the years ended October 31, 2021, 2020 and 2019:
Year Ended October 31,
2021 2020 2019
United States tax at statutory rate 21.0 % 21.0 % 21.0 %
State and local income tax 3.1 % 1.7 % 1.6 %
Non-United States income tax 2.3 % 1.2 % 1.2 %
U.K. patent box benefit (1.4) % (2.0) % (1.7) %
U.S. income tax credits (4.2) % (2.3) % (4.7) %
Foreign tax positions under the Act (GILTI and FDII) 4.2 % 2.5 % 3.3 %
Impact of deemed repatriation - % - % (1.1) %
Asset impairment charges - % - % (50.7) %
Non-cash compensation 1.9 % (0.3) % (1.6) %
Other 2.0 % 1.7 % 2.7 %
Effective tax rate 28.9 % 23.5 % (30.0) %
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. This Act reduced our federal income tax statutory rate from 35.0% to 21.0% for the fiscal years ending October 31, 2021, 2020 and 2019. This 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 therefore we have not recorded deferred taxes related to GILTI on our foreign subsidiaries.
The October 31, 2021 effective tax rate is higher than the U.S. federal statutory rate of 21% primarily due to state income taxes, GILTI, and non-United States income tax, partially offset by U.S. foreign tax credits.
The October 31, 2020 effective tax rate was impacted by the true-up of our accruals and related deferred taxes from prior year filings and settled tax audits as well as $0.6 million related to the vesting or exercise of equity-based compensation awards.
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 6, “Goodwill and Intangible Assets.”
Given the significance of the Tax Cuts and Jobs 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 Tax Cuts and Jobs Act, we repatriated $28.4 million and $31.9 million of foreign earnings from our international operations during the years ended October 31, 2021 and 2020, respectively. This was repatriation of excess cash that was 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. Our earnings from our foreign subsidiaries are not subject to significant withholding taxes upon remittances to the U.S.. As a result, we do not anticipate any significant future tax impacts from any potential repatriation of previously unremitted foreign earnings.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Significant components of our net deferred tax liabilities and assets were as follows (in thousands):
October 31,
2021 2020
Deferred tax assets:
Employee benefit obligations $ 7,591 $ 6,634
Accrued liabilities and reserves 1,425 1,471
Pension and other benefit obligations 1,934 3,303
Inventory 894 471
Loss and tax credit carry forwards 1,857 2,331
Other 107 103
Total gross deferred tax assets 13,808 14,313
Less: Valuation allowance
1,174 1,493
Total deferred tax assets, net of valuation allowance 12,634 12,820
Deferred tax liabilities:
Property, plant and equipment 11,187 10,465
Goodwill and intangibles 23,412 21,471
Total deferred tax liabilities 34,599 31,936
Net deferred tax liabilities $ 21,965 $ 19,116
At October 31, 2021, state operating loss carry forwards totaled $28.0 million. The majority of these losses begin to expire in 2025. We evaluate tax benefits of operating losses and tax credit carry forwards on an ongoing basis, including a review of 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, 2021 and 2020, totaling $1.3 million and $1.5 million, respectively ($1.0 million and $1.2 million, respectively, net of federal taxes). During the year ended October 31, 2021, we recorded a net $0.2 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 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 each reporting date, management considers the weight of all evidence, both positive and negative, to determine 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.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table shows the change in the unrecognized income tax benefit associated with uncertain tax positions for the years ended October 31, 2021, 2020 and 2019 (in thousands):
Unrecognized
Income Tax Benefits
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
Additions for tax positions related to the current year -
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 current year -
Additions for tax positions related to the prior year 953
Reassessment of position (87)
Balance at October 31, 2021
$ 1,388
As of October 31, 2021, our unrecognized tax benefit (UTB) relates to certain federal and state tax items regarding the interpretation of tax laws and regulations. At October 31, 2021, $1.4 million is recorded as a liability for uncertain tax positions. The addition related to the current year ended October 31, 2021 is associated with stock-based compensation tax deductions claimed on a prior U.S. federal income tax return. We have accrued an immaterial amount for the payment of interest, net of tax benefits, and penalties as of October 31, 2021, 2020 and 2019, respectively. 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 reduction of the overall income tax provision.
We, along with our 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 2017 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 states 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 do not believe any of the UTB at October 31, 2021 will be recognized within the next twelve months.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Commitments and Contingencies
Purchase Obligations
We are a party to non-cancelable purchase obligations primarily for door hardware, primary and secondary steel and primary and secondary aluminum used in our manufacturing processes, as well as expenditures related to capital projects in progress. We paid $9.9 million and $9.0 million pursuant to these arrangements for the years ended October 31, 2021 and 2020, respectively. These obligations total $23.4 million and $22.4 million at October 31, 2021 and 2020, respectively, and extend through fiscal 2022. Future amounts paid pursuant to these arrangements will depend, to some extent, on our usage.
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 liability over a seven year term, to culminate in an asset retirement obligation of $2.3 million as of February 2025.
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 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 2022. 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. 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.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. 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 asset or liability (e.g., interest rates) and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
Carrying amounts reported on the balance sheets for cash, cash 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, 2021 and 2020 (Level 2 measurement).
Our 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 13. Stock-Based Compensation - Performance Share Awards.
13. Stock-Based Compensation
We have established and maintain an Omnibus Incentive Plan (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 2020 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 2020 Plan is 3,139,895 as approved by the shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 2020 Plan. We grant restricted stock units to non-employee directors on the first business day of each fiscal year. As approved by the Compensation & Management Development Committee of our Board of Directors 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 a restricted stock award 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 award activity during the years ended October 31, 2021, 2020 and 2019, follows:
Restricted Stock Awards Weighted Average
Grant Date Fair Value per Share
Non-vested at October 31, 2018 217,200 $ 19.76
Granted 124,800 13.78
Vested (69,400) 19.19
Forfeited (42,500) 17.87
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
The total weighted average grant-date fair value of restricted stock awards that vested during the years ended October 31, 2021, 2020 and 2019 was $0.9 million, $1.1 million and $1.3 million, respectively. As of October 31, 2021, total unrecognized compensation cost related to unamortized restricted stock awards totaled $1.5 million. We expect to recognize this expense over the remaining weighted average period of 1.8 years.
Stock Options
Historically, stock options have been awarded to key employees, officers and 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 vested 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 was 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 were nearing retirement-eligibility, we recognized stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our stock option activity for the years ended October 31, 2021, 2020 and 2019.
Stock Options Weighted Average
Exercise Price Weighted Average
Remaining Contractual
Term (in years) Aggregate
Intrinsic
Value (000s)
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
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
Vested at October 31, 2021 218,304 $ 19.37 3.4 $ 297
Exercisable at October 31, 2021 218,304 $ 19.37 3.4 $ 297
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, 2021, 2020 and 2019, the total intrinsic value of our stock options that were exercised totaled $4.2 million, $0.5 million and $0.4 million, respectively. The total fair value of stock options vested during the years ended October 31, 2021, 2020 and 2019, was zero, $0.6 million and $1.1 million, respectively.
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, 2021, 2020 and 2019, 28,826, 25,621 and 34,050 restricted stock units, respectively, were granted with corresponding weighted average grant date fair value of $18.79, $18.18, and $15.51, respectively. As of October 31, 2021 there were 21,774 unvested restricted stock units from the fiscal 2020 grant. During the years ended October 31, 2021, 2020 and 2019, we paid $0.8 million, $0.2 million and $0.4 million to settle restricted stock units.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, performance share awards vest with return on net assets (RONA) as the vesting condition, pay out 100% in cash, and are accounted for as liability.
The expected cash settlement of the performance share award 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.
The following table summarizes our performance share grants and the grant date fair value for the RONA performance metric:
Grant Date Shares Awarded Grant Date Fair Value Shares Forfeited
December 5, 2018 132,400 $ 13.63 40,900
December 5, 2019 55,900 $ 19.40 5,300
December 2, 2020 65,300 $ 20.68 -
In December 2020, the December 2017 grant vested, however, no shares were awarded as performance criteria were not met. On November 30, 2019, a total of 56,103 shares vested pursuant to the November 2016 grant, which were settled with 28,051 shares of common stock and a cash payment of $0.6 million.
Performance share awards are payable in cash based upon the number of performance shares ultimately earned, and are therefore not considered outstanding shares.
Performance Restricted Stock Units
We awarded performance restricted stock units to key employees and 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 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, 2018 89,200 $ 13.63 25,500
December 5, 2019 35,000 $ 19.40 -
December 2, 2020 38,400 $ 20.68 -
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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, 2021, 2020 and 2019 (in thousands):
Year Ended October 31,
2021 2020 2019
Restricted stock awards $ 1,235 $ 625 $ 1,018
Stock options - 10 158
Restricted stock units 1,197 186 950
Performance share awards 4,039 (170) 1,131
Performance restricted stock units 729 515 708
Total compensation expense 7,200 1,166 3,965
Income tax effect 2,078 274 997
Net compensation expense
$ 5,122 $ 892 $ 2,968
14. Stockholders' Equity
As of October 31, 2021, our authorized capital stock consists of 125,000,000 shares of common stock, at par value of $0.01 per share, and 1,000,000 shares of preferred stock, with no par value. As of October 31, 2021 and 2020, we had 37,273,510 and 37,296,166 shares of common stock issued, respectively, and 33,274,785 and 32,804,737 shares of common stock outstanding, respectively. There were no shares of preferred stock issued or outstanding at October 31, 2021 and 2020.
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. Repurchases under the new program will be made in open market transactions or privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. The program does not have an expiration date or a limit on the number of shares that may be purchased. During the years ended October 31, 2021 and 2020, we purchased 478,311 shares and 450,000 shares, respectively, at a cost of $11.2 million and $7.2 million respectively, under this program.
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. 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 zero, $0.1 million and $0.3 million, in the years ended October 31, 2021, 2020, and 2018, respectively.
For a summary of treasury stock activity for the years ended October 31, 2021, 2020 and 2019, refer to the Consolidated Statement of Stockholders' Equity located elsewhere herein.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Other, net
Other income included under the caption “Other, net” on the accompanying consolidated statements of income (loss), consisted of the following (in thousands):
Year Ended October 31,
2021 2020 2019
Foreign currency transaction losses $ (98) $ (42) $ (187)
Foreign currency exchange derivative losses - (15) (197)
Pension service benefit 839 243 396
Interest income 5 28 63
Other 8 66 41
Other income $ 754 $ 280 $ 116
16. Segment Information
We present three reportable business segments: (1) NA Fenestration, comprising three 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 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, 2021, 2020 and 2019 were $21.6 million, $21.7 million and $18.3 million, respectively.
ASC Topic 280-10-50, “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, 2021, 2020 and 2019 was as follows (in thousands):
NA Fenestration EU Fenestration NA Cabinet Comp. Unallocated Corp. & Other Total
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
Total assets $ 252,703 $ 223,248 $ 174,713 $ 40,921 $ 691,585
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
The following table summarizes the change in the carrying amount of goodwill by segment for the years ended October 31, 2021 and 2020 (in thousands):
NA Fenestration EU Fenestration NA Cabinet Comp. Unallocated Corp. & Other Total
Balance as of October 31, 2019 $ 38,712 $ 67,704 $ 39,147 $ - $ 145,563
Foreign currency translation adjustment - 591 - - 591
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
For further details of Goodwill, see Note 6, “Goodwill and Intangible 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 income (loss) for the years ended October 31, 2021, 2020 and 2019 (in thousands):
Year Ended October 31,
2021 2020 2019
Operating income (loss) $ 81,870 $ 55,265 $ (26,427)
Interest expense (2,530) (5,245) (9,643)
Other, net 754 280 116
Income tax expense (23,114) (11,804) (10,776)
Net income (loss) $ 56,980 $ 38,496 $ (46,730)
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2021, 2020 and 2019, and our long-lived assets as of October 31, 2021 and 2020 (in thousands):
Year Ended October 31,
Net sales 2021 2020 2019
United States $ 778,486 $ 654,802 $ 683,204
Europe 244,308 158,831 162,106
Canada 25,007 18,213 20,088
Asia 18,445 11,504 18,360
Other foreign countries 5,903 8,223 10,083
Total net sales $ 1,072,149 $ 851,573 $ 893,841
October 31,
Long-lived assets, net 2021 2020
United States $ 291,282 $ 307,534
Germany 25,513 25,519
United Kingdom 146,158 142,097
Total long-lived assets, net $ 462,953 $ 475,150
Long-lived assets, net includes: property, plant and equipment, net; goodwill, intangible assets, net, and operating leases.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Earnings Per Share
We compute basic earnings (loss) per share by dividing net income (loss) 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, 2021, 2020 and 2019 follows (in thousands, except per share data):
Year Ended October 31, 2021 Net Income (Loss) Weighted Average Shares Per Share
Basic earnings per common share $ 56,980 33,193 $ 1.72
Effect of dilutive securities:
Stock options 82
Restricted stock awards 132
Performance restricted stock units 88
Diluted earnings per common share $ 56,980 33,495 $ 1.70
Year Ended October 31, 2020
Basic earnings per common share $ 38,496 32,689 $ 1.18
Effect of dilutive securities:
Stock options 10
Restricted stock 90
Performance restricted stock units 32
Diluted earnings per common share $ 38,496 32,821 $ 1.17
Year Ended October 31, 2019
Basic and diluted loss per share $ (46,730) 32,960 $ (1.42)
We do not include equity instruments in our calculation of diluted earnings per share if those instruments would be antidilutive. Such dilution is 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, 2021, 2020 and 2019 (shares in thousands):
Year Ended October 31,
2021 2020 2019
Stock options - 1,032 1,307
Restricted stock awards - - 113
Performance share awards - - 28
Total - 1,032 1,448
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Unaudited Quarterly Data
Selected quarterly financial data for the years ended October 31, 2021 and 2020 was as follows (amounts in thousands, except per share amounts):
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, 2020 April 30, 2020 July 31, 2020 October 31, 2020
Net sales $ 196,597 $ 187,475 $ 212,096 $ 255,405
Cost of sales (excluding depreciation and amortization) 157,427 149,732 162,427 189,164
Depreciation and amortization 12,905 11,886 11,060 11,378
Operating income 1,980 8,893 16,563 27,829
Net income 10 5,501 10,833 22,152
Basic earnings per share - 0.17 0.33 0.68
Diluted earnings per share - 0.17 0.33 0.68
Cash dividends paid per common share 0.08 0.08 0.08 0.08
Quarterly earnings per share results may not sum to the consolidated earnings per share results on the accompanying consolidated statements of income due to rounding and changes in weighted average shares during the respective periods.
19. New Accounting Guidance
Accounting Standards Recently Adopted
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This ASU sets forth a “current expected credit loss” model, which requires the measurement of all expected credit losses for financial instruments or other assets (e.g., trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. We adopted this amendment on November 1, 2020, with no material impact on our condensed consolidated financial statements as pre-existing processes for estimating credit losses for trade receivables aligned with the expected credit loss model.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
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, 2021. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of October 31, 2021, 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” 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” 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.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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” is incorporated herein by reference from the Registrant's Definitive Proxy Statement relating to the 2022 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, 2021.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
Pursuant to General Instruction G(3) to Form 10-K, the information on “Executive Compensation” is incorporated herein by reference from the Registrant's Definitive Proxy Statement relating to the 2022 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, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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” is incorporated herein by reference from the Registrant's Definitive Proxy Statement relating to the 2022 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, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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” is incorporated herein by reference from the Registrant's Definitive Proxy Statement relating to the 2022 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, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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” is incorporated herein by reference from the Registrant's Definitive Proxy Statement relating to the 2022 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, 2021.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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. Certain of our exhibits as denoted with a † between exhibits 10.1 through 10.39 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.