UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 31, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-33913
_______________________________
QUANEX BUILDING PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
26-1561397
(I.R.S. Employer Identification No.)
1800 West Loop South, Suite 1500, Houston, Texas 77027
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (713) 961-4600
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Trading Symbol(s)
NX
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
_______________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
x
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended period for
complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of April 30, 2019, computed by reference to the
closing price for the Common Stock on the New York Stock Exchange, Inc. on that date, was $544,032,919. Such calculation assumes only the registrant’s
officers and directors at such date were affiliates of the registrant.
At December 9, 2019 there were outstanding 33,019,430 shares of the registrant’s Common Stock, $0.01 par value.
_______________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the Commission within 120 days
of October 31, 2019 are incorporated herein by reference in Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Item 6.
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Change in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
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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.
Cautionary Note Regarding Forward-Looking Statements
Certain of the statements contained in this document and in documents incorporated by reference herein, including those
made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-
looking” statements as defined under the Private Securities Litigation Reform Act of 1995. Generally, the words “expect,” “believe,”
“intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally
are not historical in nature. Forward looking statements are (1) all statements which address future operating performance, (2)
events or developments that we expect or anticipate will occur in the future, including statements relating to volume, sales, operating
income and earnings per share, and (3) statements expressing general outlook about future operating results. Forward-looking
statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical
experience and our current projections or expectations. As and when made, we believe that these forward-looking statements are
reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements since such
statements speak only as of the date when made and there can be no assurance that such forward-looking statements will occur.
We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise.
Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking
statements include, but are not limited to the following:
• changes in market conditions, particularly in the new home construction, and residential remodeling and replacement
activity markets in the United States, United Kingdom, Germany and elsewhere;
• changes in non-pass-through raw material costs;
• changes in domestic and international economic conditions;
• changes in purchases by our principal customers;
• fluctuations in foreign currency exchange rates;
• our ability to maintain an effective system of internal controls;
• our ability to successfully implement our internal operating plans and acquisition strategies;
• our ability to successfully implement our plans with respect to information technology (IT) systems and processes;
• our ability to control costs and increase profitability;
• changes in environmental laws and regulations;
• changes in warranty obligations;
• changes in energy costs;
• changes in tax laws, and interpretations thereof;
• changes in interest rates;
• our ability to service our debt facilities and remain in good standing with our lenders;
• changes in the availability or applicability of our insurance coverage;
• our ability to maintain good relationships with our suppliers, subcontractors, and key customers; and
• the resolution of litigation and other legal proceedings.
Additional factors that could cause actual results to differ materially are discussed under "Item 1A. Risk Factors” included
elsewhere in this Annual Report on Form 10-K.
About Third-Party Information
In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available
information, industry publications, United States government sources and other third parties. Although we believe this information
is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.
Table of Contents
Item 1. Business.
Our Company
PART I
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, 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.
Notable developments and transactions which occurred since the spin-off include the following:
• in March 2011, we acquired Edgetech, I.G. Inc. and its German subsidiary, which provided us with three manufacturing
facilities, one each in the United States (U.S.), U.K. and Germany, that produce and market a full line of flexible insulating
glass spacer systems for window and door customers in North America and abroad. This acquisition complemented our
then existing insulating glass products business in the U.S.;
• in December 2012, we acquired substantially all of the assets of Alumco Inc. and its subsidiaries (Alumco), an aluminum
screen manufacturer, which allowed us to expand the scope of our fenestration business to include screens for vinyl
window and door manufacturers and to expand our geographic reach throughout the U.S.;
• in April 2014, we sold our interest in a limited liability company which held the net assets of our Nichols Aluminum
business to a privately held company that provides aluminum rolled products and extrusions, aluminum recycling and
specification aluminum alloy production;
• in June 2015, we acquired the outstanding ownership shares of Flamstead Holdings Limited, an extruder of vinyl lineal
products and manufacturer of other plastic products incorporated and registered in England and Wales. Following a pre-
sale reorganization and purchase, Flamstead Holdings Limited owned 100% of the ownership shares of the following
subsidiaries: HL Plastics Limited, Vintage Windows Limited, Wegoma Machinery Sales Limited (renamed in 2016 as
Avantek Machinery Company), and Liniar Limited (collectively referred to as “HLP”), each registered in England and
Wales. This acquisition expanded our vinyl extrusion product offerings and grew our international presence in the global
fenestration business;
• in November 2015, we completed the merger of QWMS, Inc., a Delaware corporation which was a newly-formed and
wholly-owned Quanex subsidiary, and WII Holding, Inc. (WII), a Delaware corporation. Upon satisfaction or waiver of
conditions set forth in the merger agreement, QWMS, Inc. merged with and into WII, and WII became our wholly-owned
subsidiary, and, as a result, we acquired all the subsidiaries of WII (referred to collectively as Woodcraft). Woodcraft is
a manufacturer of cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry, operating
various plants in the U.S. and Mexico;
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• in October 2016, we committed to a restructuring plan that included the closure of two vinyl extrusion plants in the U.S.
and our kitchen and bathroom cabinet door plant in Guadalajara, Mexico; and
• in September 2017, we closed a kitchen and bathroom cabinet door plant in Lansing, Kansas, and, in October 2017, sold
a wood-flooring business in Shawano, Wisconsin.
As of October 31, 2019, we operated 30 manufacturing facilities located in 17 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 North American based 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 house systems to smaller customers primarily in the U.K., as well as our insulating glass business 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 in these countries. 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 October 2019 the National Association
of Home Builders (NAHB) (units in thousands):
Period
Units
% Change
Units
% Change
Units
% Change
Total Units
Single-family Units
Multi-family Units
Manufactured Units
Annual Data
2013
2014
2015
2016
2017
2018
2019
2020
2021
620
647
713
786
852
873
854
873
893
N/A
4%
10%
10%
8%
2%
(2)%
2%
2%
308
355
394
392
357
377
383
385
399
N/A
15%
11%
(1)%
(9)%
6%
2%
1%
4%
60
64
71
81
93
97
97
111
115
N/A
7%
11%
14%
15%
4%
—%
14%
4%
988
1,066
1,178
1,259
1,302
1,347
1,334
1,369
1,407
Annual Data - Forecast
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Ducker Worldwide LLC, a consulting and research firm, indicated that window shipments in the residential remodeling and
replacement (R&R) market are expected to decline slightly during the calendar year ended 2019, increase 2% during 2020 and
increase 3% during 2021. Derived from reports published by Ducker, the overall decline in window shipments for the trailing
twelve months ended September 30, 2019 was 1.6%. During this period, R&R activity and new construction decreased 0.9% and
2.5%, respectively.
According to Catalina Research, a consulting and research firm, total U.S. residential cabinet demand is expected to increase
through 2020. Projections from Catalina Research as of September 2019 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:
Period
Annual Data
Annual Data - Forecast
Cabinet Market Annual Growth Rates
Stock
Semi-Custom
Custom
Overall
2012
2013
2014
2015
2016
2017
2018
2019
2020
(4.9)%
28.9%
16.6%
16.7%
5.3%
7.3%
7.9%
4.4%
4.2%
10.0%
5.7%
(15.6)%
10.1%
1.0%
5.7%
(1.6)%
(2.6)%
0.5%
5.3%
6.3%
(10.0)%
21.6%
8.1%
(0.3)%
3.8%
4.6%
3.8%
1.7%
17.0%
2.3%
15.4%
4.4%
6.0%
4.9%
2.7%
3.3%
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;
• the recovery of the housing market has slowed due primarily to the declining growth of multi-family units;
• 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;
• 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 logistic solutions that provide our customers with just-in-time service which can reduce their processing costs;
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• 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, the ability to generate unique patented products and participation in industry advocacy.
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, and Endura. Competitors in the vinyl extrusion business in the U.K. include Epwin, Veka, Synseal, Eurocell
and others. Primary competitors in the cabinet door business in the U.S. include Conestoga, Decore-ative Specialties, 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 Doubtful
Accounts," 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 relatively low backlog, approximately $25 million as of
October 31, 2019. 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 2020 in accordance with our revenue recognition accounting policy.
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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 EDGE TAPE, 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, K2 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 HLP, we hold a number of registered designs, patents and trademarks registered in the U.K., which include:
MODLOK, LINIAR, SUPERCUT, 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 dies 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
on-going 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.
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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 2020. 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.
Employees
As of October 31, 2019, we had 3,632 employees. Of these employees, 2,988 were domiciled in the U.S., 558 in the U.K.,
and 86 in Germany.
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.
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.
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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 on-going 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 2016 and could record future impairment charges. Goodwill totaled $145.6 million at October 31, 2019. The results of
goodwill impairment testing are described in the accompanying notes to the audited financial statements, Note 5, "Goodwill and
Intangible Assets" included elsewhere 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.
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Due to the fact that we have operations located within the U.K., our business and financial results may be negatively
impacted as a result of the U.K.'s planned exit from the European Union (E.U.), 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.
These risks would be heightened in the event that the U.K. and the E.U. are unable to reach a mutually satisfactory exit
agreement before the current deadline of January 31, 2020.
Following the U.K.’s vote to leave the E.U. in 2016 (commonly referred to as Brexit), the value of the British Pound Sterling
incurred significant fluctuations. Additionally, further actions related to Brexit may occur in the future. If the value of the British
Pound Sterling continues to incur similar fluctuations, 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
US 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. In addition, a so-called “Hard Brexit,” where no formal agreement is made between the E.U. and U.K. prior to
the U.K.’s exit, could result in a continued deflation of the British Pound Sterling; additional increases in prices, fees, taxes or
tariffs applicable to goods that are bought and sold between the U.K. and Europe, and a negative impact on end markets in the
U.K. as a result of declines in consumer sentiment or decreased immigration rates into the U.K. Any of these results could have
a material adverse effect on the business, revenues and financial condition of our U.K. and European operations.
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 our 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.
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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, 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 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.
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 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 manufacturing 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.
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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 products.
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 large 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.
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 37,370,402 were issued at
October 31, 2019. These authorized shares can be issued, without stockholder approval, as securities convertible into either
common stock or preferred stock.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
The following table lists our principal properties by location, general character and use as of October 31, 2019.
Location
Character & Use of Property
Executive Offices
Houston, Texas*
North American Fenestration Segment
Akron, Ohio*
Rice Lake, Wisconsin
Cambridge, Ohio*
Richmond, Kentucky
Kent, Washington*
European Fenestration Segment
Denby, United Kingdom*
Heinsberg, Germany*
North American Cabinet Components Segment
St. Cloud, Minnesota
* These locations are leased as of October 31, 2019.
Executive corporate office
Segment executive office and R&D facility
Fenestration products
Flexible spacer and solar adhesives
Vinyl and composite extrusions
Vinyl and composite extrusions
Vinyl and composite extrusions
Flexible spacer
Hardwood doors & components for kitchen and bath
In addition to the locations identified above, our North American Fenestration Segment maintains 14 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 12 locations to manufacture hardwood doors and other wood components for kitchen and bath
cabinets. We maintain a lease in Yakima, Washington, which will expire in 2021, related to a location which was closed as a result
of restructuring activities. 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 2019, on a consolidated basis, our facilities operated at approximately 59% of capacity. This
capacity utilization is subject to variability by product line, seasonality, and location.
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 2017,
2018 and 2019, 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.
14
For discussion of environmental issues, see Item 1, "Business - Environmental and Employee Safety Matters” discussed
elsewhere in this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures.
Not Applicable.
15
Table of Contents
PART II
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 1,856 holders of our common stock (excluding individual participants in securities positions listings) on record
as of December 9, 2019.
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, 2019:
Plan Category
Equity compensation plans approved by security holders
(a)
(b)
(c)
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights(1)
2,252,331
Weighted-average
exercise price of
outstanding options,
warrants and rights(2)
18.71
$
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
1,678,721
(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 14, "Stock-Based Compensation" included elsewhere
within 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, 2019.
Period
August 2019
September 2019
October 2019
Total
(a) Total Number
of Shares
Purchased (1)
—
—
175,000
175,000
(b) Average Price
Paid per Share(1)
$—
—
18.37
$18.37
(c) Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs(1)
—
—
175,000
175,000
(d) Maximum US
Dollars Remaining
that May Yet Be Used
to Purchase Shares
Under the Plans or
Programs(1)
$21,630,466
$21,630,466
$18,415,158
(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. 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, 2019 and 2018, we purchased 583,398 shares and 1,900,000 shares, respectively, at a cost of $9.6 million and $32.0
million, respectively, under this program.
16
Table of Contents
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), 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, 2019 are AAON Inc., American
Woodmark Corp, Apogee Enterprises Inc., Armstrong Flooring Inc., Continental Building Products Inc., Cornerstone Building
Brands Inc., CSW Industrials Inc., Gibraltar Industries Inc., Griffon Corporation, Insteel Industries Inc., Masonite International,
Patrick Industries Inc., PGT Innovations, Inc., Simpson Manufacturing Company Inc., and Trex Company Inc.
Comparison of Cumulative Five Year Total Return
$225
$200
$175
$150
$125
$100
$75
$50
10/31/2014
10/31/2015
10/31/2016
10/31/2017
10/31/2018
10/31/2019
Quanex Building Products Corporation
S&P 500 Index
Russell 2000 Index
Peer Group
INDEXED RETURNS
Company Name / Index
Quanex Building Products Corporation
S&P 500 Index
Russell 2000 Index
New Peer Group
For the Years Ended
10/31/2014
10/31/2015
10/31/2016
10/31/2017
10/31/2018
10/31/2019
$
$
$
$
100.00
100.00
100.00
100.00
$
$
$
$
95.04
105.20
100.34
118.85
$
$
$
$
82.83
109.94
104.46
136.42
$
$
$
$
112.41
135.93
133.53
178.95
$
$
$
$
76.68
145.91
136.03
166.02
$
$
$
$
101.82
166.81
142.70
210.61
17
Table of Contents
Item 6. Selected Financial Data.
The following table presents selected historical consolidated financial and operating data for the periods shown. The selected
consolidated financial data as of October 31, 2019, 2018, 2017, 2016 and 2015 and for each of the fiscal years then ended was
derived from our audited consolidated financial statements for those dates and periods, adjusted for discontinued operations, as
indicated. Data reflects the adoption of accounting standards updates and accounting changes made during the year ended
October 31, 2019. The following information should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our audited financial statements and related notes included elsewhere in this
Annual Report on Form 10-K.
Consolidated Statements of Income
Net sales
Cost and expenses:
Cost of sales (excluding depreciation and amortization)
Selling, general and administrative
Restructuring charges
Depreciation and amortization
Asset impairment charges
Operating (loss) income
Non-operating (expense) income:
Interest expense
Other, net
(Loss) income from continuing operations before income
taxes
Income tax (expense) benefit
(Loss) income from continuing operations
Income from discontinued operations, net of taxes
Net (loss) income
Basic (loss) earnings per common share:
Basic (loss) earnings from continuing operations
Basic earnings from discontinued operations
Basic (loss) earnings per share
Diluted (loss) earnings per common share:
Diluted (loss) earnings from continuing operations
Diluted earnings from discontinued operations
Diluted (loss) earnings per share
Cash dividends declared per share
Other Financial & Operating Data
Cash provided by operating activities
Cash used for investing activities
Cash (used for) provided by financing activities
Acquisitions, net of cash acquired
Capital expenditures
Selected Consolidated Balance Sheet Data at Year
End
Cash and cash equivalents
Total assets
Long-term debt, excluding current portion
$
$
$
$
$
$
$
$
$
2019(1)(2)
Fiscal Years Ended October 31,
2017(2)
2018(2)(3)(4)
(Dollars in thousands, except per share data)
2016(2)(5)(6)(7)
2015(8)
$
893,841
$
889,785
$
866,555
$
928,184
$
645,528
694,420
101,292
370
49,586
74,600
(26,427)
(9,643)
116
(35,954)
(10,776)
(46,730)
—
697,022
103,758
1,486
51,822
—
35,697
(11,100)
1,156
25,753
800
26,553
—
$
$
$
$
$
$
$
(46,730) $
26,553
(1.42) $
—
(1.42) $
(1.42) $
—
(1.42) $
$
$
0.32
96,372
(23,559)
(71,264)
—
0.77
—
0.77
0.76
—
0.76
0.20
104,611
(26,052)
(65,817)
—
672,488
98,085
4,550
57,495
—
33,937
(9,595)
1,160
25,502
(6,819)
18,683
—
18,683
0.55
—
0.55
0.54
—
0.54
0.16
79,778
(32,627)
(55,133)
—
710,947
115,012
529
53,146
12,602
35,948
(36,498)
(5,074)
(5,624)
3,765
(1,859)
—
499,680
86,718
—
35,220
—
23,910
(991)
234
23,153
(7,539)
15,614
479
$
$
$
$
$
$
$
(1,859) $
16,093
(0.05) $
—
(0.05) $
(0.05) $
—
(0.05) $
0.16
87,341
$
$
0.46
0.01
0.47
0.46
0.01
0.47
0.16
67,087
(282,103)
(160,144)
195,448
245,904
(4,581)
(131,689)
24,883
$
26,484
$
34,564
$
37,243
$
(29,982)
30,868
$
29,003
$
17,455
$
25,526
$
645,110
156,414
743,214
209,332
774,944
218,184
781,418
259,011
23,125
566,581
53,767
Total liabilities
$
314,923
$
347,992
$
367,252
$
412,742
$
170,441
18
Table of Contents
(1) In 2019, we recorded goodwill impairment charges of $74.6 million associated with our cabinet components business.
(2) In 2019, 2018, 2017 and 2016, we incurred $0.4 million, $1.5 million, $4.6 million, and $0.5 million respectively, of
restructuring costs associated with the closure of several plant facilities. See Note 1, "Nature of Operations, Basis of
Presentation and Significant Accounting Policies - Restructuring," included elsewhere in this Annual Report on Form 10-K.
(3) In October 2018, we refinanced our credit facility resulting in a charge of $1.1 million of unamortized deferred financing fees.
See Note 8, "Debt and Capital Lease Obligations" included elsewhere in this Annual Report on Form 10-K.
(4) In 2018, we recorded a $6.5 million net benefit related to the tax effect of implementing the Tax Cuts and Jobs Act, which
was signed into law on December 22, 2017. See Note 10, "Income Taxes" included elsewhere in this Annual Report on Form
10-K.
(5) In November 2015, we acquired Woodcraft, a manufacturer of cabinet doors and other components to OEMs in the kitchen
and bathroom cabinet industry. The results of operations of Woodcraft including revenue of $223.4 million and net income
of $4.1 million have been included in our consolidated operating results since the date of acquisition, November 2, 2015.
(6) In July 2016, we refinanced our credit facility resulting in a $3.1 million prepayment call premium fee, a charge of $8.1 million
of unamortized deferred financing fees and a charge of $5.5 million of unamortized original issuer’s discount. See Note 8,
"Debt and Capital Lease Obligations" included elsewhere in this Annual Report on Form 10-K.
(7) In October 2016, we recorded a goodwill impairment charge of $12.6 million associated with our U.S. vinyl extrusion business.
(8) In June 2015, we acquired HLP, a vinyl profile extruder with operations located in the U.K. The results of operations of HLP
include revenue of $42.3 million and net income of $1.5 million for the period June 15, 2015 through October 31, 2015.
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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 "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: 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, 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 four operating segments primarily focused on the fenestration market in North America manufacturing vinyl profiles,
IG spacers, screens & 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, 2019, 2018 and 2017 were $18.3 million, $18.7 million and
$17.0 million, respectively.
Notable Items
During 2017, we rationalized capacity and closed two U.S. vinyl plants and two cabinet door plants, relocating assets to
improve overall operational efficiency. We have incurred $0.4 million, $1.5 million and $4.6 million of expense associated with
these restructuring efforts during fiscal 2019, 2018 and 2017, respectively, and recognized $6.2 million of accelerated depreciation
and amortization associated with related assets during fiscal 2017.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the Act) that included sweeping tax
reform which affected U.S. corporations, including a reduction of the statutory federal corporate tax rate from 35% to 21%. We
made an initial assessment of the Act and recorded a discrete benefit of $6.5 million, which included a charge of $1.2 million for
a one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings during the
fiscal year ended October 31, 2018. We completed the accounting for the income tax effects of the Act and recorded a charge of
$0.4 million for the re-measurement of the one-time mandatory transition tax during the year ended October 31, 2019. The Act
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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), which resulted in
a net charge of $1.2 million during the year ended October 31, 2019.
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. These sources generally provide information about activity levels in the U.S.
The NAHB has forecasted calendar-year housing starts (excluding manufactured units) to increase slightly through 2021.
Ducker indicated that window shipments in the R&R market are expected to decline slightly during the calendar year ended 2019,
increase 2% during 2020 and increase 3% during 2021. Derived from reports published by Ducker, the overall decline in window
shipments for the trailing twelve months ended September 30, 2019 was 1.6%. During this period, R&R activity and new
construction decreased 0.9% and 2.5%, respectively.
Our U.K. vinyl business (commonly referred to as "HLP") is largely focused on the sale of vinyl house systems under the
trade name “Liniar” to smaller window manufacturers in the U.K. HLP 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. HLP’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, HLP 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.
Woodcraft manufactures kitchen and bathroom cabinet doors and components, amongst other products, using a variety of
woods from traditional hardwoods to engineered wood products. Currently, Woodcraft sells all of its products in the U.S., so
domestic housing starts and R&R activity constitute the primary drivers of this business as well. We also utilize industry publications
to evaluate the wood markets and commodity trends. Although NAHB forecasts indicate expected continued growth in the U.S.
housing market, much of this anticipated growth is in new construction for multi-family dwellings, or rental properties, which is
not the primary market for Woodcraft’s products. In recent years, forecasts project increased growth in single family homes. 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).
Woodcraft'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. However, significant weather events do disrupt the construction industry. The Southern
U.S. was impacted by Hurricane Michael in October 2018 and Hurricanes Harvey and Irma in August and September of 2017.
Although our operating plants were not directly impacted, several of our customers were impacted directly, as well as indirectly,
as some skilled laborers relocated to the region for construction jobs. From a longer-term perspective, the rebuilding efforts from
these storms spur additional growth in construction beyond the year in which they make landfall.
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.
We utilize several commodities in our business for which pricing can fluctuate, including polyvinyl resin (PVC), petroleum
products, aluminum, titanium dioxide (TIO2), silicone 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 these 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 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.
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In July 2016, the U.K. voted to exit the European Union (commonly referred to as “Brexit”), which has impacted the valuation
of the British Pound Sterling relative to other currencies used in our business, including our reporting currency, the United States
Dollar. The Pound remains well below the pre-Brexit level, and some general market uncertainty remains in the U.K. Although
we do not know the long-term effects of this change, there has been some impact on our results of operations to date (primarily
foreign currency translation).
The global economy remains uncertain due to currency devaluations, political unrest, terror threats, 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, 2019 and 2018
This table sets forth our consolidated results of operations for the twelve-month periods ended October 31, 2019 and 2018.
2019
For the Years Ended October 31,
2018
2019 vs. 2018
Amounts
% of Sales
Amounts
% of Sales
$ Change
Variance %
Net sales
Cost of sales (excluding depreciation and amortization)
Selling, general and administrative
Restructuring charges
Depreciation and amortization
Asset impairment charges
Operating income
Interest expense
Other, net
Income tax (expense) benefit
Net (loss) income
$ 893.8
694.4
101.2
0.4
49.6
74.6
(26.4)
(9.6)
0.1
(10.8)
(46.7)
$
100%
78%
11%
—%
6%
8%
(3)%
(1)%
—%
(1)%
(5)%
(Dollars in millions)
100%
78%
12%
—%
6%
—%
4%
(1)%
—%
—%
3%
$ 889.8
697.0
103.8
1.5
51.8
—
35.7
(11.1)
1.2
0.8
26.6
$
$
$
4.0
—%
(2.6) —%
3%
(2.6)
73%
(1.1)
4%
(2.2)
(100)%
74.6
(174)%
(62.1)
14%
1.5
(92)%
(1.1)
(1,450)%
(11.6)
(276)%
(73.3)
Our year-over-year results by reportable segment follow. Our comparison of the results for the fiscal years ended October 31,
2018 and 2017 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, 2018.
Changes Related to Operating Income by Reportable Segment:
NA Fenestration
For the Years Ended October 31,
2019
2018
$ Change
Variance %
(Dollars in millions)
Net sales
Cost of sales (excluding depreciation and amortization)
Selling, general and administrative
Restructuring charges
Depreciation and amortization
Operating income
Operating income margin
$
$
503.8
386.2
50.4
0.4
27.0
39.8
$
$
485.4
372.0
54.2
1.4
27.2
30.6
8%
6%
$
$
18.4
14.2
(3.8)
(1.0)
(0.2)
9.2
4%
(4)%
7%
71%
1%
30%
Net Sales. Net sales increased $18.4 million, or 4%, for the twelve months ended October 31, 2019 compared to the same
period in 2018. We experienced an increase of $10.0 million related to price, $7.2 million of revenue growth driven both by new
volume and market growth, and an increase of $1.2 million related to surcharges.
Cost of Sales. Cost of sales increased $14.2 million, or 4%, for the twelve months ended October 31, 2019 compared to the
same period in 2018. Cost of sales increased due to the corresponding increase in volume coupled with inflationary cost increases.
A portion of the raw material increases are recovered through surcharges.
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Selling, General and Administrative. Our selling, general and administrative expenses decreased by $3.8 million, or 7%,
for the twelve months ended October 31, 2019 compared to the same period in 2018. This decrease was due primarily to lower
compensation expenses as a result of a reduction in headcount.
Restructuring Charges. Restructuring charges of $0.4 million incurred during the twelve months ended October 31, 2019
primarily relate to facility lease expense related to a vinyl extrusion plant which was closed in January 2017 in the U.S. that has
not been sublet or otherwise exited as of October 31, 2019. Restructuring charges of $1.4 million incurred for the twelve months
ended October 31, 2018 relate to two such plants in the prior year.
EU Fenestration
For the Years Ended October 31,
2019
2018
$ Change
Variance %
(Dollars in millions)
Net sales
Cost of sales (excluding depreciation and amortization)
Selling, general and administrative
Depreciation and amortization
Operating income
Operating income margin
$
$
164.9
114.1
23.0
8.8
19.0
$
$
160.0
114.9
22.8
9.6
12.7
$
$
12%
8%
4.9
(0.8)
0.2
(0.8)
6.3
3%
1%
(1)%
8%
50%
Net Sales. Net sales increased $4.9 million, or 3%, when comparing the twelve months ended October 31, 2019 compared
to the same period in 2018. This increase reflects $7.4 million of volume increases and $6.2 million of base price increases,
partially offset by $8.7 million of unfavorable foreign currency rate changes.
Cost of Sales. The cost of sales decreased $0.8 million for the twelve months ended October 31, 2019 compared to the same
period in 2018. This decrease is primarily related to the impact of foreign currency rate changes during the period.
Selling, General and Administrative. Our selling, general and administrative expense increased $0.2 million for the twelve
months ended October 31, 2019 compared to the same period in 2018 due to increased marketing expenses, which were offset by
foreign currency rate changes.
Depreciation and Amortization. Depreciation and amortization expense decreased $0.8 million for the twelve months ended
October 31, 2019 compared to the same period in 2018 due to foreign currency rate changes coupled with the run-off of depreciation
expense.
NA Cabinet Components
For the Years Ended October 31,
2019
2018
$ Change
Variance %
(Dollars in millions)
Net sales
Cost of sales (excluding depreciation and amortization)
Selling, general and administrative
Restructuring charges
Depreciation and amortization
Asset impairment charge
Operating loss
Operating loss margin
$
$
229.6
197.2
18.8
—
13.2
74.6
(74.2)
$
$
249.8
214.1
18.0
0.1
14.4
—
3.2
$
$
(32)%
1%
(20.2)
(16.9)
0.8
(0.1)
(1.2)
74.6
(77.4)
(8)%
8%
(4)%
100%
8%
(100)%
(2,419)%
Net Sales. Net sales decreased $20.2 million for the twelve months ended October 31, 2019 compared to the same period
in 2018. On a year-over-year basis, we realized a decrease of $23.7 million as a result of lower volumes primarily related to the
industry shift from semi-custom to stock cabinets, which was partially offset by $3.5 million of price increases and raw material
surcharges.
Cost of Sales. The cost of sales decreased $16.9 million for the twelve months ended October 31, 2019 compared to the same
period in 2018 as a result of market volume declines.
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Selling, General and Administrative. Our selling, general and administrative expense increased $0.8 million for the twelve
months ended October 31, 2019 compared to the same period in 2018, largely driven by a loss on the sale of fixed assets.
Restructuring Charges. Restructuring charges of $0.1 million for the year ended October 31, 2018 represent the remaining
costs from the Kansas plant closure effected in September 2017 which were incurred during the first quarter of the year ended
October 31, 2018.
Depreciation and Amortization. Depreciation and amortization expense decreased $1.2 million for the twelve months ended
October 31, 2019 compared to the same period in 2018, reflecting the run-off of depreciation expense related to existing assets
and disposals during the period.
Asset Impairment Charge. Asset impairment charges of $74.6 million relate to goodwill impairment charges. For further
information, see Note 5, "Goodwill and Intangible Assets" included elsewhere in this Annual Report on Form 10-K.
Unallocated Corporate & Other
For the Years Ended October 31,
2019
2018
$ Change
Variance %
Net sales
Cost of sales (excluding depreciation and amortization)
Selling, general and administrative
Depreciation and amortization
Operating loss
$
$
(4.5)
(3.1)
9.0
0.6
(11.0)
$
$
(Dollars in millions)
(5.4)
(4.0)
8.8
0.6
(10.8)
$
$
0.9
0.9
0.2
—
(0.2)
17%
(23)%
(2)%
—%
(2)%
Net Sales. Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the twelve
months ended October 31, 2019 and 2018.
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 $0.2 million, for the twelve
months ended October 31, 2019 compared to the same period in 2018. This increase is attributable to $2.0 million of higher
compensation expense primarily related to the valuations of our stock based compensation awards and higher severance expense
of $1.9 million related to executive severance and headcount reduction, which were offset by $3.6 million of lower medical expenses
due to reimbursement of certain medical expenses during the twelve months ended October 31, 2019.
Changes Related to Non-Operating Items:
Interest Expense. Interest expense decreased $1.5 million for the twelve months ended October 31, 2019 compared to the
same period in 2018. The decrease in interest expense was primarily driven by the absence of $1.1 million of deferred financing
fees which were incurred in 2018 related to amending the 2016 Credit Agreement. Excluding these fees, interest expense decreased
slightly due to lower debt balances during 2019, partially offset by higher interest rates. The weighted average interest rate for
borrowings outstanding for the twelve months ended October 31, 2019 was 4.07% compared with 3.76% for the twelve months
ended October 31, 2018.
Other, net. The reduction in other, net of $1.1 million for the twelve months ended October 31, 2019 compared to the same
period in 2018 relates primarily to a decrease in net pension service benefits.
Income Taxes. We recorded income tax expense of $10.8 million on a pre-tax loss of $36.0 million for the twelve months
ended October 31, 2019, an effective rate of 30.0%, and income tax benefit of $0.8 million on pre-tax income of $25.8 million for
the twelve months ended October 31, 2018, an effective benefit rate of 3.1%. The effective rate for the twelve months ended
October 31, 2019 was primarily impacted by the fact that a majority of the $74.6 million asset impairment charge in the NA Cabinet
Components segment did not generate a tax benefit, and a net charge of $1.2 million related to GILTI and FDII. The effective rate
for the twelve months ended October 31, 2018 reflects the impact of the Act, which reduced our federal tax rate from 35.0% to
21.0% as of January 1, 2018, and resulted in a discrete tax benefit.
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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, 2019, we had $30.9 million of cash and equivalents, $142.5 million outstanding under our
credit facilities, $4.8 million of outstanding letters of credit and $15.9 million outstanding under capital leases. We had $177.7
million available for use under a revolving credit facility at October 31, 2019.
On July 29, 2016, we entered into a $450.0 million credit agreement comprising a $150.0 million Term Loan A and a $300.0
million revolving credit facility (collectively, the “ 2016 Credit Agreement”), under which we borrowed $150.0 million and $150.0
million, respectively. The proceeds from the 2016 Credit Agreement, along with additional funding of $16.4 million of cash on
hand, were used to repay outstanding borrowings under our prior credit facilities of $309.2 million, to pay a 1% prepayment call
premium, to settle outstanding interest accrued, and to pay loan fees which totaled $2.8 million. In addition, we expensed $8.1
million to write-off unamortized deferred financing fees and $5.5 million of unamortized original issuer’s discount associated with
our prior credit facilities. The 2016 Credit Agreement was to mature in 2021 (5-year term) and required interest payments calculated,
at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin (0.50% to
1.25%) or the LIBOR Rate plus an applicable margin (1.50% to 2.25%). We included deferred financing fees of $2.8 million as
a contra-liability account, and were amortizing this balance straight-line over the term of the facility.
On October 18, 2018, we amended and restated the 2016 Credit Agreement by entering into a $325.0 million revolving credit
facility (the “2018 Credit Facility”), under which we borrowed $205.0 million. The proceeds from the 2018 Credit Facility, along
with additional funding of $10.0 million of cash on hand, were used to repay outstanding borrowings under the 2016 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 2016 Credit
Agreement. The 2018 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, 2019 and
2018 was 4.07% and 3.76%, respectively. We were in compliance with our debt covenants as of October 31, 2019. For additional
details of the Credit Agreement, see "Item 1A. Risk Factors" included elsewhere within this Annual Report on Form 10-K.
Analysis of Cash Flow
The following table summarizes our cash flow results for the years ended October 31, 2019, 2018 and 2017:
Cash flows provided by operating activities
Cash flows used for investing activities
Cash flows used for financing activities
Operating Activities
Year Ended October 31,
2019
2018
(In millions)
2017
$
$
$
96.4
(23.6)
(71.3)
$
$
$
104.6
(26.1)
(65.8)
$
$
$
79.8
(32.6)
(55.1)
Operating cash flow for the year ended October 31, 2019 declined by approximately $8.2 million compared to the year ended
October 31, 2018. Unfavorable impacts to cash receipts as a result of a reduction in net income were largely offset by favorable
working capital changes, including a lower accrued incentive, a favorable change in accounts payable and improved inventory
management. Cash provided by operating activities increased $24.8 million for the year ended October 31, 2018 compared to the
year ended October 31, 2017. Cash receipts were impacted favorably by higher net income along with a reduction of inventory
in 2018 versus a build in 2017 and favorable changes in accounts payable and accrued liabilities.
Investing Activities
Cash used for investing activities for the year ended October 31, 2019 decreased $2.5 million compared to the year ended
October 31, 2018 due to a $1.6 million decline in our investment in capital expenditures year-over-year, as well as $0.9 million
of additional proceeds from the sale of capital assets. Cash used for investing activities decreased $6.5 million in 2018 compared
to 2017. Our investment in capital expenditures declined $8.1 million during 2018, which partially offset a decrease of $1.5 million
in proceeds from the sale of capital assets during the year.
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At October 31, 2019, we had firm purchase commitments of approximately $6.9 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 2019, cash used for financing activities was $71.3 million and related primarily to net debt repayments of $54.0 million,
payment of dividends of $10.6 million, and share repurchases of $9.6 million. In 2018, our cash used for financing activities was
$65.8 million and related primarily to share repurchases of $32.0 million, net debt repayments of $29.5 million, payment of
dividends of $7.0 million, and other spending of $2.0 million, partially offset by funds received from the issuance of common
stock in settlement of stock option exercises of $4.7 million. In 2017, cash used for financing activities was $55.1 million and
related primarily to repayment of borrowings under our credit facility, an acquisition earn-out payment of $8.5 million, and payment
of dividends of $5.5 million, partially offset by funds received from the issuance of common stock in settlement of stock option
exercises of $8.0 million.
Liquidity Requirements
Our strategy for deploying cash is to invest in organic growth opportunities, develop our infrastructure, and make strategic
acquisitions. Other uses of cash include paying cash dividends to our shareholders and repurchasing our own stock. We have
historically invested cash and cash equivalents in commercial paper with terms of three months or less. We did not have any
investments during the years ended October 31, 2019 and 2018. We maintain cash balances in foreign countries which totaled $9.8
million and $15.7 million as of October 31, 2019 and 2018. During the years ended October 31, 2019 and 2018, we repatriated
$24.2 million and $2.8 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 2018 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 2018 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 2018 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 2018 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
2018 Credit Facility.
The 2018 Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the
Consolidated Interest Coverage Ratio, as defined, to be less than 2.25 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 2018 Credit Facility also limits our ability to enter into certain
business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted
payments, pay dividends (limited to $20.0 million per year) and to conduct other transactions as further defined in the 2018 Credit
Facility. Some of these limitations, however, do not take effect so long as total leverage is less than or equal to 2.75 to 1.00 and
available liquidity exceeds $25 million. Substantially all of our domestic assets, with the exception of real property, are pledged
as collateral for the 2018 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 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
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October 31, 2019 and 2018, we purchased 583,398 shares and 1,900,000 shares, respectively, at a cost of $9.6 million and $32.0
million, respectively, under this program.
Contractual Obligations and Commercial Commitments
The following table summarizes our known contractual obligations and commitments as of October 31, 2019:
Contractual Obligations:
Long-term debt, including interest(1)
Capital leases
Operating leases(2)
Unconditional purchase obligations(3)
Total contractual cash obligations(4)
Payments Due by Period
Total
2020
2021-2022
2023-2024
Thereafter
$
164,751
$
15,865
47,539
18,683
$
246,838
$
5,560
1,050
9,121
18,683
34,414
(In thousands)
$
11,121
$
148,070
$
1,691
12,993
—
1,736
10,205
—
—
11,388
15,220
—
$
25,805
$
160,011
$
26,608
(1) Interest on our long-term debt was computed using rates in effect at October 31, 2019.
(2) Operating leases include facilities, light vehicles, forklifts, office equipment and other operating equipment.
(3) The unconditional purchase obligations consist of commitments to buy miscellaneous parts, inventory, and expenditures
related to capital projects in progress.
(4) This table excludes tax reserves recorded in accordance with ASC Topic 740 “Income Taxes,” as we are unable to reasonably
estimate the timing of future cash flows related to these reserves.
During fiscal 2020, we expect to contribute approximately $3.7 million to our pension plan to maintain our 100% funding
threshold and meet our minimum contribution requirements. Pension contributions beyond 2020 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, 2019, we have recorded a long-term liability for deferred pension
and postretirement benefits totaling $13.3 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, 2019, our liability under the supplemental benefit plan
and the deferred compensation plan was approximately $4.2 million and $3.8 million, respectively.
The following table reflects other commercial commitments or potential cash outflows that may result from a contingent
event.
Other Commercial Commitments:
Standby letters of credit
$
4,800
$
4,800
(In thousands)
$
— $
— $
—
Amount of Commitment Expiration per Period
Total
2020
2021-2022
2023-2024
Thereafter
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. While we utilize
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 believe inflation has not had a significant effect on our earnings
or financial position over the previous three fiscal years. We cannot provide assurance, however, that our results of operations and
financial position will not be materially impacted by inflation in the future.
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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.
Revenue from Contracts with Customers
On November 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers
(ASC Topic 606) using the modified retrospective method and applying ASC Topic 606 to all revenue contracts with customers.
Results for reporting periods beginning on or after November 1, 2018 are presented under ASC Topic 606. In accordance with
the modified retrospective approach, prior period amounts were not adjusted and are reported under ASC Topic 605, Revenue
Recognition. As a result of adoption, there was not a material impact on our consolidated financial statements. We expect the
impact of the adoption of ASC Topic 606 to continue to be immaterial to our net income on an ongoing basis.
Revenue Recognition
We recognize revenue that reflects the consideration we expect to receive for product sales when the promised items are
transferred to customers. Revenue for product sales is recognized when control of the promised products is transferred to our
customers, and we expect to be entitled to consideration in exchange for transferring those products. We account for a contract
when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those
services, and when collectability of the consideration due is probable.
Performance obligations
A performance obligation is a promise to provide the customer with a good or service. Our performance obligations include
product sales, with each product included in a customer contract being recognized as a separate performance obligation. For
contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable.
Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance
with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to
account for product returns related to general returns and product nonconformance.
Pricing and sales incentives
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling
price, reflective of current and prospective discounts.
Practical expedients and exemptions
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be
less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original
expected length of one year or less.
Shipping and handling costs
We have elected to account for shipping and handling services as fulfillment services in accordance with ASC Topic 606
guidance; accordingly, freight revenue will be combined with the product deliverable rather than being accounted for as a distinct
performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods
to customers are considered a cost to fulfill the contract and are included in Cost of sales in the accompanying Condensed
Consolidated Statements of Income.
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Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for
which we have received consideration.
Allowance for Doubtful Accounts
We record trade accounts receivable at billed amounts, less an allowance for doubtful accounts. This allowance is established
to estimate the risk of loss associated with our trade receivables which may arise due to the inability of our customers to pay or
due to changes in circumstances. The allowance is maintained at a level that we consider appropriate based on factors that affect
collectability, including: (a) historical trends of write-offs, recoveries and credit losses; (b) the credit quality of our customers;
and (c) projected economic and market conditions. Different assumptions or changes in economic circumstances could result in
changes to the allowance. Our historical bad debt expense has approximated 0.3% of sales for the years ended October 31, 2019,
2018 and 2017. If bad debt expense increased by 1% of net sales, the impact on operating results would have been an increase in
net loss of $6.8 million for the year ended October 31, 2019, and a decrease in net income of $9.2 million and $6.4 million for the
years ended October 31, 2018 and 2017, respectively.
Business Combinations - Contingencies
We apply the acquisition method of accounting for business combinations in accordance with U.S. GAAP, which requires
us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net assets
and liabilities acquired. We use established valuation techniques and engage reputable valuation specialists to assist us with these
valuations. However, there is a risk that we may not identify all pre-acquisition contingencies or that our estimates may not reflect
the actual results when realized. We utilize a reasonable measurement period to record any adjustment related to the opening
balance sheet (generally, less than one year). After the measurement period, changes to the opening balance sheet can result in the
recognition of income or expense as period costs. To the extent these items stem from contingencies that existed at the balance
sheet date, but are contingent upon the realization of future events, the cost is charged to expense at the time the future event
becomes known. If our purchase accounting estimates are not correct, or if we do not recognize contingent assets or liabilities
accurately, we may incur losses.
Impairment or Disposal of Long-Lived Assets
Property, Plant and Equipment and Intangible Assets with Defined Lives
We make judgments and estimates in conjunction with the carrying value of our long-term assets, including property, plant
and equipment, and identifiable intangibles. These judgments may include the basis for capitalization, depreciation and amortization
methods and the useful lives of the underlying assets. In accordance with U.S. GAAP, we review the carrying values of these assets
for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine
that the carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. If the carrying value exceeds the sum of the undiscounted cash flows and after considering
alternate uses for the asset, an impairment charge would be recorded in the period in which such review is performed. We measure
the impairment loss as the amount by which the carrying amount of the long-lived asset exceeds its fair value. Fair value is
determined by reference to quoted market prices in active markets, if available, or by calculating the discounted cash flows
associated with the use and eventual disposition of the asset. Therefore, if there are indicators of impairment, we are required to
make long-term forecasts of our future revenues and costs related to the assets subject to review. Forecasts require assumptions
about demand for our products and future market conditions. Although there may be no indicators of impairment in the current
period, unanticipated changes to assumptions or circumstances in future periods could result in an impairment charge in the period
of the change. No impairment charges were incurred with regard to our property, plant and equipment for the years ended October 31,
2019, 2018 and 2017.
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.
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During October 2016 and continuing throughout 2017, we determined that a triggering event occurred which necessitated a
review of our long-term assets as prescribed above (expected reduction in volume for our U.S. vinyl business and results below
our forecasts for Woodcraft). Based on an undiscounted cash flow analysis, we determined that our property, plant and equipment
and defined-lived intangible assets were not impaired. However, with regard to our U.S. vinyl business, we recorded a change in
accounting estimate associated with shortening the remaining useful lives of certain property, plant and equipment to be retired
as part of the announced closures of several plants. We recognized incremental depreciation expense of $4.3 million in 2017 as
a result of the change in estimates. In addition, we shortened the life of several defined-lived intangible assets, which resulted in
the recognition of incremental amortization expense of $1.9 million for the year ended October 31, 2017. There have been no
impairments or related expenses of property, plant and equipment and defined-lived intangibles during the year ended October
31, 2019 and 2018.
Goodwill
We use the acquisition method to account for business combinations and, to the extent that the purchase price exceeds the fair
value of the net assets acquired, we record goodwill. In accordance with U.S. GAAP, we are required to evaluate our goodwill at
least annually. We perform our annual goodwill assessment as of August 31, or more frequently if indicators of impairment exist.
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 utilizes market multiples and a selection of guideline
public companies. This test requires us to make assumptions about the future growth of our business and the market in general,
as well as other variables such as the level of investment in capital expenditure, growth in working capital requirements and the
terminal or residual value of our reporting units beyond the periods of estimated annual cash flows. We use a third-party valuation
firm to assist us with this analysis. If the fair value of each reporting unit exceeds its carrying value, no action is required. Otherwise,
an impairment loss is recorded to the extent that the carrying amount of the reporting unit including goodwill exceeds the fair
value of that reporting unit. We believe the estimates and assumptions used in our impairment assessment are reasonable based
on available market information, but variations in any of the assumptions could result in materially different calculations of fair
value and determinations of whether or not an impairment is indicated during current or future periods.
During the second quarter of 2019, our reporting unit included in our NA Cabinet Components segment experienced financial
performance for the year to date period ended March 31, 2019 that was below our budget. As a result, we developed a new long-
range forecast for this reporting unit that was below its previous long-range forecast as a result of an industry-wide shift from
semi-custom cabinets to stock cabinets. We determined that the combination of i) actual financial results below planned
performance, ii) a downward revision of the long-range forecast, and iii) the historical narrow margin of fair value over carrying
value in previous annual and interim goodwill assessments represented a triggering event that would more likely than not indicate
that the carrying value of this reporting unit was greater than its fair value. Therefore, we performed a quantitative impairment
test of the goodwill balance at March 31, 2019. The quantitative impairment test was conducted using multiple valuation techniques,
including a discounted cash flow analysis, which utilizes Level 3 fair value inputs, and resulted in an asset impairment charge of
$30.0 million during the second quarter of 2019.
At our annual testing date, August 31, 2019, 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 the two reporting units in the EU Fenestration segment. This review included an analysis of
historical goodwill test results, operating results relative to forecast, projected results over the next five years, and other measures
and concluded that there were no indicators of potential impairment associated with these reporting units. Therefore, no additional
testing was deemed necessary for the reporting units in the NA Fenestration segment and the EU Fenestration segment. Also, at
our annual testing date, we performed a quantitative assessment of the reporting unit in our NA Cabinet Components segment
primarily due to the recent impairment of goodwill during the second quarter of 2019 and the history of a narrow margin of fair
value above carrying value in quantitative assessments performed in prior years. We determined that the fair value of this reporting
unit exceeded its carrying value by approximately 5%. At that date, we concluded that no impairment was necessary.
After the annual assessment date and prior to our fiscal year end of October 31, 2019, the reporting unit in our NA Cabinet
Components segment was notified about a change in strategy at one of our large customers that may result in lower sales volumes
in the future. In addition, we continued to experience lower-than-expected volumes as a result of the ongoing shift in demand
from semi-custom cabinets to stock cabinets. Based on this information, we updated our long-range forecast for this reporting
unit to reflect the expected volume declines. This revised long-range forecast was utilized to perform another quantitative
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impairment test of this reporting unit as of October 31, 2019, which resulted in an asset impairment charge of $44.6 million during
the fourth quarter of 2019. As a result of the quantitative assessments performed in the second and fourth quarters of 2019, we
recorded impairment charges totaling $74.6 million during the year ended October 31, 2019, reducing the goodwill balance
applicable to the reporting unit included in our NA Cabinet Components operating segment from $113.7 million to $39.1 million.
Restructuring
We account for restructuring costs in accordance with U.S. GAAP, whereby we accrue for one-time severance benefits
pursuant to an approved plan of restructuring at the communication date, when affected employees have been notified of the
potential severance and sufficient information has been provided for the employee to calculate severance benefits, in the event the
employee is involuntarily terminated. In addition, we accrue costs associated with the termination of contractual commitments
including operating leases at the time the lease is terminated pursuant to the lease provisions or in accordance with another agreement
with the landlord. Otherwise, we continue to recognize operating lease expense through the cease-use date. After the cease-use
date, we determine if our operating lease payments are at market. We assume sublet of the facility at the market rate. To the extent
our lease obligations exceed the fair value rentals, we discount to arrive at the present value and record a liability. If the facility
is not sublet, we expense the amount of the lease in the current period until sublet. For other costs directly related to the restructuring
effort, such as equipment moving costs, we expense in the period incurred.
In 2017, we incurred costs related to plant closures which were announced in 2016, including equipment moving costs,
additional employee termination and severance costs, retirements and inventory adjustments, operating lease costs, accelerated
amortization and depreciation costs, and equipment lease termination costs. In addition, we incurred costs related to the closure
of a kitchen and bathroom cabinet door plant in Lansing, Kansas. Restructuring costs totaled $4.6 million for the year ended
October 31, 2017. During the year ended October 31, 2018, we negotiated the exit from one of the vinyl extrusion plants, and the
lease for the plant in Lansing, Kansas expired. During the years ended October 31, 2019 and 2018, we incurred $0.4 million and
$1.5 million of restructuring costs related to these leases, and expect to continue to incur costs related to the remaining vinyl plant
during fiscal 2020 until such time we are able to sublet or otherwise negotiate an exit from the facility.
Income Taxes
We operate in various jurisdictions and therefore our income tax expense relates to income taxes in the U.S., U.K., Canada,
and Germany, as well as local and state income taxes. We recognize the effect of a change in tax rates in the period of the change.
We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and the amounts
reported in our consolidated balance sheets, as well as net operating losses and tax credit carry forward. We evaluate the carrying
value of our net deferred tax assets and determine if our business will generate sufficient future taxable income to realize the net
deferred tax assets. We perform this review for recoverability on a jurisdictional basis, whereby we consider both positive and
negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative
evidence is commensurate with the extent to which the evidence can be objectively verified. We evaluate recoverability based on
an estimate of future taxable income using the long-term forecasts we use to evaluate long-lived assets, goodwill and intangible
assets for impairment, taking into consideration the future reversal of existing taxable temporary differences and reviewing our
current financial operations. In the event that our estimates and assumptions indicate we will not generate sufficient future taxable
income to realize our deferred tax assets, we will record a valuation allowance, to the extent indicated, to reduce our deferred tax
assets to their realizable value.
Annually, we evaluate our tax positions to determine if there have been any changes in uncertain tax positions or if there has
been a lapse in the statute of limitations with regard to such positions. Our liability for uncertain tax positions at October 31, 2019
and 2018 totaled $0.6 million and related to certain state tax items regarding the interpretation of tax laws and regulations.
We believe we will have sufficient taxable income in the future to fully utilize our unreserved deferred tax assets recorded
as of October 31, 2019. There is a risk that our estimates related to the future use of loss carry forwards and our ability to realize
our deferred tax assets may not come to fruition, and that the results could materially impact our financial position and results of
operations. We have recorded the benefit associated with the “patent box” deduction in the U.K. with regard to our operations at
HLP. We believe that it is more likely than not that our deduction with regard to this position would be sustained upon examination.
In addition, we recorded the effect of a statutory change in the deferred tax rate from 19% to 17% in the U.K. in 2017 results,
which provided a discrete tax benefit of $1.0 million during the period. Our deferred tax assets at October 31, 2019 and 2018
totaled $21.0 million and $19.8 million, respectively, against which we had recorded a valuation allowance of $1.6 million and
$1.3 million, respectively.
Insurance
We manage our costs of workers’ compensation, group medical, property, casualty and other liability exposures through a
combination of self-insurance retentions and insurance coverage with third-party carriers. Liabilities associated with our portion
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of this exposure are not discounted. We estimate our exposure by considering various factors which may include: (1) historical
claims experience, (2) severity factors, (3) estimated claims incurred but not reported and (4) loss development factors, which are
used to estimate how claims will develop over time until settled or closed. While we consider a number of factors in preparing
our estimate of risk exposure, we must use our judgment to determine the amounts to accrue in our financial statements. Actual
claims can differ significantly from estimated liabilities if future claims experience differs from historical experience, and if we
determine that our assumptions used for analysis or our development factors are flawed. We do not recognize insurance recoveries
until any contingencies relating to the claim have been resolved.
Inventory
We record inventory at the lower of cost or market value. Inventories are valued using the first-in first-out (FIFO) method.
In the second quarter of 2019, we changed the method of inventory costing for certain inventory in two plants included in our
North American Fenestration reportable business segment to the FIFO method from the last-in first-out (LIFO) method. We utilize
the FIFO method to determine costs at all of our other operating locations. We believe that the FIFO method is preferable as it
provides uniformity of inventory valuation across our global operations, aligns with a majority of our peers which use FIFO as
their only inventory valuation method, and provides better matching of revenues and expenses. The impact of this change in
accounting principle on the financial statements for each period presented is further explained in Note 3, "Inventories", contained
elsewhere herein this Annual Report on Form 10-K. Fixed costs related to excess manufacturing capacity have been expensed in
the period, and therefore, are not capitalized into inventory. Inventory quantities are regularly reviewed and provisions for excess
or obsolete inventory are recorded primarily based on our forecast of future demand and market conditions. Significant unanticipated
changes to our forecasts or changes in the net realizable value of our inventory would require a change in the provision for excess
or obsolete inventory. For the years ended October 31, 2019, 2018 and 2017, our inventory reserves are approximately 5%, 6%,
and 5% of gross inventory, respectively. Assuming an increase in obsolescence equal to 1% of gross inventory, net loss would
have increased by $0.5 million for the year ended October 31, 2019, and net income would have been reduced by $1.0 million
and $0.7 million for the years ended October 31, 2018 and 2017, 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. The measurement of liabilities related to these plans is based on our
assumptions related to future events, including expected return on plan assets, rate of compensation increases, and healthcare cost
trend rates. The discount rate reflects the rate at which benefits could be effectively settled on the measurement date. We determine
our discount rate using a RATE: 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, 2019, our projected benefit obligation (PBO) and accumulated benefit obligation (ABO) exceeded the fair
value of the plan assets by $13.1 million and $12.1 million, respectively. As a comparison, our PBO and ABO exceeded the fair
value of plan assets by $3.9 million and $3.3 million, respectively, as of October 31, 2018. During fiscal 2019, we contributed
$0.7 million to the pension plan to meet minimum contribution requirements. We expect to continue to fund at this level for fiscal
2020. Expected contributions are dependent on many variables, including the variability of the market value of the assets as
compared to the obligation and other market or regulatory conditions. In addition, we take into consideration our business investment
opportunities and our cash requirements. Accordingly, actual funding may differ greatly from current estimates. As of October
31, 2019, a 1% decrease in the discount rate would result in an increase in the PBO of $5.7 million.
Under U.S. GAAP, we are not required to immediately recognize the effects of a deviation between actual and assumed
experience under our pension plan, or to revise our estimate as a result. This approach allows the favorable and unfavorable effects
that fall within an acceptable range to be netted and disclosed as an unrecognized gain or loss. As of October 31, 2019 and 2018,
a net actuarial loss of $6.7 million and $3.0 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, 2019 and 2018. The effect
on fiscal years after 2019 will depend on the actual experience of the plans.
Mortality assumptions used to determine the obligations for our pension plans are based on the RP-2006 base mortality table
with MP-2018 mortality improvement scale.
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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 our consolidated balance sheets at October 31, 2019 and 2018, included elsewhere within this Annual Report on Form
10-K.
In addition, we have granted performance share units which settle in cash and shares upon vesting. The awards granted during
the years ended October 31, 2018 and 2017 have vesting criteria based on a market condition (relative total shareholder return)
and an internal performance condition (earnings per share growth). The award granted during the year ended October 31, 2019
utilizes return on net assets as the vesting condition and settles in cash. We utilize 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. We bifurcate the liability
and equity portion of the awards (amounts expected to settle in cash and shares, respectively) and recognize expense ratably over
the vesting period of three years. We 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, 2019, we expect 56,103 performance share awards to vest, of
which 28,051 would be paid in our common stock and 28,051 would settle in cash.
We also awarded performance restricted stock units to key employees and officers in December 2018 and 2017. These awards
cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term
as the vesting criteria. The number of performance restricted stock units earned is variable depending on the metric achieved, and
the settlement method is 100% in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the
shares had been outstanding throughout the performance period. To value the performance restricted stock units, we utilize a
Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over
the three-year term of the award with a credit to additional paid-in-capital. Similar to performance shares, the performance restricted
stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares
used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13,
Financial Instruments - Credit Losses (Topic 326). This amendment replaces the incurred loss impairment methodology in current
U.S. GAAP and requires that financial assets be measured on an amortized cost basis and presented at the net amount expected to
be collected. This new methodology reflects expected credit losses (rather than probable credit losses) and requires consideration
of a broader range of supportable information when determining these estimated credit losses, including relevant experience,
current conditions and supportable forecasts to determine collectability. In addition, the amendment provides guidance with regard
to the use of an allowance for credit losses for purchased financial assets and available-for-sale debt securities. This amendment
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becomes effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We expect
to adopt this amendment during fiscal 2021, with no material impact on our consolidated financial statements.
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize
leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use
model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term
longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification
of expense recognition in the income statement.
The new standard is effective for us on November 1, 2019, with early adoption permitted. We plan to adopt using a modified
retrospective transition approach, applying the new standard to all leases existing at the date of initial application. We expect to
adopt the new standard on November 1, 2019 and use the effective date as our date of initial application. Consequently, financial
information will not be updated and the disclosures required under the new standard will not be provided for dates and periods
prior to November 1, 2019.
The new standard provides a number of optional practical expedients in transition. We will elect all of the new standard’s
available transition practical expedients.
This standard will have a material effect on our financial statements. The most significant effects on our financial statements
relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our operating leases and providing
significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between
now and adoption.
On adoption, we will recognize additional operating liabilities ranging from $40.0 million to $45.0 million, with corresponding
ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing
standards for existing operating leases.
The new standard also provides practical expedients for an entity’s ongoing accounting. We will elect the short-term lease
recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or
lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in
transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our
leases.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General
(Subtopic 715-20). This amendment modifies the disclosure requirements for employers that sponsor defined benefit pensions or
other postretirement plans. Specifically, the amendment removes disclosures which were no longer considered cost beneficial,
clarifies certain disclosure requirements, and adds disclosures identified as relevant. This amendment becomes effective for fiscal
years beginning after December 15, 2020, including interim periods within that fiscal year. We expect to adopt this amendment
during fiscal 2022, with no impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The following discussion of our exposure to various market risks contains “forward looking statements” regarding our
estimates, assumptions and beliefs concerning our exposure. Although we believe these estimates and assumptions are reasonable
in light of information currently available to us, we cannot provide assurance that these estimates will not materially differ from
actual results due to the inherent unpredictability of interest rates, foreign currency rates and commodity prices as well as other
factors. We do not use derivative financial instruments for speculative or trading purposes.
Interest Rate Risk
Our outstanding debt bears interest at variable rates and accordingly is sensitive to changes in interest rates. Based upon the
balances of the variable rate debt at October 31, 2019, a hypothetical 1.0% increase or decrease in interest rates could result in
approximately $1.4 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 2018 Credit Facility as of October 31, 2019.
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.
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The notional and fair market values of these positions at October 31, 2019 and 2018, were as follows:
Foreign currency exchange derivatives:
Buy EUR, Sell USD
Sell CAD, Buy USD
Sell GBP, Buy USD
Buy EUR, Sell GBP
Buy USD, Sell EUR
Notional as indicated
Fair Value in $
October 31,
2019
October 31,
2018
October 31,
2019
October 31,
2018
EUR
CAD
GBP
EUR
USD
301
405
73
57
13
(In thousands)
$
455
229
22
34
12
$
1
2
—
—
—
1
—
—
—
—
At October 31, 2019 and 2018, we held foreign currency derivative contracts hedging cross-border intercompany and
commercial activity for our insulating glass spacer business. Although these derivatives hedge our exposure to fluctuations in
foreign currency rates, we do not apply hedge accounting and therefore, the change in the fair value of these foreign currency
derivatives is recorded directly to other income and expense in the accompanying consolidated statements of (loss) income. To
the extent the gain or loss on the derivative instrument offsets the gain or loss from the remeasurement of the underlying foreign
currency balance, changes in exchange rates should have no effect. See Note 12, "Derivative Instruments", contained elsewhere
herein this Annual Report on Form 10-K.
During October 2018, we settled an unhedged foreign currency intercompany loan which facilitated the HLP acquisition.
For the year ended October 31, 2018, we realized a loss of less than $0.1 million related to this foreign currency exposure. For
the year ended October 31, 2017, we recorded a foreign currency gain of $0.7 million, of which $0.5 million was realized.
On June 23, 2016, voters in the U.K. voted for the U.K. to exit the E.U. (referred to as Brexit). The U.K. is currently due to
leave the E.U. on January 31, 2020, but the actual timing, terms of its withdrawal and the nature of its future with the E.U. are still
being debated. Since the 2016 vote, the primary impact on our financial performance has been related to foreign currency fluctuations
of the British Pound Sterling. This fluctuation has driven foreign currency translation impacts, as well as raw material cost increases
from upstream suppliers located outside of the U.K.
Given the lack of comparable precedent, it is difficult for us to predict the future impacts on our U.K. based operations, which
accounted for approximately 15% of our total sales for the year ended October 31, 2019. Due to the fact that we manufacture and
sell a majority of our U.K. products within the U.K., there is minimal risk to our ability to physically deliver goods and complete
sales. As such, we believe we are well positioned within the U.K. to respond to potential changes to underlying demand as a result
of the final Brexit outcome. The primary focus for our U.K. operations centers on the availability and pricing of raw materials.
While we source the majority of our raw materials from within the U.K., many of the primary upstream raw materials our vendors
utilize are being sourced from outside of the U.K., which could expose us to cross-border issues and raw material price impacts
due to foreign currency volatility. If the U.K. exits the E.U. without an agreement (referred to as a hard Brexit), there could be
complete closure of the U.K. border which could have widespread negative ramifications for the U.K. We do not expect a full
closure to occur and instead assume at a minimum that trading with certain countries will continue uninterrupted. Since we purchase
the same raw materials utilized in our U.K. facilities at our other non-U.K. facilities and source raw materials from multiple
countries, we believe we are prepared to utilize our existing Quanex-wide supply infrastructure to minimize potential supply
disruptions as much as possible.
Commodity Price Risk
We purchase polyvinyl resin (PVC) as the significant raw material consumed in the manufacture of vinyl extrusions. We
have a monthly resin adjuster in place with a majority of our customers and our resin supplier that is adjusted based upon published
industry indices for resin prices for the prior month. This adjuster effectively shares the base pass-through price changes of PVC
with our customers commensurate with the market at large. Our long-term exposure to changes in PVC prices is somewhat mitigated
due to the contractual component of the resin adjuster program. In addition, there is a level of exposure to short-term volatility
due to the one month lag.
We also charge our customers a surcharge related to petroleum-based raw materials. The surcharge is intended to offset the
rising cost of products which are highly correlated to the price of oil including butyl and other oil-based raw materials. The surcharge
is in place with the majority of our customers who purchase these products and 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 changes in oil-based raw material prices is significantly reduced under this surcharge program.
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Similarly, Woodcraft includes a surcharge 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.
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Item 8. Financial Statements and Supplementary Data.
Quanex Building Products Corporation
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Management's Annual Report on Internal Control over Financial Reporting
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of (Loss) Income
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statement of Stockholders’ Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
Page
38
41
42
43
44
45
46
47
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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, 2019 and 2018, the related consolidated statements of (loss) income,
comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended October 31,
2019, 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, 2019 and 2018, and the results of its
operations and its cash flows for each of the three years in the period ended October 31, 2019, in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of October 31, 2019, 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 12, 2019 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 matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) 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 matters 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 separate opinions on the critical audit matter or on the accounts or
disclosures to which they relate.
Goodwill impairment of the reporting unit included in the North American Cabinet Components operating segment
As described further in Note 1 to the Company’s financial statements, the Company is required to evaluate goodwill for impairment
annually or more frequently if indicators of impairment exist. The Company performs its annual goodwill impairment test as of
August 31. The Company determined that indicators of impairment exist as of March 31, 2019 and then subsequently on October
31, 2019 for the reporting unit included in the North American (“NA”) Cabinet Components operating segment. As such, the
Company estimated the fair value of this reporting unit to determine if the fair value was less than the carrying amount. As a result
of these assessments, the Company recognized goodwill impairments of $30.0 million at March 31, 2019 and $44.6 million at
October 31, 2019. We identified the estimation of the fair value of the reporting unit included in the NA Cabinet Components
operating segment as a critical audit matter.
The principal considerations for our determination that the goodwill impairment of the reporting unit included in the NA Cabinet
Components operating segment is a critical audit matter include the significant judgments and assumptions management makes
to estimate the fair value of the reporting unit for purposes of measuring the impairment of goodwill. Auditing the fair value of
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the reporting unit involved a high degree of auditor judgment, subjectivity and audit effort in evaluating management’s significant
assumptions, including future revenues, earnings and cash flows, expected growth rates, terminal growth rates, discount rates,
guideline public companies and market multiples. 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 the reporting unit included in the NA Cabinets Components
operating segment included the following, among others.
• We tested the effectiveness of controls over goodwill impairment including those over the determination of fair value,
including controls relating to management’s development of forecasts of future revenues, earnings and cash flows, discount
rates, market multiples and selection of guideline public companies.
• 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, communications to the Board of Directors, press releases and
industry reports.
• We utilized our valuation specialists to evaluate:
◦
The discount rate, including the testing of underlying source information and the mathematical accuracy of the
calculations, and developing a range of independent estimates and comparing those to the discount rates selected
by management.
◦ Market multiples by evaluating the selected comparable publicly traded companies and the adjustments made
for difference in growth prospects and risk profiles between the reporting unit and the comparable publicly traded
companies. We tested the underlying source information and mathematical accuracy of calculations.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2014.
Houston, Texas
December 12, 2019
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Quanex Building Products Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Quanex Building Products Corporation (a Delaware corporation)
and subsidiaries (the “Company”) as of October 31, 2019, 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, 2019, 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, 2019, and our report
dated December 12, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on
Internal Control 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 12, 2019
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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, 2019
using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control —
Integrated Framework (2013). Based on this assessment, management has concluded that, as of October 31, 2019, the Company’s
internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles based
on such criteria.
Grant Thornton LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the
effectiveness of the Company’s internal control over financial reporting. This report appears on page 40.
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QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of October 31, 2019 and 2018
Current assets:
Cash and cash equivalents
ASSETS
Accounts receivable, net of allowance for doubtful accounts of $393 and $325
Inventories, net
Prepaid and other current assets
Total current assets
Property, plant and equipment, net of accumulated depreciation of $317,568 and $288,607
Goodwill
Intangible assets, net
Other assets
Total assets
Current liabilities:
Accounts payable
Accrued liabilities
Income taxes payable
LIABILITIES AND STOCKHOLDERS' EQUITY
$
$
$
Current maturities of long-term debt
Total current liabilities
Long-term debt
Deferred pension and postretirement benefits
Deferred income taxes
Liability for uncertain tax positions
Other liabilities
Total liabilities
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 37,370,402 and 37,433,817
respectively; outstanding 33,021,789 and 33,339,032, respectively
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive loss
Less: Treasury stock at cost, 4,348,613 and 4,094,785 shares, respectively
Total stockholders’ equity
Total liabilities and stockholders' equity
See notes to consolidated financial statements.
42
October 31,
2019
2018
(In thousands, except share
amounts)
$
30,868
82,946
67,159
9,353
190,326
193,600
145,563
107,297
8,324
29,003
84,014
70,730
7,296
191,043
201,370
219,627
121,919
9,255
645,110
$
743,214
$
63,604
39,221
6,183
746
109,754
156,414
13,322
19,363
556
15,514
314,923
—
374
254,673
185,703
(33,817)
(76,746)
330,187
52,389
45,968
2,780
1,224
102,361
209,332
4,218
17,510
606
13,965
347,992
—
374
254,678
243,904
(30,705)
(73,029)
395,222
743,214
$
645,110
$
Table of Contents
QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
For the Years Ended October 31, 2019, 2018 and 2017
Net sales
Cost and expenses:
Cost of sales (excluding depreciation and amortization)
Selling, general and administrative
Restructuring charges
Depreciation and amortization
Asset impairment charges
Operating (loss) income
Non-operating (expense) income:
Interest expense
Other, net
(Loss) income before income taxes
Income tax (expense) benefit
Net (loss) income
Basic (loss) earnings per common share
Diluted (loss) earnings per common share
Weighted-average common shares outstanding:
Basic
Diluted
Year Ended October 31,
2019
2018
2017
(In thousands, except per share amounts)
$
893,841
$
889,785
$
866,555
694,420
101,292
370
49,586
74,600
(26,427)
(9,643)
116
(35,954)
(10,776)
(46,730)
(1.42)
(1.42)
$
$
$
697,022
103,758
1,486
51,822
—
35,697
(11,100)
1,156
25,753
800
26,553
0.77
0.76
$
$
$
32,960
32,960
34,701
35,025
672,488
98,085
4,550
57,495
—
33,937
(9,595)
1,160
25,502
(6,819)
18,683
0.55
0.54
34,230
34,837
$
$
$
Cash dividends per share
$
0.32
$
0.20
$
0.16
See notes to consolidated financial statements.
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QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the Years Ended October 31, 2019, 2018 and 2017
Net (loss) income
Other comprehensive (loss) income:
Year Ended October 31,
2019
2018
2017
(In thousands)
$
(46,730)
$
26,553
$
18,683
Foreign currency translation adjustments gain (loss)
Change in pension from net unamortized (loss) gain (pretax)
Change in pension from net unamortized (loss) gain tax benefit (expense)
Total other comprehensive (loss) income, net of tax
1,864
(6,572)
1,596
(3,112)
(6,640)
2,253
(1,242)
(5,629)
Comprehensive (loss) income
$
(49,842)
$
20,924
$
11,524
3,462
(1,297)
13,689
32,372
See notes to consolidated financial statements.
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QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Years Ended October 31, 2019, 2018 and 2017
Common Stock
Accumulated
Treasury Stock
Total
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Other
Comprehensive
Loss
(In thousands, except share amounts)
Shares
Amount
Stockholders’
Equity
Balance at October 31, 2016
37,560,249
$
376
$ 254,540
$ 214,892
$
(38,765)
(3,339,753) $ (62,367) $ 368,676
Net income
Foreign currency translation adjustment
Change in pension from net unamortized
gain (net of tax expense of $1,297)
Common dividends ($0.16 per share)
Expense related to stock-based
compensation
Stock options exercised
Tax benefit from share-based
compensation
Restricted stock awards granted
Performance share awards vested
Other
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(51,372)
(1)
—
—
—
—
18,683
—
—
(5,516)
5,189
—
(76)
(1,451)
(4)
(1,752)
(1,261)
(917)
—
—
—
(59)
—
11,524
2,165
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
507,660
9,480
—
161,350
—
—
—
1,752
1,261
18,683
11,524
2,165
(5,516)
5,189
7,953
(4)
—
—
(1)
(978)
Balance at October 31, 2017
37,508,877
$
375
$ 255,719
$ 226,549
$
(25,076)
(2,670,743) $ (49,875) $ 407,692
Net income
Foreign currency translation adjustment
Change in pension from net unamortized
gain (net of tax expense of $1,242)
Common dividends ($0.20 per share)
Expense related to stock-based
compensation
Treasury shares purchased, at cost
Stock options exercised
Restricted stock awards granted
Performance share awards vested
Other
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(75,060)
(1)
—
—
—
—
1,874
—
(149)
(1,371)
(473)
(922)
26,553
—
—
(7,020)
—
—
(2,141)
—
—
(37)
—
(6,640)
1,011
—
—
—
—
—
—
—
—
—
—
—
—
26,553
(6,640)
1,011
(7,020)
1,874
— (1,900,000)
(32,034)
(32,034)
—
—
—
—
377,218
73,400
25,340
—
7,036
1,371
473
—
4,746
—
—
(960)
Balance at October 31, 2018
37,433,817
$
374
$ 254,678
$ 243,904
$
(30,705)
(4,094,785) $ (73,029) $ 395,222
Net loss
Foreign currency translation adjustment
Change in pension from net unamortized
loss (net of tax expense of $1,596)
Common dividends ($0.32 per share)
Treasury shares purchased, at cost
Expense related to stock-based
compensation
Stock options exercised
Restricted stock awards granted
Other
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
(63,415)
(1)
—
—
—
—
—
2,045
—
(1,720)
(330)
(46,730)
—
—
(10,644)
—
—
(322)
(505)
—
—
1,864
(4,976)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(583,398)
(9,551)
—
204,770
124,800
—
—
3,609
2,225
—
(46,730)
1,864
(4,976)
(10,644)
(9,551)
2,045
3,288
—
(331)
Balance at October 31, 2019
37,370,402
$
374
$ 254,673
$ 185,703
$
(33,817)
(4,348,613) $ (76,746) $ 330,187
See notes to consolidated financial statements.
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QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended October 31, 2019, 2018 and 2017
Operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Depreciation and amortization
Loss (gain) on disposition of capital assets
Stock-based compensation
Deferred income tax
Charge for deferred loan costs and debt discount
Asset impairment charges
Other, net
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in accounts receivable
Decrease (increase) in inventory
(Increase) decrease in other current assets
Increase (decrease) in accounts payable
(Decrease) increase in accrued liabilities
Increase in income taxes
Increase in deferred pension and postretirement benefits
Increase (decrease) in other long-term liabilities
Other, net
Cash provided by operating activities
Investing activities:
Capital expenditures
Proceeds from disposition of capital assets
Cash used for investing activities
Financing activities:
Borrowings under credit facility
Repayments of credit facility borrowings
Debt issuance costs
Repayments of other long-term debt
Common stock dividends paid
Issuance of common stock
Payment of acquisition earn-out contingency
Payroll tax paid to settle shares forfeited upon vesting of stock
Purchase of treasury stock
Cash used for financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended October 31,
2019
2018
2017
(In thousands)
$
(46,730)
$
26,553
$
18,683
49,586
732
2,045
3,260
—
74,600
2,176
574
3,797
(2,014)
8,124
(6,760)
3,416
2,531
513
522
96,372
(24,883)
1,324
(23,559)
83,500
(136,000)
—
(1,526)
(10,644)
3,287
—
(330)
(9,551)
(71,264)
316
1,865
29,003
30,868
$
51,822
(142)
1,874
(5,556)
1,064
—
135
(5,550)
17,230
217
8,325
6,892
676
2,038
(523)
(444)
104,611
(26,484)
432
(26,052)
268,500
(296,250)
(1,001)
(1,798)
(7,020)
4,746
—
(960)
(32,034)
(65,817)
(1,194)
11,548
17,455
29,003
$
$
57,495
1,528
5,189
(112)
—
—
1,741
5,378
(3,240)
186
(4,893)
(7,521)
4,670
(271)
1,382
(437)
79,778
(34,564)
1,937
(32,627)
53,500
(98,875)
—
(2,722)
(5,516)
7,953
(8,497)
(976)
—
(55,133)
(89)
(8,071)
25,526
17,455
See notes to consolidated financial statements.
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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 17, "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. During the year ended October 31, 2017, we recorded a change in
estimate related to certain assets involved in restructuring activities, as more fully described under the caption "Restructuring."
A summary of our significant accounting policies consistently applied in the preparation of the accompanying consolidated
financial statements follows:
Revenue from Contracts with Customers
On November 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers
(ASC Topic 606) using the modified retrospective method and applying ASC Topic 606 to all revenue contracts with customers.
Results for reporting periods beginning on or after November 1, 2018 are presented under ASC Topic 606. In accordance with
the modified retrospective approach, prior period amounts were not adjusted and are reported under ASC Topic 605, “Revenue
Recognition.” As a result of adoption, there was not a material impact on our consolidated financial statements. We expect the
impact of the adoption of ASC Topic 606 to continue to be immaterial to our net income on an ongoing basis.
Revenue recognition
The core principle of ASC Topic 606 is to recognize revenue that reflects the consideration we expect to receive for product
sales when the promised items are transferred to customers. Revenue for product sales is recognized when control of the promised
products is transferred to our customers, and we expect to be entitled to consideration in exchange for transferring those products.
We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the
payment terms for those services, and when collectability of the consideration due is probable.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Performance obligations
A performance obligation is a promise to provide the customer with a good or service. Our performance obligations include
product sales, with each product included in a customer contract being recognized as a separate performance obligation. For
contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable.
Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance
with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to
account for product returns related to general returns and product nonconformance.
Pricing and sales incentives
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling
price, reflective of current and prospective discounts.
Practical expedients and exemptions
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be
less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original
expected length of one year or less.
Shipping and handling costs
We have elected to account for shipping and handling services as fulfillment services in accordance ASC Topic 606 guidance;
accordingly, freight revenue will be combined with the product deliverable rather than being accounted for as a distinct performance
obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers
are considered a cost to fulfill the contract and are included in Cost of sales in the accompanying Condensed Consolidated Statements
of Income.
Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for
which we have received consideration.
Disaggregation of revenue
We produce a wide variety of products that are used in the fenestration industry, including insulating glass spacer systems;
extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we produce certain non-
fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape,
plastic decking, fencing, water retention barriers, conservatory roof components, and other products.
The following table summarizes our product sales for the three years ended October 31, 2019, 2018, and 2017 into groupings
by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected
by economic factors. For further details regarding our results by segment, refer to Note 17, “Segment Information”.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NA Fenestration:
United States - fenestration
International - fenestration
United States - non-fenestration
International - non-fenestration
EU Fenestration:
United States - fenestration
International - fenestration
International - non-fenestration
NA Cabinet Components:
United States - fenestration
United States - non-fenestration
International - non-fenestration
Unallocated Corporate & Other:
Eliminations
Net sales
Cash and Cash Equivalents
Year Ended October 31,
2019
2018
2017
(in thousands)
$
439,536
$
412,000
$
399,694
31,106
17,061
16,134
39,309
18,211
15,846
34,279
25,263
15,642
503,837
$
485,366
$
474,878
— $
— $
303
139,638
25,359
164,997
13,144
214,211
2,289
229,644
(4,637)
(4,637)
893,841
$
$
$
$
$
$
135,415
24,558
159,973
14,596
232,990
2,227
249,813
(5,367)
(5,367)
889,785
$
$
$
$
$
$
129,140
18,520
147,963
17,083
229,550
2,175
248,808
(5,094)
(5,094)
866,555
$
$
$
$
$
$
$
$
Cash equivalents include all highly liquid investments with an original maturity of three months or less. Such securities with
an original maturity which exceeds three months are deemed to be short-term investments. We maintain cash and cash equivalents
at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. We have not
experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts.
Concentration of Credit Risk and Allowance for Doubtful Accounts
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 years ended October 31,
2019, 2018 and 2017, no customers provided more than 10% of our consolidated net sales.
We have established an allowance for doubtful accounts 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, 2019.
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.
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Inventory
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
During the year ended October 31, 2019, we changed the method of inventory costing for certain inventory in two plants
located in our NA Fenestration reportable business segment to the first-in first-out (FIFO) method from the last-in first-out method.
We utilize the FIFO method to determine costs at all of our other operating locations. We believe that the FIFO method is preferable
as it provides uniformity of inventory valuation across our global operations, aligns with how we internally manage inventory,
and provides better matching of revenues and expenses. The impact of this change in accounting principle on the financial
statements for each period presented is further explained in Note 3, “Inventories.”
Long-Lived Assets
Property, Plant and Equipment and Intangible Assets with Defined Lives
We make judgments and estimates related to the carrying value of property, plant and equipment, intangible assets with
defined lives, and long-lived assets, which include determining when to capitalize costs, the depreciation and amortization methods
to use and the useful lives of these assets. We evaluate these assets for impairment when there are indicators that the carrying
values of these assets might not be recoverable. Such indicators of impairment may include changes in technology, significant
market fluctuations, historical losses or loss of a significant customer, or other changes in circumstance that could affect the assets’
ability to generate future cash flows. When we evaluate these assets for impairment, we compare the sum of the undiscounted cash
flows expected to result from the use and eventual disposition of the asset to its carrying value. If the carrying value exceeds the
sum of the undiscounted cash flows, and there is no alternative use for the asset, we determine that the asset is impaired. To measure
the impairment charge, we compare the carrying amount of the long-lived asset to its fair value, as determined by quoted market
prices in active markets, if available, or by discounting the projected future cash flows using our incremental borrowing rate. 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 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 and 2017 impacted our long-term forecasts of future operating results with
regard to the reduction of significant sales volume to a large customer of our United States (U.S.) vinyl operations, and lower-
than-expected operating performance of our North American Cabinet Components business. We determined that these conditions
were indicators of triggering events which necessitated an evaluation of certain long-term assets utilized in these businesses for
potential impairment. We compared the projected undiscounted cash flows we expected to realize associated with these assets
over the remaining useful lives of the primary operating assets to the net book value of the long-term assets, including goodwill,
and determined that these assets were not impaired. 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, 2019 and 2017. There were no indicators
of triggering events noted for the year ended October 31, 2018.
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.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The software is then amortized over its estimated useful life. When events or circumstances indicate the carrying value of internal
use software might not be recoverable, we assess the recoverability of these assets by comparing the carrying value of the asset
to the undiscounted future cash flows expected to be generated from the asset’s use, consistent with the methodology to test other
property, plant and equipment for impairment.
Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful
lives of the assets. We capitalize betterments which extend the useful lives or significantly improve the operational efficiency of
assets. We expense repair and maintenance costs as incurred.
The estimated useful lives of our primary asset categories at October 31, 2019 were as follows:
Land improvements
Buildings
Building improvements
Machinery and equipment
Useful Life (in Years)
7 to 25
25 to 40
5 to 20
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.
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 utilizes market multiples and a selection of guideline
public companies. This test requires us to make assumptions about the future growth of our business and the market in general,
as well as other variables such as the level of investment in capital expenditure, growth in working capital requirements and the
terminal or residual value of our reporting units beyond the periods of estimated annual cash flows. We use a third-party valuation
firm to assist us with this analysis. If the fair value of each reporting unit exceeds its carrying value, no action is required. Otherwise,
an impairment loss is recorded to the extent that the carrying amount of the reporting unit including goodwill exceeds the fair
value of that reporting unit. We believe the estimates and assumptions used in our impairment assessment are reasonable based
on available market information, but variations in any of the assumptions could result in materially different calculations of fair
value and determinations of whether or not an impairment is indicated during current or future periods.
During the second quarter of 2019, our reporting unit included in our NA Cabinet Components segment experienced financial
performance for the year to date period ended March 31, 2019 that was below our budget. As a result, we developed a new long-
range forecast for this reporting unit that was below its previous long-range forecast as a result of an industry-wide shift from
semi-custom cabinets to stock cabinets. We determined that the combination of i) actual financial results below planned
performance, ii) a downward revision of the long-range forecast, and iii) the historical narrow margin of fair value over carrying
value in previous annual and interim goodwill assessments represented a triggering event that would more likely than not indicate
that the carrying value of this reporting unit was greater than its fair value. Therefore, we performed a quantitative impairment
test of the goodwill balance at March 31, 2019. The quantitative impairment test was conducted using multiple valuation techniques,
including a discounted cash flow analysis, which utilizes Level 3 fair value inputs, and resulted in an asset impairment charge of
$30.0 million during the second quarter of 2019.
At our annual testing date, August 31, 2019, 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 the two reporting units in the EU Fenestration segment. This review included an analysis of
historical goodwill test results, operating results relative to forecast, projected results over the next five years, and other measures
and concluded that there were no indicators of potential impairment associated with these reporting units. Therefore, no additional
testing was deemed necessary for the reporting units in the NA Fenestration segment and the EU Fenestration segment. Also, at
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
our annual testing date, we performed a quantitative assessment of the reporting unit in our NA Cabinet Components segment
primarily due to the recent impairment of goodwill during the second quarter of 2019 and the history of a narrow margin of fair
value above carrying value in quantitative assessments performed in prior years. We determined that the fair value of this reporting
unit exceeded its carrying value by approximately 5%. At that date, we concluded that no impairment was necessary.
After the annual assessment date and prior to our fiscal year end of October 31, 2019, the reporting unit in our NA Cabinet
Components segment was notified about a change in strategy at one of our large customers that may result in lower sales volumes
in the future. In addition, we continued to experience lower-than-expected volumes as a result of the ongoing shift in demand
from semi-custom cabinets to stock cabinets. Based on this information, we updated our long-range forecast for this reporting
unit to reflect the expected volume declines. This revised long-range forecast was utilized to perform another quantitative
impairment test of this reporting unit as of October 31, 2019, which resulted in an asset impairment charge of $44.6 million during
the fourth quarter of 2019. As a result of the quantitative assessments performed in the second and fourth quarters of 2019, we
recorded impairment charges totaling $74.6 million during the year ended October 31, 2019, reducing the goodwill balance
applicable to the reporting unit included in our NA Cabinet Components operating segment from $113.7 million to $39.1 million.
Restructuring
We accrue one-time severance costs pursuant to an approved plan of restructuring at the communication date, when affected
employees have been notified of the potential severance and sufficient information has been provided for the employee to calculate
severance benefits, in the event the employee is involuntarily terminated. In addition, we accrue costs associated with the termination
of contractual commitments including operating leases at the time the lease is terminated pursuant to the lease provisions or in
accordance with another agreement with the landlord. Otherwise, we continue to recognize operating lease expense through the
cease-use date. After the cease-use date, we determine if our operating lease payments are at market. We assume sublet of the
facility at the market rate. To the extent our lease obligations exceed the fair value rentals, we discount to arrive at the present
value and record a liability. If the facility is not sublet, we expense the amount of the assumed sublet in the current period. For
other costs directly related to the restructuring effort, such as equipment moving costs, we expense in the period incurred.
In September 2017, we closed a kitchen and bathroom cabinet door plant in Lansing, Kansas. We expensed $4.6 million
associated with our restructuring efforts for the year ended October 31, 2017, including cost of equipment moves, employee
termination costs and severance, professional fees and operating lease costs. Our facility lease obligations were deemed to be at
fair market value. We negotiated the exit of one of the vinyl facilities during September 2018, and the lease of the cabinet door
plant expired during fiscal 2018. We incurred $0.4 million and $1.5 million of expenses related to operating leases costs during
the years ended October 31, 2019 and 2018, respectively, and we expect to incur costs related to the operating leases for the
remaining vinyl facility during fiscal 2020 until we are able to sublet or otherwise exit the lease.
In addition, we evaluated the remaining depreciable lives of property, plant and equipment that has been abandoned, displaced
or otherwise disposed as a result of the plant closures. We recorded a change in estimate associated with the remaining useful
lives of these assets which resulted in an increase in depreciation expense of $4.3 million for the year ended October 31, 2017.
Furthermore, we evaluated the remaining service lives of intangible assets with defined lives associated with our U.S. vinyl
extrusion business and recorded a change in estimate associated with the remaining useful lives of a customer relationship intangible
and a utility process intangible asset resulting in an increase in amortization expense of $1.9 million for the year ended October
31, 2017. We did not incur similar increases in depreciation or amortization expenses related to restructuring activities during the
years ended October 31, 2019 and 2018.
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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Retirement Plans
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 recorded a net loss for the year ended October 31, 2019 and net income for the years ended October 31, 2018 and 2017. We
have recorded pre-tax cumulative income from operations of $43.2 million for the three-year period ended October 31, 2019. We
believe we will fully realize our deferred tax assets, net of a recorded valuation allowance. We project future taxable income using
the same forecasts used to test long-lived assets and intangibles for impairment, scheduling out the future reversal of existing
taxable temporary differences and reviewing our most recent financial operations. In the event the estimates and assumptions
indicate we will not generate sufficient future taxable income to realize our deferred tax assets, we record a valuation allowance
against a portion of our deferred tax assets.
We evaluate our on-going 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 state
tax items related to the interpretation of tax laws and regulations. We continue to evaluate our positions regarding various state
tax interpretations at each reporting date, until the applicable statute of limitations lapse.
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. The Act reduced our federal income tax
statutory rate from 35.0% to 21.0% and 23.3% for the fiscal years ended October 31, 2019 and 2018, respectively. We have re-
measured our deferred income tax assets and liabilities and have recorded tax expense for the one-time mandatory transition tax
on deemed repatriation of previously tax-deferred and unremitted foreign earnings. For further details of the impact of the Act,
see Note 10, "Income Taxes."
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Instruments
We have historically used financial and commodity-based derivative contracts to manage our exposure to fluctuations in
foreign currency exchange rates and aluminum prices. All derivatives are measured at fair value on a recurring basis and the
methodology and classifications are discussed further in Note 13, "Derivative Instruments." 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.
Foreign Currency Translation
Our consolidated financial statements are presented in our reporting currency, the United States Dollar. Our German and
U.K. operations are measured using the local currency as the functional currency. The assets and liabilities of our foreign operations
which are denominated in other currencies are translated to United States Dollars using the prevailing exchange rates as of the
balance sheet date. Revenues and expenses are translated at the average exchange rates for the applicable period. The resulting
translation adjustments are recorded as a component of accumulated other comprehensive loss on the consolidated balance sheets.
Occasionally, we enter into transactions that are denominated in currencies other than our functional currency. At each balance
sheet date, we translate these asset or liability accounts to our functional currency and record unrealized transaction gains or losses.
When these assets or liabilities settle, we record realized transaction gains or losses. These realized and unrealized gains or losses
are included in the accompanying consolidated statements of (loss) income under the caption, “Other, net.”
Stock–Based Compensation
We have issued stock-based compensation in the form of stock options to directors, employees and officers, and non-vested
restricted stock awards to certain key employees and officers. We apply the provisions of ASC Topic 718 “Compensation - 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, 2019 and 2018. See Note 15, “Stock-based
Compensation.”
In addition, we have granted performance share units which settle in cash and shares upon vesting. The awards granted during
the years ended October 31, 2018 and 2017 have vesting criteria based on a market condition (relative total shareholder return)
and an internal performance condition (earnings per share growth). The award granted during the year ended October 31, 2019
utilizes return on net assets as the vesting condition and settles in cash. We utilize 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. We bifurcate the liability
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and equity portion of the awards (amounts expected to settle in cash and shares, respectively) and recognize expense ratably over
the vesting period of three years.
We have also granted performance restricted stock units which settle in shares upon vesting. These awards cliff vest upon
a three-year service period with the absolute performance of our common stock as the vesting criteria. We utilized a Monte Carlo
simulation model to arrive at a grant-date value of these performance restricted stock units. This amount, which is settled in our
common stock, is expensed over the three-year term of the award with a credit to additional paid-in-capital.
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, 2019, 2018 and
2017:
Cash paid for interest
Cash paid for income taxes
Cash received from income tax refunds
Noncash investing and financing activities:
Investment in capital leases
Increase in capitalized expenditures in accounts payable and accrued liabilities
Related Party Transactions
Year Ended October 31,
2019
2018
2017
$ 9,020
5,081
1,020
(In thousands)
$ 7,890
4,217
95
$ 9,019
3,334
1,167
567
2,897
799
264
16,846
392
During the years ended October 31, 2018 and 2017, we leased several operating facilities from a company that was directly
owned by the former owner of our U.K.-based vinyl extrusion business, who was our employee until his retirement in October
2018. We recorded rent expense of $1.3 million and $1.2 million related to the related party leases for the years ended October
31, 2018 and 2017. We did not participate in any related party transactions during the year ended October 31, 2019.
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 Doubtful Accounts
Accounts receivable consisted of the following as of October 31, 2019 and 2018:
October 31,
2019
2018
(In thousands)
Trade receivables
Other
Total
Less: Allowance for doubtful accounts
Accounts receivable, net
The changes in our allowance for doubtful accounts were as follows:
Beginning balance as of November 1, 2018, 2017 and 2016, respectively $
Bad debt expense
Amounts written off
Recoveries
Balance as of October 31,
3. Inventories
Inventories consisted of the following at October 31, 2019 and 2018:
Raw materials
Finished goods and work in process
Supplies and other
Total
Less: Inventory reserves
Inventories, net
$
$
$
82,745
594
83,339
393
82,946
Year Ended October 31,
2019
2018
(In thousands)
$
325
700
(916)
284
$
393
$
333
46
(54)
—
325
$
$
$
$
$
83,828
511
84,339
325
84,014
2017
251
131
(49)
—
333
October 31,
2019
2018
(In thousands)
$
$
$
32,818
35,538
2,593
70,949
3,790
67,159
$
$
$
41,584
31,727
1,794
75,105
4,375
70,730
The changes in our inventory reserve accounts were as follows for the years ended October 31, 2019, 2018 and 2017:
Year Ended October 31,
2019
2018
(In thousands)
2017
Beginning balance as of November 1, 2018, 2017 and 2016, respectively
$
4,375
$
4,620
$
Charged to cost of sales
Write-offs
Other
Balance as of October 31,
341
(939)
13
$
3,790
$
1,201
(1,415)
(31)
4,375
$
3,929
1,296
(661)
56
4,620
As described in Note 1, “Nature of Operations and Basis of Presentation - Inventories,” during the year ended October 31,
2019, we elected to change our method of accounting for certain inventory in our NA Fenestration reportable business segment
from LIFO to FIFO. We applied this change in method of inventory costing by retrospectively adjusting the prior period financial
statements. As a result of the retrospective adjustment of the change in accounting principle, certain amounts in our consolidated
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
statements of net income for the three months and year ended October 31, 2018 was adjusted as follows (there was no impact to
the corresponding three months and year ended October 31, 2017):
Three months ended October 31, 2018
Year ended October 31, 2018
As Reported (1)
Impact of
change to
FIFO
As Adjusted
As Reported (1)
(In thousands, except per share amounts)
Impact of
change to
FIFO
As Adjusted
Cost of sales
Operating income
Income before income taxes
Income tax (expense) benefit
Net income
Basic earnings per common share
Diluted earnings per common share
$
$
$
187,960
$
11,396
8,153
(1,661)
6,492
0.19
0.19
$
$
$
(300) $
300
300
(75)
225
— $
— $
187,660
$
697,322
$
11,696
8,453
(1,736)
6,717
0.19
0.19
$
$
35,397
25,453
875
26,328
0.76
0.75
$
$
$
(300) $
300
300
(75)
225
0.01
0.01
$
$
697,022
35,697
25,753
800
26,553
0.77
0.76
(1) As reported cost of sales and operating income have been updated to reflect the adoption of accounting standards update
2017-07. See Note 20, "New Accounting Guidance " for further details.
The consolidated balance sheet for the year ended October 31, 2018 was adjusted as follows:
Inventories, net
Deferred income taxes
Retained earnings
As of October 31, 2018
As Reported
Impact of
change to
FIFO
(In thousands)
As Adjusted
$
69,365
$
1,365
$
17,215
242,834
295
1,070
70,730
17,510
243,904
The consolidated statement of cash flow for the year ended October 31, 2018 was adjusted as follows (there was no impact
to the corresponding year ended October 31, 2017):
Net income
Deferred income tax
Decrease in inventory
As of October 31, 2018
As Reported
$
26,328
(5,631)
17,530
Impact of
change to
FIFO
(In thousands)
As Adjusted
$
225
$
75
(300)
26,553
(5,556)
17,230
During the fourth quarter of 2019, we updated our assessment of the impact of the change in method of inventory costing
and noted the impact would have not changed significantly.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at October 31, 2019 and 2018:
Land and land improvements
Buildings and building improvements
Machinery and equipment
Construction in progress
Property, plant and equipment, gross
Less: Accumulated depreciation
Property, plant and equipment, net
October 31,
2019
2018
(In thousands)
$
10,298
$
101,569
386,953
12,348
511,168
317,568
193,600
$
$
10,366
98,212
371,106
10,293
489,977
288,607
201,370
Depreciation expense for the years ended October 31, 2019, 2018, and 2017 was $34.3 million, $35.6 million and $39.1
million, respectively.
Assets recorded under capital leases had a historical cost of $16.6 million and $22.2 million, respectively, and accumulated
depreciation of $3.7 million and $3.4 million, respectively as of October 31, 2019 and 2018. Depreciation expense related to these
assets totaled $0.2 million, $1.1 million and $2.0 million for the periods ended October 31, 2019, 2018, and 2017, respectively.
Refer to Note 7, ""Debt and Capital Lease Obligations"" for additional information on capital leases.
If there are indicators of potential impairment, we evaluate our property, plant and equipment for recoverability over the
remaining useful lives of the assets. We did not incur impairment losses associated with these assets for the years ended October 31,
2019, 2018, and 2017. 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. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the years ended October 31, 2019 and 2018 was as follows:
Year Ended October 31,
2019
2018
(In thousands)
Beginning balance as of November 1, 2018 and 2017
Goodwill impairment charge
Foreign currency translation adjustment
Balance as of October 31,
$
219,627
(74,600)
536
$
145,563
$
$
222,194
—
(2,567)
219,627
At our annual testing date, August 31, 2019, 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 $50.9 million and $16.8 million, and our NA Cabinet Components
segment had one unit with a goodwill balance of $83.8 million. During the the year ended October 31, 2019, we recorded impairment
charges of $74.6 million associated with our NA Cabinet Components segment. The details of the impairment charges, as well as
the results of our goodwill assessment as of August 31, 2019 are more fully described at Note 1, "Nature of Operations, Basis of
Presentation and Significant Accounting Policies - Long-Lived Assets - Goodwill."
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of October 31, 2019 and 2018:
Customer relationships
Trademarks and trade names
Patents and other technology
Total
October 31, 2019
October 31, 2019
October 31, 2018
Remaining Weighted
Average Useful Life
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
(In thousands)
10 years
10 years
3 years
$
153,950
$
70,103
$
153,704
$
55,745
22,386
35,210
19,471
55,583
22,278
59,332
32,668
17,646
$
232,081
$
124,784
$
231,565
$
109,646
We do not estimate a residual value associated with these intangible assets. During the year ended October 31, 2017, we
determined that triggering events occurred which necessitated a review of our long-term assets. Based on an undiscounted cash
flow analysis, we determined that our defined-lived intangible assets were not impaired. In addition, we shortened the life of
several defined-lived intangible assets, which resulted in the recognition of incremental amortization expense of $1.9 million for
the year ended October 31, 2017. We did not incur any corresponding incremental amortization expense during the years ended
October 31, 2019 and 2018. See additional disclosure at Note 1, "Nature of Operations, Basis of Presentation and Significant
Accounting Policies - Restructuring."
During each of the years ended October 31, 2019 and 2018, we retired fully amortized identifiable assets of $0.3 million
related to customer relationships and patents and other technology, respectively.
The aggregate amortization expense associated with identifiable intangible assets for the years ended October 31, 2019,
2018, and 2017 was $15.3 million, $16.2 million and $18.4 million, respectively.
Estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for future fiscal
years ending October 31, is as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total
Estimated
Amortization Expense
$
$
14,284
12,562
11,941
11,194
10,464
46,852
107,297
We did not incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2019,
2018, and 2017.
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6. Accrued Liabilities
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accrued liabilities consisted of the following at October 31, 2019 and 2018:
Payroll, payroll taxes and employee benefits
Accrued insurance and workers compensation
Sales allowances
Deferred compensation (current portion)
Deferred revenue
Warranties
Audit, legal, and other professional fees
Accrued taxes
Other
Accrued liabilities
7. Debt and Capital Lease Obligations
Long-term debt consisted of the following at October 31, 2019 and 2018:
Revolving Credit Facility
Capital lease obligations
Unamortized deferred financing fees
Total debt
Less: Current maturities of long-term debt
Long-term debt
Revolving Credit Facility
October 31,
2019
2018
(In thousands)
$
19,637
$
3,514
6,323
1,231
1,251
136
2,561
2,403
2,165
28,202
3,095
6,514
153
287
148
2,170
2,286
3,113
$
39,221
$
45,968
October 31,
2019
2018
(In thousands)
$
$
$
$
142,500
15,865
(1,205)
157,160
746
156,414
$
$
$
$
195,000
17,043
(1,487)
210,556
1,224
209,332
On July 29, 2016, we entered into a $450.0 million credit agreement comprising a $150.0 million Term Loan A and a $300.0
million revolving credit facility (collectively, the “2016 Credit Agreement”), with Wells Fargo Bank, National Association, as
Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A. serving as Syndication Agent. The 2016 Credit Agreement
had a five-year term, maturing on July 29, 2021, and required interest payments calculated, at our election and depending upon
our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin (0.50% to 1.25%) or the LIBOR Rate plus an
applicable margin (1.50% to 2.25%). At the time of the initial borrowing, the applicable rate was LIBOR + 2.00%. In addition,
we were subject to commitment fees for the unused portion of the 2016 Credit Agreement (0.20% to 0.30%).
On October 18, 2018, we amended and extended the 2016 Credit Agreement by entering into a $325.0 million revolving
credit facility (the “2018 Credit Facility”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing
Lender, and Bank of America, N.A. serving as Syndication Agent. The 2018 Credit Facility has a five-year term, maturing on
October 18, 2023, and required interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio,
at either a Base Rate plus an applicable margin or 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 2018 Credit
Facility.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The applicable margin and commitment fees are outlined in the following table:
Pricing Level
I
II
III
IV
Consolidated Leverage Ratio
Less than or equal to 1.50 to 1.00
Greater than 1.50 to 1.00, but less
than or equal to 2.25 to 1.00
Greater than 2.25 to 1.00, but less
than or equal to 3.00 to 1.00
Greater than 3.00 to 1.00
Commitment Fee
0.200%
LIBOR Rate Loans
1.25%
Base Rate Loans
0.25%
0.225%
0.250%
0.300%
1.50%
1.75%
2.00%
0.50%
0.75%
1.00%
In the event of default, outstanding borrowings accrue interest at the Default Rate, as defined, whereby the obligations will
bear interest at a per annum rate equal to 2% above the total per annum rate otherwise applicable.
The 2018 Credit Facility provides for incremental revolving credit commitments for a minimum principal amount of $10.0
million, up to an aggregate amount of $150.0 million, subject to the lender's discretion to elect or decline the incremental increase.
We can also borrow up to the lesser of $15.0 million or the revolving credit commitment, as defined, under a Swingline feature
of the Credit Agreement.
The 2018 Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the
Consolidated Interest Coverage Ratio, as defined, to be less than 2.25 to 1.00, and (2) Consolidated Leverage Ratio requirement
whereby we must not permit the Consolidated Leverage Ratio, as defined, must be greater than 3.25 to 1.00.
In addition to maintaining these financial covenants, the 2018 Credit Facility also limits our ability to enter into certain
business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted
payments, pay dividends (limited to $20.0 million per year) and other transactions as further defined in the 2018 Credit Facility.
Some of these limitations, however, do not take effect so long as total leverage is less than or equal to 2.75 to 1.00 and available
liquidity exceeds $25 million. Substantially all of our domestic assets, with the exception of real property were utilized as collateral
for the Credit Agreement.
We utilized initial borrowings of $205.0 million from the 2018 Credit Facility, along with additional funding of $10.0 million
of cash on hand, to repay outstanding borrowings under the 2016 Credit Agreement of $213.5 million, to settle outstanding interest
accrued and loan fees under the prior facility, and to pay loan fees associated with the 2018 Credit Agreement which totaled $1.0
million. We expensed $1.1 million of unamortized deferred financing fees associated with the 2016 Credit Agreement, while
deferring the remaining $0.5 million of unamortized deferred financing fees attributable to the remaining lenders from the previous
facility over the life of the 2018 Credit Facility.
As of October 31, 2019, we had $142.5 million of borrowings outstanding under the 2018 Credit Facility (reduced by
unamortized debt issuance costs of $1.2 million), $4.8 million of outstanding letters of credit and $15.9 million outstanding under
capital leases. We had $177.7 million available for use under the 2018 Credit Facility at October 31, 2019. The borrowings
outstanding as of October 31, 2019 under the 2018 Credit Facility accrue interest at 3.30% per annum, and our weighted average
borrowing rate for borrowings outstanding during the years ended October 31, 2019 and 2018 was 4.07% and 3.76%, respectively.
We were in compliance with our debt covenants as of October 31, 2019.
Other Debt Instruments
We maintain certain capital lease obligations related to equipment purchases, vehicles, and warehouse space. The cost and
accumulated depreciation of property, plant and equipment under capital leases at October 31, 2019 was $16.6 million and $3.7
million. These obligations accrue interest at an average rate of 3.60%, and extend through the year 2037.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below presents the scheduled maturity dates of our long-term debt outstanding (excluding deferred loan costs of
$1.2 million ) at October 31, 2019 (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total
8. Retirement Plans
Revolving Credit
Facility
Capital Leases and
Other Obligations
$
— $
—
—
142,500
—
—
1,050
842
849
1,008
728
11,388
$
142,500
$
15,865
$
Aggregate Maturities
1,050
$
842
849
143,508
728
11,388
158,365
We have a number of retirement plans covering substantially all employees. We provide both defined benefit and defined
contribution plans. In general, an employee’s coverage for retirement benefits depends on the location of employment.
Defined Benefit Plan
We have a non-contributory, single employer defined benefit pension plan that covers the majority of our domestic employees,
excluding the Woodcraft employees who are not currently participating. Effective January 1, 2007, we amended this defined
benefit pension plan to include a cash balance formula for all new salaried employees hired on or after January 1, 2007 and for
any non-union employees who were not participating in a defined benefit plan prior to January 1, 2007. All participating salaried
employees hired after January 1, 2007, are eligible to receive credits equivalent to 4% of their annual eligible wages. Some of the
employees at the time of the amendment were “grandfathered” and are eligible to receive credits ranging up to 6.5% based upon
a percentage of benefits received under our defined benefit plan prior to this amendment of the pension plan. Additionally, every
year the participants will receive an interest related credit on their respective balance equivalent to the prevailing 30-year Treasury
rate. For employees who were participating in this plan prior to January 1, 2007, the benefit formula is a more traditional formula
for retirement benefits, whereby the plan pays benefits to employees upon retirement, using a formula which considers years of
service and pensionable compensation prior to retirement. Of our pension plan participants, 99% have their benefit determined
pursuant to the cash balance formula.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law on
December 8, 2003. This Act introduces a Medicare prescription-drug benefit beginning in 2006 as well as a federal subsidy to
sponsors of retiree health care plans that provide a benefit at least “actuarially equivalent” to the Medicare benefit. We concluded
that our plans are at least “actuarially equivalent” to the Medicare benefit. For those who are otherwise eligible for the subsidy,
we have not included this subsidy per the Act in our benefit calculations. The impact to net periodic benefit cost and to benefits
paid did not have a material impact on the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Funded Status and Net periodic Benefit Cost
The changes in benefit obligation and plan assets, and our funded status (reported in deferred pension and postretirement
benefits on the consolidated balance sheets) were as follows:
Change in Benefit Obligation:
Beginning balance as of November 1, 2018 and 2017, respectively
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Administrative expenses
Projected benefit obligation at October 31,
Change in Plan Assets:
Beginning balance as of November 1, 2018 and 2017, respectively
Actual return on plan assets
Employer contributions
Benefits paid
Administrative expenses
Fair value of plan assets at October 31,
Non current liability - Funded Status
October 31,
2019
2018
(In thousands)
$
35,959
$
3,629
1,456
7,690
(3,581)
(830)
44,323
32,064
2,869
690
(3,581)
(830)
31,212
(13,111)
$
$
$
$
$
$
$
$
38,323
3,908
1,130
(4,296)
(2,551)
(555)
35,959
34,340
66
764
(2,551)
(555)
32,064
(3,895)
As of October 31, 2019 and 2018, included in our accumulated comprehensive loss was a net actuarial loss of $6.7 million
and $3.0 million, respectively. There were no net prior service costs or transition obligations for the years ended October 31, 2019
and 2018.
As of October 31, 2019 and 2018, the accumulated benefit obligation was $43.3 million and $35.4 million, respectively. The
accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service
rendered before the measurement date, and based on employee service and compensation prior to that date. The accumulated
benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels.
The net periodic benefit cost for the years ended October 31, 2019, 2018 and 2017, was as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss
Net periodic benefit cost
Year Ended October 31,
2019
2018
2017
(In thousands)
$
3,629
$
3,908
$
3,794
1,456
(1,977)
125
1,130
(2,172)
64
859
(1,863)
574
$
3,233
$
2,930
$
3,364
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The changes in plan assets and projected benefit obligations which were recognized in our other comprehensive loss for the
years ended October 31, 2019, 2018 and 2017 were as follows:
Net loss (gain) arising during the period
Less: Amortization of net loss
Total recognized in other comprehensive loss
Measurement Date and Assumptions
Year Ended October 31,
2019
2018
2017
(In thousands)
$
$
$
6,697
125
6,572
$
$
$
(2,189) $
64
$
(2,253) $
(2,888)
574
(3,462)
We generally determine our actuarial assumptions on an annual basis, with a measurement date of October 31. The following
table presents our assumptions for pension benefit calculations for the years ended October 31, 2019, 2018 and 2017:
2019
2018
2017
2019
2018
2017
For the Year Ended October 31,
Weighted Average Assumptions:
Discount rate
Rate of compensation increase
Expected return on plan assets
Benefit Obligation
4.44%
3.00%
n/a
3.10%
3.00%
n/a
3.68%
3.00%
n/a
Net Periodic Benefit Cost
3.68%
3.00%
6.50%
3.66%
3.00%
6.50%
4.44%
3.00%
6.50%
The discount rate was used to calculate the present value of the projected benefit obligation for pension benefits. The rate
reflects the amount at which benefits could be effectively settled on the measurement date. We used a RATE: 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.
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Plan Assets
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables provide our target allocation for the year ended October 31, 2019, as well as the actual asset allocation
by asset category and fair value measurements as of October 31, 2019 and 2018:
Equity securities
Fixed income
Money market fund
Large capitalization
Small capitalization
International equity
Other
Equity securities
High-quality core bond
High-quality government bond
High-yield bond
Fixed income
Total securities(1)
Target Allocation
Actual Allocation
October 31, 2019
October 31, 2019
October 31, 2018
60.0%
40.0%
61.0%
39.0%
61.0%
39.0%
Fair Value Measurements at
October 31, 2019
October 31, 2018
$
$
$
$
$
$
(In thousands)
574
$
8,092
2,489
6,219
1,848
18,648
9,525
1,228
1,237
11,990
31,212
$
$
$
$
$
597
8,362
2,559
6,385
1,913
19,219
9,736
1,251
1,261
12,248
32,064
(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. We accelerated
contributions to target a 100% funding threshold. Additionally, we consider funding annual requirements early in the fiscal year
to potentially maximize the return on assets. For the fiscal years ended October 31, 2019, 2018 and 2017, we made total pension
contributions of $0.7 million, $0.8 million and $3.6 million, respectively.
During fiscal 2020, we expect to contribute approximately $3.7 million to the pension plan to reach 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.
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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):
2020
2021
2022
2023
2024
2025 - 2029
Total
Defined Contribution Plan
Pension Benefits
3,211
3,227
3,181
3,187
3,322
17,098
33,226
$
$
We also sponsor a defined contribution plan into which we and our employees make contributions. We merged a predecessor
plan sponsored by Woodcraft into our defined contribution plan effective January 1, 2017. We match 50% up to the first 5% of
employee annual salary deferrals under our existing plan. Beginning January 1, 2018, the plan was amended to provide the same
match to Woodcraft employees. Prior to January 1, 2018, we matched 35% up to the first 5% of employee deferrals for employees
who participated in the predecessor Woodcraft plan. We do not offer our common stock as a direct investment option under these
plans. For the years ended October 31, 2019, 2018 and 2017, we contributed approximately $2.7 million, $2.6 million and $2.4
million for these plans, respectively.
Other Plans
Under our postretirement benefit plan, we provide certain healthcare and life insurance benefits for a small number of eligible
retired employees who were employed prior to January 1, 1993. Certain employees may become eligible for those benefits if they
reach normal retirement age while working for us. We continue to fund benefit costs on a pay-as-you-go basis. The table below
indicates the amount of these liabilities included in the accompanying consolidated balance sheets:
October 31, 2019
October 31, 2018
Accrued liabilities
Deferred pension and postretirement benefits
Total
$
$
$
(In thousands)
49
311
360
$
49
323
372
We also have supplemental benefit plans covering certain executive officers and a non-qualified deferred compensation plan
covering members of the Board of Directors and certain key employees. Our liability under the supplemental benefit plan was
approximately $4.2 million and $3.4 million as of October 31, 2019 and 2018, and our liability under the deferred compensation
plan was approximately $3.8 million and $3.5 million, respectively. As of October 31, 2019 and 2018, 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.
9. Warranty Obligations
We accrue warranty obligations as we recognize revenue associated with certain products. We make provisions for our
warranty obligations based upon historical experience of costs incurred for such obligations adjusted, as necessary, for current
conditions and factors. There are significant uncertainties and judgments involved in estimating our warranty obligations, including
changing product designs, differences in customer installation processes and future claims experience which may vary from
historical claims experience. Therefore, the ultimate amount we incur as warranty costs in the near and long-term may not be
consistent with our current estimate.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of the activity related to our accrued warranty, including both the current and long-term portions (reported
in accrued liabilities and other liabilities, respectively, on the accompanying consolidated balance sheets) follows:
Beginning balance as of November 1, 2018, and 2017, respectively
Provision for warranty expense
Change in accrual for preexisting warranties
Warranty costs paid
Total accrued warranty
Less: Current portion of accrued warranty
Long-term portion at October 31,
10. Income Taxes
Year Ended October 31,
2019
2018
(In thousands)
$
$
$
295
—
(20)
(15)
260
136
124
$
$
$
323
4
(16)
(16)
295
148
147
We provide for income taxes on taxable income at the applicable statutory rates. The following table summarizes the
components of income tax expense (benefit) for the years ended October 31, 2019, 2018 and 2017:
Year Ended October 31,
2019
2018
(In thousands)
2017
Current
Federal
State and local
Non-United States
Total current
Deferred
Federal
State and local
Non-United States
Total deferred
$
3,338
$
299
3,879
7,516
1,497
1,087
676
3,260
Total income tax expense (benefit)
$
10,776
$
983
417
3,356
4,756
(5,828)
670
(398)
(5,556)
(800)
$
$
1,991
873
4,067
6,931
1,860
(450)
(1,522)
(112)
6,819
For financial reporting purposes, (loss) income before income taxes for the years ended October 31, 2019, 2018 and 2017
includes the following components:
Domestic
Foreign
Total (loss) income before income taxes
Year Ended October 31,
2019
2018
(In thousands)
2017
$
$
(58,247)
22,293
(35,954)
$
$
9,721
16,032
25,753
$
$
9,189
16,313
25,502
The following table reconciles our effective income tax rate to the federal statutory rate for the years ended October 31, 2019,
2018 and 2017:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
United States tax at statutory rate
State and local income tax
Non-United States income tax
Deferred rate impact
General business credits
Change in valuation allowance
Other permanent differences
Deferred rate impact of enactment of tax reform
Foreign tax positions under the Act (GILTI and FDII)
Tax impact of stock based compensation
Impact of deemed repatriation
Asset impairment charges
Return to actual adjustments
Effective tax rate
Year Ended October 31,
2019
2018
2017
21.0 %
3.1
(0.5)
—
(4.7)
(1.5)
3.0
—
3.3
(1.6)
(1.1)
(50.7)
(0.3)
(30.0)%
23.3 %
3.4
(1.6)
—
(0.4)
(0.1)
—
(30.5)
—
(0.5)
4.8
—
(1.5)
(3.1)%
35.0%
1.7
(9.1)
(4.1)
(0.5)
(0.6)
3.3
—
—
—
—
—
1.0
26.7%
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. The Act reduced our federal income tax
statutory rate from 35.0% to 21.0% for the fiscal year ending October 31, 2019 and 23.3% for the fiscal year ended October 31,
2018, which reflects the period November 1, 2017 to December 31, 2017 at the previous 35.0% rate and the period January 1,
2018 to October 31, 2018 at the new 21.0% rate. The Act also imposed additional tax law changes that became effective during
fiscal 2019, which include new requirements for a global intangible low-taxed income provision (GILTI) and a deduction for
foreign-derived intangible income (FDII). We elected to account for the tax on GILTI as a period cost and therefore have not
recorded deferred taxes related to GILTI on our foreign subsidiaries.
The October 31, 2019 effective rate was primarily impacted by a net charge of $1.2 million related to GILTI and FDII, as
well as discrete charge of $0.4 million for the adjustment of the one-time mandatory transition tax on deemed repatriation of
previously tax-deferred and unremitted foreign earnings and $0.6 million related to the vesting or exercise of equity-based
compensation awards. Additionally, during the year ended October 31, 2019, we recorded a $74.6 million asset impairment charge,
which was primarily non-deductible, in the NA Cabinet Components segment, as further explained in Note 5, "Goodwill and
Intangible Assets."
Discrete items contributing to the October 31, 2018 income tax benefit included $7.7 million for the re-measurement of our
deferred income tax assets and liabilities due to the decrease in the federal corporate income tax rate, a benefit of $0.2 million for
the true up of our accruals and related deferred taxes from prior year filings and settled tax audits, and a benefit of $0.2 million
related to the vesting or exercise of equity-based compensation awards, partially offset by a tax expense of $1.2 million for the
one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings.
The decrease in the October 31, 2017 effective tax rate is due primarily to a greater proportion of U.S. taxable income in
relation to foreign taxable income for the year. The U.S. tax rate is generally higher than the foreign tax rate. The effective rate
is also lower due to a change over a period of three years in the deferred tax rate, primarily in the U.K., from 19% to 17%.
Given the significance of the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants
to record provisional amounts during a one year “measurement period”. As of October 31, 2019, we have completed the accounting
for the tax effects of the Act.
In light of the Act, we repatriated $24.2 million and $2.8 million of foreign earnings from our international operations during
the years ended October 31, 2019 and 2018, 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. With the exception of the one-time mandatory transition tax on deemed repatriation of previously
tax-deferred and unremitted foreign earnings, we do not anticipate any material tax impact from any potential repatriation of
previously unremitted foreign earnings. If the investment in our foreign subsidiaries were completely realized, we could incur an
estimated residual U.S. tax liability of $0.1 million.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The decrease in the 2017 effective tax rate is due primarily to a greater proportion of U.S. taxable income in relation to
foreign taxable income for the year. The U.S. tax rate is generally higher than the foreign tax rate. The effective rate is also lower
due to a change over a period of three years in the deferred tax rate, primarily in the U.K., from 19% to 17%.
Significant components of our net deferred tax liabilities and assets were as follows:
Deferred tax assets:
Employee benefit obligations
Accrued liabilities and reserves
Pension and other benefit obligations
Inventory
Loss and tax credit carry forwards
Other
Total gross deferred tax assets
Less: Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Property, plant and equipment
Goodwill and intangibles
Total deferred tax liabilities
$
October 31,
2019
2018
(In thousands)
$
7,227
1,646
4,365
632
2,915
110
16,895
1,560
15,335
11,075
23,623
34,698
9,910
1,609
1,872
548
3,716
119
17,774
1,275
16,499
10,577
23,432
34,009
Net deferred tax liabilities
$
19,363
$
17,510
At October 31, 2019, state operating loss carry forwards totaled $37.5 million. The majority of these losses begin to expire
in 2025. Tax credits available to offset future tax liabilities totaled $1.4 million and are expected to be utilized within the next
twelve months. 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, 2019 and 2018, totaling $1.6 million and $1.3 million,
respectively ($1.2 million and $1.0 million, respectively, net of federal taxes) for the respective periods. In assessing the need for
a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax
assets.
The following table reconciles the change in the unrecognized income tax benefit associated with uncertain tax positions for
the years ended October 31, 2019, 2018 and 2017 (in thousands):
Balance at October 31, 2016
Additions for tax positions related to the current year
Additions for tax positions related to the prior year
Balance at October 31, 2017
Additions for tax positions related to the current year
Additions for tax positions related to the prior year
Balance at October 31, 2018
Additions for tax positions related to the current year
Additions for tax positions related to the prior year
Reassessment of position
Balance at October 31, 2019
69
Unrecognized
Income Tax Benefits
579
$
—
12
591
—
15
606
—
16
(66)
556
$
$
$
Table of Contents
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of October 31, 2019, our unrecognized tax benefit (UTB) relates to certain state tax items regarding the interpretation of
tax laws and regulations. At October 31, 2019, $0.6 million is recorded as a liability for uncertain tax positions. The disallowance
of the UTB would not materially affect the annual effective tax rate.
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 2016 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,
2019 will be recognized within the next twelve months.
11. Commitments and Contingencies
Operating Leases and Purchase Obligations
We have operating leases for certain real estate and equipment used in our business. Rental expense for the years ended
October 31, 2019, 2018 and 2017 was $9.9 million, $9.5 million and $10.5 million, respectively.
We are a party to non-cancelable purchase obligations primarily for door hardware, primary and secondary steel and primary
and secondary aluminum used in our manufacturing processes, as well as expenditures related to capital projects in progress. We
paid $11.1 million and $5.2 million pursuant to these arrangements for the years ended October 31, 2019 and 2018, respectively.
These obligations total $18.7 million and $16.7 million at October 31, 2019 and 2018, respectively, and extend through fiscal
2018. Future amounts paid pursuant to these arrangements will depend, to some extent, on our usage.
The following table presents future minimum rental payments under operating leases with remaining terms in excess of one
year at October 31, 2019 (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total
Asset Retirement Obligation
Operating
Leases
9,121
6,981
6,012
5,506
4,699
15,220
47,539
$
$
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 $2.2
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
70
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
material expenses or capital expenditures related to environmental matters during the past three fiscal years, and do not expect to
incur a material amount of such costs in fiscal 2020. While we will continue to have future expenditures related to environmental
matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe
that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or
cash flows.
Litigation
From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course
of our business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal
injury, environmental matters, product performance or warranties, product liability, insurance coverage and personnel and
employment disputes.
We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks
to the extent deemed prudent by our management and to the extent such insurance is available. However, there is no assurance
that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future,
incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we
face, which could materially impact our results of operations.
We have been and are currently party to multiple claims, some of which are in litigation, relating to alleged defects in a
commercial sealant product that was manufactured and sold during the 2000's. During the years ended October 31, 2018 and 2017,
our insurance carrier reimbursed fees and expenses originally incurred as part of our defense of these various commercial sealant
claims totaling $0.5 million and $4.0 million, respectively. There were no corresponding reimbursements during 2019. While we
believe that our product was not defective and that we would prevail in these commercial sealant product claims if taken to trial,
the timing, ultimate resolution and potential impact of these claims is not currently determinable. Nevertheless, after taking into
account all currently available information, including our defenses, the advice of our counsel, and the extent and currently-expected
availability of our existing insurance coverage, we believe that the eventual outcome of these commercial sealant claims will not
have a material adverse effect on our overall financial condition, results of operations or cash flows, and we have not recorded
any accrual with regard to these claims.
12. Derivative Instruments
Our derivative activities are subject to the management, direction, and control of the Chief Financial Officer and Chief
Executive Officer. Certain transactions in excess of specified levels require further approval from the Board of Directors.
The nature of our business activities requires the management of various financial and market risks, including those related
to changes in foreign currency exchange rates and aluminum scrap prices. We have historically used foreign currency forwards
and options to mitigate or eliminate certain of those risks at our subsidiaries. We use foreign currency contracts to offset fluctuations
in the value of accounts receivable and payable balances that are denominated in currencies other than the United States Dollar,
including the Euro, British Pound Sterling and Canadian Dollar. Currently, we do not enter into derivative transactions for
speculative or trading purposes. We are exposed to credit loss in the event of nonperformance by the counterparties to our derivative
transactions. We attempt to mitigate this risk by monitoring the creditworthiness of our counterparties and limiting our exposure
to individual counterparties. In addition, we have established master netting agreements in certain cases to facilitate the settlement
of gains and losses on specific derivative contracts.
We have not designated any of our derivative contracts as hedges for accounting purposes in accordance with the provisions
under the Accounting Standards Codification topic 815, Derivatives and Hedging (ASC 815). Therefore, changes in the fair value
of these contracts and the realized gains and losses are recorded in the consolidated statements of (loss) income for the years ended
October 31, 2019, 2018 and 2017 were as follows (in thousands):
Derivatives Not Designated as Hedging Instruments
Foreign currency derivatives
Location of (Loss) or Gain:
Other, net
2019
2018
2017
$
(10)
$
(11)
$
(88)
Year Ended October 31,
We have chosen not to offset any of our derivative instruments in accordance with the provisions of ASC 815. Therefore,
the assets and liabilities are presented on a gross basis on our accompanying consolidated balance sheets. Less than $0.1 million
of fair value related to foreign currency derivatives was included in prepaid and other current assets as of the years ended October
31, 2019 and 2018, and less than $0.1 million of fair value related to foreign currency derivatives was included in accrued liabilities
as of October 31, 2019.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the notional amounts and fair value of outstanding derivative contracts at October 31, 2019
and 2018 (in thousands):
Foreign currency derivatives:
Buy EUR, Sell USD
Sell CAD, Buy USD
Sell GBP, Buy USD
Buy EUR, Sell GBP
Buy USD, Sell EUR
Notional as indicated
Fair Value in $
October 31,
2019
October 31,
2018
October 31,
2019
October 31,
2018
EUR
CAD
GBP
EUR
USD
301
405
73
57
13
$
455
229
22
34
12
$
1
2
—
—
—
1
—
—
—
—
For the classification in the fair value hierarchy, see Note 13, "Fair Value Measurements of Assets and Liabilities", included
herewith.
13. Fair Value Measurements of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant
assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own
assumptions about market participant assumptions developed based on the best information available in the circumstances
(unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to Level 1 and the
lowest priority to Level 3. The three levels of the fair value hierarchy are described below:
• Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities.
• Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly
or indirectly including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the 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.
As of October 31, 2019 and 2018, foreign currency derivatives were the only instruments being measured on a recurring
basis. Less than $0.1 million of foreign currency derivatives were included in total assets as of October 31, 2019 and less than
$0.1 million of foreign currency derivatives were included in total assets and total liabilities as of October 31, 2018. All of our
derivative contracts are valued using quoted market prices from brokers or exchanges and are classified within Level 2 of the fair
value hierarchy.
As of October 31, 2019 and 2018, we had approximately $2.4 million of certain property, plant and equipment located in
our NA Fenestration segment that was recorded at fair value on a non-recurring basis and classified as Level 3. The fair value
was based on broker opinions.
Carrying amounts reported on the balance sheet 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, 2019 and 2018 (Level 2 measurement).
The liability portion of our performance share awards are marked-to-market on a quarterly basis during a three-year vesting
period based on market data (Level 2 measurement). For further information, refer to Note 14, "Stock-Based Compensation -
Performance Share Awards."
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Stock-Based Compensation
We have established and maintain an Omnibus Incentive Plan (2008 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 2008 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 2008 Plan is 7,650,000 as approved by the
shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 2008 Plan. We grant
restricted stock units to non-employee directors on the first business day of each fiscal year. Annually, pending approval by the
Compensation & Management Development Committee of our Board of Directors in December, 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 the restricted stock awards 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.
A summary of non-vested restricted stock awards activity during the years ended October 31, 2019, 2018 and 2017, follows:
Restricted Stock
Awards
Weighted Average
Grant Date Fair Value
per Share
Non-vested at October 31, 2016
266,700
$
Granted
Vested
Forfeited
Non-vested at October 31, 2017
Granted
Vested
Forfeited
Non-vested at October 31, 2018
Granted
Vested
Forfeited
Non-vested at October 31, 2019
93,800
(73,100)
(3,100)
284,300
73,400
(111,800)
(28,700)
217,200
124,800
(42,500)
(69,400)
230,100
$
19.19
19.46
17.67
19.65
19.66
20.70
20.16
19.66
19.76
13.78
17.87
19.19
17.02
The total weighted average grant-date fair value of restricted stock awards that vested during the years ended October 31,
2019, 2018 and 2017 was $1.3 million, $2.3 million and $1.3 million, respectively. As of October 31, 2019, 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.
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Stock Options
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Historically, stock options have been awarded to key employees, officers and non-employee directors. Effective May 2015,
the director compensation structure was revised to eliminate the grant of stock options to non-employee directors. In December
2017, the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term
incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted
stock units as further described below. As a result, stock options were not granted during the years ended October 31, 2019 and
2018. Stock options typically vest 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 is
determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital. For
employees who are nearing retirement-eligibility, we recognize stock option expense ratably over the shorter of the vesting period
or the period from the grant-date to the retirement-eligibility date.
We use the Black-Scholes pricing model to estimate the fair value of our stock options. A description of the methodology
for the valuation assumptions follows:
• Expected Volatility – For stock options granted prior to July 1, 2013, we used an estimate of the historical volatility of a selected
peer group. Effective July 1, 2013, we determined that we had sufficient historical data to calculate the volatility of our common
stock since our spin-off in April 2008. We believe there has been uncertainty in the U.S. equities market over the past several
years and that uncertainty has contributed to volatility in equities in general. We expect this volatility to continue over the
foreseeable future. Therefore, we believe that our historical volatility is a proxy for expected volatility. We have not excluded
any of our historical data from the volatility calculation, and we are not aware of any specific significant factors which might
impact our future volatility.
• Expected Term – For stock options granted prior to July 1, 2013, we determined the expected term using historical information
of our former parent company prior to the spin-off in 2008, with regards to option vesting, exercise behavior and contractual
expiration, as we believed that this employee group was the most similar to our employee group. Separate groups of employees
that have similar historical exercise behavior were considered separately. Effective July 1, 2013, we determined that we had
sufficient historical data to estimate our expected term using our own data with regards to the exercise behavior, cancellations,
retention patterns and remaining contractual terms. When analyzing these patterns and variables, we considered the
stratification of the awards (large grants to relatively few employees versus smaller grants to many others), the age of certain
employees with larger grants, the historical exercise behavior of the employee group, and fluctuations/volatility of our
underlying common stock, as to whether the stock options are expected to be out-of-the-money. For our directors, stock options
vested immediately, and, as such, the expected term approximated the contractual term, after adjusting for historical forfeitures.
We believe our estimates are reasonable given these factors.
• Risk-Free Rate – We base the risk-free rate on the yield at the date of grant of a zero-coupon United States Treasury bond
whose maturity period equals the option’s expected term.
• Expected Dividend Yield – We base the expected dividend yield on our historical dividend payment of approximately $0.16
per share.
The following table summarizes the assumptions used to estimate the fair value of our stock options granted during the year
ended October 31, 2017.
Weighted-average expected volatility
Weighted-average expected term (in years)
Risk-free interest rate
Expected dividend yield over expected term
Weighted average grant date fair value
Year Ended October 31, 2017
34.7%
5.7
2.0%
1.0%
$6.25
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our stock option activity for the years ended October 31, 2019, 2018 and 2017.
Stock Options
Weighted Average
Exercise Price
Outstanding at October 31, 2016
2,386,220
$
Granted
Exercised
Forfeited/Expired
Outstanding at October 31, 2017
Granted
Exercised
Forfeited/Expired
Outstanding at October 31, 2018
Granted
Exercised
Forfeited/Expired
Outstanding at October 31, 2019
Vested or expected to vest at October 31, 2019
292,600
(507,660)
(18,402)
2,152,758
—
(377,218)
(21,884)
1,753,656
—
(204,770)
(132,700)
1,416,186
1,416,186
Exercisable at October 31, 2019
1,334,714
$
16.84
19.45
15.67
19.90
17.44
—
12.58
19.28
18.47
—
15.76
20.01
18.71
18.71
18.67
Weighted Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value (000s)
5.1
$
2,384
5.2
$
9,700
5.0
$
51
4.2
4.2
4.0
$
$
$
1,449
1,449
1,449
Intrinsic value is the amount by which the market price of the common stock on the date of exercise exceeds the exercise
price of the stock option. For the years ended October 31, 2019, 2018 and 2017, the total intrinsic value of our stock options that
were exercised totaled $0.4 million, $2.9 million and $3.1 million, respectively. The total fair value of stock options vested during
the years ended October 31, 2019, 2018 and 2017, was $1.1 million, $1.5 million and $1.8 million, respectively. As of October 31,
2019, substantially all compensation cost related to stock options has been recognized.
Restricted Stock Units
Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee
directors. The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of
service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date. Restricted
stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued employment
as the vesting conditions. Restricted stock units are not considered outstanding shares and do not have voting rights, although the
holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares.
Once the vesting criteria is met, each restricted stock unit is payable to the holder in cash based on the market value of one share
of our common stock. Accordingly, we record a liability for the restricted stock units on our balance sheet and recognize any
changes in the market value during each reporting period as compensation expense.
During the years ended October 31, 2019, 2018 and 2017, 34,050, 18,050 and 24,560 restricted stock units, respectively,
were granted and immediately vested with corresponding weighted average grant date fair value of $15.51, $21.85 and $15.65,
respectively. As of October 31, 2019, there were 4,616 non-vested restricted stock units from the fiscal 2019 grant which will vest
in December 2020. As of October 31, 2018 and 2017, there were no non-vested restricted stock units. During the year ended
October 31, 2019, we paid less than $0.4 million to settle restricted stock units. We did not make any payments to settle restricted
stock units during the years ended October 31, 2018 and 2017.
Performance Share Awards
We have granted performance share awards to key employees and officers annually in December. In addition, we awarded
performance shares in January 2016 to a new officer. These awards cliff vest after a three-year period with service and performance
measures such as relative total shareholder return (R-TSR) and earnings per share (EPS) growth as vesting conditions. The number
of performance share awards earned is variable depending on the metrics achieved. The settlement method is 50% in cash and
50% in our common stock. Performance share awards issued during the year ended October 31, 2019 vest with return on net assets
(RONA) as the vesting condition and pay out 100% in cash.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
To account for these awards, we have bifurcated the portion subject to a market condition (R-TSR) and the portion subject
to an internal performance measure (EPS or RONA). We have further bifurcated these awards based on the settlement method, as
the portion expected to settle in stock (equity component) and the portion expected to settle in cash (liability component).
To value the shares subject to the market condition, we utilized a Monte Carlo simulation model to arrive at a grant-date fair
value. This amount will be expensed over the three-year term of the award with a credit to additional paid-in-capital. To value the
shares subject to the EPS and RONA performance measures, we used the value of our common stock on the date of grant as the
grant-date fair value per share. This amount will be expensed over the three-year term of the award, with a credit to additional
paid-in-capital, and could fluctuate depending on the number of shares ultimately expected to vest based on our assessment of the
probability that the performance conditions will be achieved. The portion of the awards expected to settle in cash is recorded as
a liability and is 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 EPS, R-TSR, and RONA
performance metrics:
Grant Date
November 30, 2016
December 7, 2017
December 5, 2018
Grant Date Fair Value
Shares
Awarded
186,500
146,500
131,500
EPS
R-TSR
RONA
Forfeited
$
19.45
20.70
—
$
26.61
21.81
—
—
—
13.63
42,230
33,208
18,100
On December 3, 2018 and January 25, 2019, 139,164 shares vested pursuant to the December 2013 grant and a total of 4,300
shares vested pursuant to the January 2016 grant, however, performance conditions resulted in no share issuances or cash payments
for either of these awards. The November 2016 and December 2017 grants include a return on invested capital (ROIC) metric
which, if achieved, could enhance the number of shares that are ultimately issued but cannot exceed the maximum (200%). Due
to the uncertainty with regard to achieving this metric, no value has been assigned. In the event and at such time as the metric is
deemed achievable, compensation expense will begin to be recognized through the remaining vesting period. For the years ended
October 31, 2019 and 2017, we recorded $1.1 million and $3.0 million, respectively, of compensation expense related to performance
share awards. For the year ended October 31, 2018, we recorded a decrease in compensation expense of $0.9 million, which
reflected a decrease in the number of shares expected to vest in November 2019 associated with the November 30, 2016 performance
share grant.
Performance share awards are not considered outstanding shares and do not have voting rights, although dividends are accrued
over the performance period and will be payable in cash based upon the number of performance shares ultimately earned.
Performance shares 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. We evaluate the probability of the performance share
vesting within one year of the vesting date. As of October 31, 2019, we have deemed 56,103 performance share awards from our
November 30, 2016 grant to vest, of which 28,051 will be paid in our common stock and 28,051, along with accrued dividends,
will settle in cash. For the years ended October 31, 2019 and 2017, there were 28,051 and 23,175 shares, respectively, related to
performance shares that were potentially dilutive and considered in the diluted weighted average shares calculations. No contingent
shares related to performance shares are included in diluted weighted average shares for the year ended October 31, 2018.
Performance Restricted Stock Units
We awarded performance restricted stock units to key employees and officers beginning in December 2017. 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
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
awarded performance restricted stock units may vest. Specifically, the awards vest on a continuum with the following Absolute
Total Shareholder Return (A-TSR) milestones:
Vesting Level
Level 1
Vesting Criteria
A-TSR greater than or equal to 50%
Percentage of Award Vested
150%
Level 2
Level 3
Level 4
A-TSR less than 50% and greater than or equal to 20%
A-TSR less than 20% and greater than or equal to -20%
A-TSR less than -20%
100%
50%
—%
The following table summarizes our performance restricted stock unit grants and the grant date fair value for the A-TSR
performance metric:
December 7, 2017
December 5, 2018
Grant Date
Shares
Awarded
78,200
Grand Date
Fair Value
17.76
$
89,200
$
13.63
Shares
Forfeited
17,754
13,800
During the years ended October 31, 2019 and 2018, we recorded compensation expense of approximately $0.7 million and
$0.4 million related to our performance share restricted units.
Similar to performance shares, 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, 2019, 2018 and 2017 (in thousands):
Restricted stock awards
Stock options
Restricted stock units
Performance share awards
Performance restricted stock units
Total compensation expense
Income tax effect
Net compensation expense
15. Stockholders' Equity
Year Ended October 31,
2019
2018
2017
$
1,018
$
1,462
$
158
950
1,131
708
3,965
997
$
2,968
$
467
(364)
(944)
401
1,022
(35)
1,057
$
1,810
1,820
855
3,001
—
7,486
1,999
5,487
As of October 31, 2019, 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, 2019 and 2018, we had 37,370,402 and
37,433,817 shares of common stock issued, respectively, and 33,021,789 and 33,339,032 shares of common stock outstanding,
respectively. There were no shares of preferred stock issued or outstanding at October 31, 2019 and 2018.
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, 2019 and 2018, we purchased 583,398 shares and 1,900,000 shares, respectively, at a cost of $9.6 million and $32.0
million, respectively, under this program.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We record treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury
stock. Shares are generally issued from treasury stock at the time of grant of restricted stock awards, upon the exercise of stock
options, and upon the vesting of performance shares and performance restricted stock units. On the subsequent issuance of treasury
shares, we record proceeds in excess of cost as an increase in additional paid in capital. A deficiency of such proceeds relative to
costs would be applied to reduce paid-in-capital associated with prior issuances to the extent available, with the remainder recorded
as a charge to retained earnings. We recorded a charge to retained earnings of $0.3 million and $2.1 million in the years ended
October 31, 2019 and 2018, respectively.
For a summary of treasury stock activity for the years ended October 31, 2019, 2018 and 2017, refer to the Consolidated
Statement of Stockholders' Equity located elsewhere herein.
16. Other Income (Expense)
Other income included under the caption "Other, net" on the accompanying consolidated statements of (loss) income,
consisted of the following (in thousands):
Foreign currency transaction (losses) gains
Foreign currency exchange derivative losses
Pension service benefit
Interest income
Other
Other income
Year Ended October 31,
2019
2018
2017
$
$
(187)
(197)
396
63
41
$
113
(11)
978
69
7
713
(88)
430
86
19
$
116
$
1,156
$
1,160
Other income for the years ended October 31, 2018 and 2017 has been updated to reflect the adoption of Accounting Standards
Update 2017-07. For further information, see Note 21, "New Accounting Guidance".
17. Segment Information
We present 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 operations. We maintain a grouping called Unallocated Corporate & Other, which
includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common
stock and other factors, certain severance and legal costs not deemed to be allocable to all segments, depreciation of corporate
assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical
expense fluctuations relative to planned costs as determined during the annual planning process. Other general and administrative
costs associated with the corporate office are allocated to the reportable segments, based upon a relative measure of profitability
in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to
businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as those
used to prepare the accompanying consolidated financial statements. Corporate general and administrative expenses allocated
during the years ended October 31, 2019, 2018 and 2017 were $18.3 million, $18.7 million and $17.0 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Segment information for the years ended October 31, 2019, 2018 and 2017 was as follows (in thousands):
Year Ended October 31, 2019
Net sales
Depreciation and amortization
Operating income (loss)
Capital expenditures
Total assets
Year Ended October 31, 2018
Net sales
Depreciation and amortization
Operating income (loss)
Capital expenditures
Total assets
Year Ended October 31, 2017
Net sales
Depreciation and amortization
Operating income (loss)
Capital expenditures
NA
Fenestration(1)
EU
Fenestration(1)
NA Cabinet
Comp.
Unallocated
Corp. & Other
Total
$
503,837
$
164,997
$
229,644
$
27,054
39,765
12,984
226,243
485,366
27,248
30,633
13,929
239,915
474,878
34,308
25,955
8,845
19,040
6,365
212,239
159,973
9,607
12,702
5,450
214,704
147,963
8,833
13,673
$
$
$
$
13,178
(74,236)
5,383
181,416
249,813
14,401
3,167
6,965
272,313
248,808
13,811
4,089
$
$
$
$
$
$
$
$
$
$
$
$
(4,637)
509
(10,996)
151
$
893,841
49,586
(26,427)
24,883
25,212
$
645,110
(5,367)
$
889,785
566
(10,805)
140
51,822
35,697
26,484
16,282
$
743,214
(5,094)
$
866,555
543
(9,780)
57,495
33,937
$
18,822
$
7,841
$
7,349
$
552
$
34,564
(1) NA Fenestration and EU Fenestration were previously named "NA Engineered Components" and "EU Engineered
Components".
The following table summarizes the change in the carrying amount of goodwill by segment for the years ended
October 31, 2019 and 2018 (in thousands):
Balance as of October 31, 2017
Foreign currency translation adjustment
Balance as of October 31, 2018
Asset impairment charge
Foreign currency translation adjustment
NA
Fenestration
38,712
$
—
$
38,712
EU
Fenestration
69,735
$
(2,567)
67,168
$
$
$
—
—
—
536
NA Cabinet
Comp.
113,747
—
Unallocated
Corp. & Other
$
113,747
(74,600)
$
—
—
— $
—
— $
—
Total
222,194
(2,567)
219,627
(74,600)
536
Balance as of October 31, 2019
$
38,712
$
67,704
$
39,147
$
— $
145,563
For further details of Goodwill, see Note 5, "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 (loss) income for the years ended October 31, 2019, 2018 and 2017:
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Operating (loss) income
Interest expense
Other, net
Income tax (expense) benefit
Net (loss) income
Geographic Information
Year Ended October 31,
2019
2018
2017
$
$
(26,427)
(9,643)
116
(10,776)
(46,730)
$
(in thousands)
35,697
$
(11,100)
1,156
800
$
26,553
$
33,937
(9,595)
1,160
(6,819)
18,683
Our manufacturing facilities and all long-lived assets are located in the U.S., U.K. and Germany. We attribute our net sales
to a geographic region based on the location of the customer. The following tables provide information concerning our net sales
for the years ended October 31, 2019, 2018 and 2017, and our long-lived assets as of October 31, 2019 and 2018 (in thousands):
Net sales
United States
Europe
Canada
Asia
Other foreign countries
Total net sales
Long-lived assets, net
United States
Germany
United Kingdom
Total long-lived assets, net
Year Ended October 31,
$
2019
683,204
162,106
20,088
18,360
10,083
$
2018
676,776
159,652
23,610
18,584
11,163
$
2017
667,063
148,370
24,442
17,028
9,652
$
893,841
$
889,785
$
866,555
Year Ended October 31,
$
2019
288,722
16,899
140,839
$
2018
384,595
16,507
141,814
$
446,460
$
542,916
Long-lived assets, net includes: property, plant and equipment, net; goodwill; and intangible assets, net.
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18. Earnings Per Share
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We compute basic (loss) earnings per share by dividing net (loss) income by the weighted average number of common shares
outstanding during the period. Diluted earnings per common and potential common shares include the weighted average of additional
shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock as determined using
the treasury stock method prescribed by U.S. GAAP and contingent shares associated with performance share awards, if dilutive.
The computation of basic and diluted earnings per share for the years ended October 31, 2019, 2018 and 2017 follows (in
thousands, except per share data):
Year Ended October 31, 2019
Basic loss per common share
Diluted loss per common share (1)
Year Ended October 31, 2018
Basic earnings per common share
Effect of dilutive securities:
Stock options
Restricted stock
Diluted earnings per common share
Year Ended October 31, 2017
Basic earnings per common share
Effect of dilutive securities:
Stock options
Restricted stock
Performance shares
Net (Loss)
Income
Weighted
Average
Shares
Per Share
$ (46,730)
$ (46,730)
32,960
32,960
$
26,553
34,701
198
126
$
$
26,553
35,025
18,683
34,230
$
$
$
$
$
(1.46)
(1.46)
0.77
0.76
0.55
446
138
23
Diluted earnings per common share
$
18,683
34,837
$
0.54
(1) The computation of diluted earnings per share excludes outstanding stock options and other common stock equivalents when
their inclusion would be anti-dilutive. During the twelve-month period ended October 31, 2019, 39,766 shares of common stock
equivalents, 113,383 shares of restricted stock and 28,051 contingent shares related to performance share awards and performance
restricted stock units were excluded from the computation of diluted earnings per share.
For the years ended October 31, 2019, 2018 and 2017, we had 1,267,141, 1,000,356, and 686,650 securities, respectively,
that were potentially dilutive in future earnings per share calculations. Such dilution will be dependent on the excess of the market
price of our stock over the exercise price and other components of the treasury stock method.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Unaudited Quarterly Data
Selected quarterly financial data for the years ended October 31, 2019 and 2018 was as follows (amounts in thousands,
except per share amounts):
For the Quarter Ended
Net sales
Cost of sales (excluding depreciation and amortization)
Depreciation and amortization
Operating (loss) income
Net (loss) income
Basic earnings per share
Diluted earnings per share
Cash dividends paid per common share
For the Quarter Ended
Net sales
Cost of sales (excluding depreciation and amortization)
Depreciation and amortization
Operating (loss) income
Net (loss) income
Basic (loss) earnings per share
Diluted (loss) earnings per share
Cash dividends paid per common share
January 31,
2019
$ 196,808
158,557
April 30,
2019
$ 218,203
171,378
July 31,
2019
$ 238,461
181,357
12,404
(19,363)
12,572
(2,450)
(3,649) $ (23,974) $
(0.11)
(0.11)
0.08
(0.73)
(0.73)
0.08
$
$
12,182
19,110
11,841
0.36
0.36
0.08
$
$
October 31,
2019
$ 240,369
183,128
12,428
(23,724)
$ (30,948)
(0.94)
(0.94)
0.08
$
January 31,
2018
$ 191,666
154,521
April 30,
2018
$ 214,212
169,030
July 31,
2018
$ 239,821
185,811
October 31,
2018
$ 244,086
187,660
13,273
(596)
4,947
13,310
7,767
12,691
16,830
12,548
11,696
$
4,136
$
10,753
$
6,717
0.14
0.14
0.04
$
0.12
0.12
0.04
$
0.31
0.31
0.04
$
0.19
0.19
0.08
$
$
Quarterly (loss) earnings per share results may not sum to the consolidated earnings per share results on the accompanying
consolidated statements of (loss) income due to rounding and changes in weighted average shares during the respective periods.
Results for the 2018 quarters have been updated to reflect the impact of an accounting change from the LIFO inventory method
to the FIFO inventory method and for the adoption of Accounting Standards Update 2017-07. See Note 3, "Inventories" and Note
20, "New Accounting Guidance" for further details.
20. New Accounting Guidance
Accounting Standards Recently Adopted
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09,
Compensation - Stock Compensation (Topic 718), which provides guidance as to when changes in share-based payment awards
under Topic 718 should be accounted for as a modification of the award. Essentially, the changes should be considered a modification
unless specific criteria are met. We adopted this guidance as of November 1, 2018 with no impact to the financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update provides explicit guidance
on how to present the service cost component and other components of net benefit cost in the income statement and allows only
the service cost component of net benefit cost to be eligible for capitalization. We adopted this change retrospectively as of
November 1, 2018, resulting in a reclassification for the twelve months ended October 31, 2018 and 2017 of $0.8 million and $0.3
million of benefit, respectively, from the "Cost of sales" line item and approximately $0.2 million and $0.1 million of benefit for
the corresponding periods from the "Selling, general and administrative" line item to the "Other, net" line item on the accompanying
condensed consolidated statement of income.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which provides clarity when
determining whether a set of assets and activities constitutes a business. Specifically, if substantially all of the fair value of the
gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
is not deemed to be a business. We adopted this change prospectively as of November 1, 2018 with no impact to the financial
statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This guidance simplifies
the current two-step goodwill impairment test by eliminating the second step. Essentially, the entity compares the fair value of a
reporting unit with its carrying value amount and recognizes an impairment charge for the amount by which the carrying value
exceeds the fair value. The resulting loss is limited to the amount of goodwill. This guidance also eliminates the requirement for
a reporting unit with zero or negative carrying value to perform a qualitative assessment of goodwill and apply step-two of the
goodwill impairment test if the qualitative assessment fails. Thus, the same impairment assessment will be applied to all reporting
units (even if the carrying value is zero or negative). We prospectively adopted this guidance as of February 1, 2019 with no
material impact to the consolidated financial statements. See Note 5, "Goodwill and Intangible Assets," for further details of the
goodwill impairment analysis performed during the year ended October 31, 2019.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash
Receipts and Cash Payments. This amendment is intended to reduce diversity in practice as to how certain cash receipts and cash
payments are presented and classified in the statement of cash flows by providing guidance for several specific cash flow issues.
We adopted this change retrospectively as of November 1, 2018 which resulted in a reclassification of $8.5 million of earn-out
payments related to a prior period acquisition from investing activities to financing activities within the Statement of Cash Flow
for the year ended October 31, 2017.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This guidance prescribes a
methodology to determine when revenue is recognizable and constitutes a principles-based approach to revenue recognition based
on the consideration to which the entity expects to be entitled in exchange for goods or services. In addition, this guidance requires
additional disclosure in the notes to the financial statements with regard to the methodology applied. This pronouncement essentially
superseded and replaced existing revenue recognition rules in U.S. GAAP, including industry-specific guidance. We adopted this
guidance using the modified retrospective approach on November 1, 2018. Based on our evaluation, we have concluded that the
adoption of this new guidance did not have a material impact on our consolidated financial statements. For additional information,
refer to Note 1, “Nature of Operations and Basis of Presentation - Revenue from Contracts with Customers”.
Accounting Standards Not Yet Adopted
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize
leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use
model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term
longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification
of expense recognition in the income statement.
The new standard is effective for us on November 1, 2019, with early adoption permitted. We plan to adopt using a modified
retrospective transition approach, applying the new standard to all leases existing at the date of initial application. We expect to
adopt the new standard on November 1, 2019 and use the effective date as our date of initial application. Consequently, financial
information will not be updated and the disclosures required under the new standard will not be provided for dates and periods
prior to November 1, 2019.
The new standard provides a number of optional practical expedients in transition. We will elect all of the new standard’s
available transition practical expedients.
This standard will have a material effect on our financial statements. The most significant effects on our financial statements
relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our operating leases and providing
significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between
now and adoption.
On adoption, we will recognize additional operating liabilities ranging from $40.0 million to $45.0 million, with corresponding
ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing
standards for existing operating leases.
The new standard also provides practical expedients for an entity’s ongoing accounting. We will elect the short-term lease
recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or
lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in
transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our
leases.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) under
the Securities Exchange Act of 1934 (1934 Act) as of October 31, 2019. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of October 31, 2019, 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.
Item 9B. Other Information.
None.
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Item 10. Directors, Executive Officers and Corporate Governance.
PART III
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 2020 Annual
Meeting of Stockholders of Quanex Building Products Corporation or an amendment to this Form 10-K, which is to be filed with
the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after the close of
the fiscal year ended October 31, 2019.
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 2020 Annual Meeting of Stockholders of Quanex
Building Products Corporation or an amendment to this Form 10-K, which is to be filed with the SEC pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended, within 120 days after the close of the fiscal year ended October 31, 2019.
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 2020 Annual Meeting of Stockholders of Quanex Building Products Corporation or an amendment to
this Form 10-K, which is to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, within 120 days after the close of the fiscal year ended October 31, 2019.
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
2020 Annual Meeting of Stockholders of Quanex Building Products Corporation or an amendment to this Form 10-K, which is to
be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after
the close of the fiscal year ended October 31, 2019.
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 2020 Annual Meeting of
Stockholders of Quanex Building Products Corporation or an amendment to this Form 10-K, which is to be filed with the SEC
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after the close of the fiscal
year ended October 31, 2019.
Item 15. Exhibits and Financial Statement Schedules.
1. Financial Statements
PART IV
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. Exhibits 10.1 through 10.52 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.
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Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
Date: December 12, 2019
/s/ Scott M. Zuehlke
Scott M. Zuehlke
QUANEX BUILDING PRODUCTS CORPORATION
Senior Vice President - Chief Financial Officer and Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ William C. Griffiths
William C. Griffiths
Chairman of the Board,
President and Chief Executive Officer
/s/ Susan F. Davis
Susan F. Davis
/s/ Joseph D. Rupp
Joseph D. Rupp
/s/ Curtis M. Stevens
Curtis M. Stevens
/s/ Robert R. Buck
Robert R. Buck
/s/ Donald R. Maier
Donald R. Maier
/s/ Meredith W. Mendes
Meredith W. Mendes
Director
Director
Director
Director
Director
Director
December 12, 2019
December 12, 2019
December 12, 2019
December 12, 2019
December 12, 2019
December 12, 2019
December 12, 2019
/s/ Scott M. Zuehlke
Scott M. Zuehlke
Senior Vice President - Chief Financial Officer and Treasurer
(Principal Financial Officer)
December 12, 2019
/s/ Mark A. Livingston
Mark A. Livingston
Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)
December 12, 2019
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EXHIBIT INDEX
Exhibit Number
Description of Exhibits
2.1
2.2
2.3
2.4
2.5
2.6
3.1
3.2
4.1
4.2
†10.1
†10.2
†10.3
†10.4
Distribution Agreement among Quanex Corporation, Quanex Building Products LLC and Quanex Building
Products Corporation (incorporated by reference to Exhibit 10.1 to Quanex Corporation’s Current Report
on Form 8-K (Reg. No. 001-05725) filed with the Commission on December 24, 2007).
Agreement and Plan of Merger, dated as of January 31, 2011, by and among Quanex Building Products
Corporation, QSB Inc., Lauren Holdco Inc., Lauren International, Inc. and Kevin E. Gray, as agent for the
shareholders of Lauren Holdco Inc., filed as Exhibit 2.1 of the Registrant’s Current Report on Form 8-K
(Reg. No. 001-33913) as filed with the Securities and Exchange Commission on February 2, 2011, and
incorporated herein by reference.
Limited Liability Company Interest Purchase Agreement dated February 7, 2014, by and among Quanex
Building Products Corporation, Nichols Aluminum, LLC and Aleris International Inc., filed as Exhibit 2.1
of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913) as filed with the Securities and
Exchange Commission on February 10, 2014, and incorporated herein by reference.
First Amendment to Limited Liability Company Interest Purchase Agreement dated April 1, 2014, by and
among Quanex Building Products Corporation, Nichols Aluminum, LLC and Aleris International Inc., filed
as Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913) as filed with the
Securities and Exchange Commission on April 7, 2014, and incorporated herein by reference.
Share Purchase Agreement dated June 15, 2015 by and among R.L. Hartshorn and others, and Quanex
Building Products Corporation, filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (Reg.
No. 001-33913), as filed with the Securities and Exchange Commission on June 16, 2015, and incorporated
herein by reference.
Agreement and Plan of Merger, dated as of August 30, 2015, by and among Quanex Building Products
Corporation, QWMS, Inc., WII Holding, Inc., and Olympus Growth Fund IV, L.P, solely in its capacity as
the representative of the stockholders of WII Holding, Inc, filed as Exhibit 2.1 to the Registrant's Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on August
30, 2015, and incorporated herein by reference.
Restated Certificate of Incorporation of the Registrant dated as of March 4, 2016, filed as Exhibit 3.1 of the
Registrant’s Current Report on Form 8-K (Reg. No. 001-33913) as filed with the Securities and Exchange
Commission on March 7, 2016, and incorporated herein by reference.
Third Amended and Restated Bylaws of the Registrant dated as of March 4, 2016, filed as Exhibit 3.2 of
the Registrant’s Quarterly Report on Form 10-Q (Reg. No. 001-33913) for the quarter ended July 31, 2016,
and incorporated herein by reference.
Form of Registrant’s common stock certificate, filed as Exhibit 4.1 of Amendment No. 1 to the Registrant’s
Registration Statement on Form 10 (Reg. No. 001-33913), as filed with the Securities and Exchange
Commission on February 14, 2008, and incorporated herein by reference.
Credit Agreement dated as of October 18, 2018, by and among the Company; the lenders party thereto; and
Wells Fargo Bank, National Association, as Agent; filed as Exhibit 10.1 of the Registrant’s Current Report
on Form 8-K (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on October 18,
2018, and incorporated herein by reference.
Quanex Building Products Corporation Amended and Restated 2008 Omnibus Incentive Plan, filed as Exhibit
10.1 to the Registrant's Current Report on Form 8-K (Reg. No. 001-33913) as filed with the Securities and
Exchange Commission on February 28, 2014, and incorporated herein by reference.
Quanex Building Products Corporation Deferred Compensation Plan as amended, filed as Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-33913) for the quarter ended January 31,
2014, as filed with the Securities and Exchange Commission on March 6, 2014, and incorporated herein by
reference.
Quanex Building Products Corporation Restoration Plan, filed as Exhibit 10.8 of Amendment No. 4 to the
Registrant’s Registration Statement on Form 10 (Reg. No. 001-33913), as filed with the Securities and
Exchange Commission on March 17, 2008, and incorporated herein by reference.
Quanex Building Products Corporation Supplemental Employees Retirement Plan, filed as Exhibit 10.9 of
Amendment No. 4 to the Registrant’s Registration Statement on Form 10 (Reg. No. 001-33913), as filed
with the Securities and Exchange Commission on March 17, 2008, and incorporated herein by reference.
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EXHIBIT INDEX
Exhibit Number
Description of Exhibits
†10.5
†10.6
†10.7
†10.8
†10.9
†10.10
†10.11
†10.12
†10.13
†10.14
†10.15
†10.16
†10.17
†10.18
Form of Severance Agreement between the Registrant and certain of its executive officers, filed as Exhibit
10.5 of Amendment No. 1 to the Registrant’s Registration Statement on Form 10 (Reg. No. 001-33913), as
filed with the Securities and Exchange Commission on February 14, 2008, and incorporated herein by
reference.
Form of Indemnity Agreement between the Registrant and each of its independent directors, effective
September 2, 2008, filed as Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (Reg. No.
001-33913), as filed with the Securities and Exchange Commission on August 29, 2008, and incorporated
herein by reference.
Form of Indemnity Agreement between the Registrant and each of its officers, effective September 2, 2008,
filed as Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with
the Securities and Exchange Commission on August 29, 2008, and incorporated herein by reference.
Agreement between Quanex Building Products Corporation and William C. Griffiths, effective July 9, 2013,
filed as Exhibit 10.1 of the Registrant's Current Report on Form 8-K (Reg. No. 001-33913), as filed with
the Securities and Exchange Commission on July 9, 2013, and incorporated herein by reference.
Change in Control Agreement between Quanex Building Products Corporation and William C. Griffiths,
effective July 9, 2013, filed as Exhibit 10.2 of the Registrant's Current Report on Form 8-K (Reg. No.
001-33913), as filed with the Securities and Exchange Commission on July 9, 2013, and incorporated herein
by reference.
Indemnity Agreement between Quanex Building Products Corporation and William C. Griffiths, effective
July 9, 2013, the form of which is filed as Exhibit 10.2 of the Registrant's Current Report on Form 8-K (Reg.
No. 001-33913), as filed with the Securities and Exchange Commission on August 29, 2008, and incorporated
herein by reference.
Form of Stock Option Agreement for Employees under the Quanex Building Products Corporation 2008
Omnibus Incentive Plan, as amended, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
(Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and
incorporated herein by reference.
Form of Stock Option Agreement for Section 16 Officers under the Quanex Building Products Corporation
2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.2 to the Registrant’s Current Report on Form
8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and
incorporated herein by reference.
Form of Stock Option Agreement for Key Leaders under the Quanex Building Products Corporation 2008
Omnibus Incentive Plan, as amended, filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
( Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and
incorporated herein by reference.
Form of Stock Option Agreement for Non-Employee Directors under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.4 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April
29, 2014, and incorporated herein by reference.
Form of Restricted Stock Award Agreement for Employees under the Quanex Building Products Corporation
2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.5 to the Registrant’s Current Report on Form
8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and
incorporated herein by reference.
Form of Restricted Stock Award Agreement for Section 16 Officers under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.6 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April
29, 2014, and incorporated herein by reference.
Form of Restricted Stock Award Agreement for Key Leaders under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.7 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April
29, 2014, and incorporated herein by reference.
Form of Restricted Stock Award Agreement for Non-Employee Directors under the Quanex Building
Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.8 to the Registrant’s
Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission
on April 29, 2014, and incorporated herein by reference.
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EXHIBIT INDEX
Exhibit Number
Description of Exhibits
†10.19
†10.20
†10.21
†10.22
†10.23
†10.24
†10.25
†10.26
†10.27
†10.28
†10.29
†10.30
†10.31
Form of Restricted Stock Unit Award Agreement for Employees under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.9 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April
29, 2014, and incorporated herein by reference.
Form of Restricted Stock Unit Award Agreement for Section 16 Officers under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.10 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April
29, 2014, and incorporated herein by reference.
Form of Restricted Stock Unit Award Agreement for Key Leaders under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.11 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April
29, 2014, and incorporated herein by reference.
Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under the Quanex Building
Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.12 to the Registrant’s
Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission
on April 29, 2014, and incorporated herein by reference.
Amended Form of Performance Share Award Agreement for Employees under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on
December 7, 2015, and incorporated herein by reference.
Amended Form of Performance Share Award Agreement for Section 16 Officers under the Quanex Building
Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission
on December 7, 2015, and incorporated herein by reference.
Amended Form of Performance Share Award Agreement for Key Leaders under the Quanex Building
Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission
on December 7, 2015, and incorporated herein by reference.
Form of Performance Share Award Agreement for Non-Employee Directors the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.16 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April
29, 2014, and incorporated herein by reference.
Amended Form of Performance Unit Award Agreement for Employees under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.4 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on
December 7, 2015, and incorporated herein by reference.
Amended Form of Performance Unit Award Agreement for Section 16 Officers under the Quanex Building
Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.5 to the Registrant’s
Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission
on December 7, 2015, and incorporated herein by reference.
Amended Form of Performance Unit Award Agreement for Key Leaders under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.6 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on
December 7, 2015, and incorporated herein by reference.
Form of Performance Unit Award Agreement for Non-Employee Directors under the Quanex Building
Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.20 to the Registrant’s
Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission
on April 29, 2014, and incorporated herein by reference.
Form of Stock Appreciation Right Agreement for Employees under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.21 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April
29, 2014, and incorporated herein by reference.
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EXHIBIT INDEX
Exhibit Number
Description of Exhibits
†10.32
†10.33
†10.34
†10.35
†10.36
†10.37
†10.38
†10.39
10.40
10.41
†10.42
†10.43
†10.44
†10.45
Form of Stock Appreciation Right Agreement for Section 16 Officers under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.22 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April
29, 2014, and incorporated herein by reference.
Form of Stock Appreciation Right Agreement for Key Leaders under the Quanex Building Products
Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.23 to the Registrant’s Current
Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April
29, 2014, and incorporated herein by reference.
Form of Stock Appreciation Right Agreement for Non-Employee Directors under the Quanex Building
Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.24 to the Registrant’s
Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission
on April 29, 2014, and incorporated herein by reference.
Form of Other Stock Based Award Agreement under the Quanex Building Products Corporation 2008
Omnibus Incentive Plan, as amended, filed as Exhibit 10.25 to the Registrant’s Current Report on Form 8-
K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and
incorporated herein by reference.
Amended Form of Annual Incentive Award Agreement under the Quanex Building Products Corporation
2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.7 to the Registrant’s Current Report on Form
8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on December 7, 2015,
and incorporated herein by reference.
Agreement between Quanex Building Products Corporation and Scott Zuehlke, effective November 1,
2019, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed
with the Securities and Exchange Commission on November 1, 2019, and incorporated herein by
reference.
Change in Control Agreement between Quanex Building Products Corporation and Scott Zuehlke,
effective January 25, 2016, filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Reg.
No. 001-33913), as filed with the Securities and Exchange Commission on January 27, 2016, and
incorporated herein by reference.
Indemnity Agreement between Quanex Building Products Corporation and Scott Zuehlke, effective
January 25, 2016, the form of which is filed as Exhibit 10.2 of the Registrant's Current Report on Form 8-
K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on August 29, 2008, and
incorporated herein by reference.
Lease dated February 9, 2016, between Garner Properties Ltd. and HL Plastics Limited, filed as Exhibit
10.44 to the Registrant's Annual Report on Form 10-K (Reg. No. 001-33913) for the year ended October
31, 2016, as filed with the Securities and Exchange Commission on December 16, 2016, and incorporated
herein by reference.
Amended and Completely Restated Lease Agreement dated August 25, 2016, between Lauren Real Estate
Holding LLC and Quanex IG Systems, Inc., filed as Exhibit 10.1 to the Registrant’s Current Report on Form
8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on August 26, 2016, and
incorporated herein by reference.
Amended and Restated Employee Stock Purchase Plan, as amended and restated effective April 1, 2017,
filed as Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A for its 2017 Annual Meeting
of Stockholders (Reg. No 001-33919), as filed with the Securities and Exchange Commission on January
31, 2017, and incorporated herein by reference.
Agreement between Quanex Building Products Corporation and George Wilson, effective August 1, 2017,
filed as Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33919) as filed with
the Securities and Exchange Commission on July 27, 2017.
Change in Control Agreement between Quanex Building Products Corporation and George Wilson, effective
August 1, 2017, filed as Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33919)
as filed with the Securities and Exchange Commission on July 27, 2017.
Form of Indemnity Agreement between Quanex Building Products Corporation and George Wilson, effective
August 1, 2017, in the form filed as Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (Reg.
No. 001-33913), as filed with the Securities and Exchange Commission on August 29, 2008, and
incorporated herein by reference.
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EXHIBIT INDEX
Exhibit Number
Description of Exhibits
†10.46
†10.47
10.48
*†10.49
†10.50
†10.51
†10.52
†10.53
*21.1
*23.1
*31.1
*31.2
*32
Form of Key Leader Stock Settled Performance Restricted Stock Units Award Agreement filed as Exhibit
10.50 to the Registrant's Annual Report on Form 10-K (Reg. No. 001-33913) for the year ended October
31, 2017, as filed with the Securities and Exchange Commission on December 12, 2017, and incorporated
herein by reference.
Form of Section 16 Officer Stock Settled Performance Restricted Stock Units Award Agreement filed as
Exhibit 10.51 to the Registrant's Annual Report on Form 10-K (Reg. No. 001-33913) for the year ended
October 31, 2017, as filed with the Securities and Exchange Commission on December 12, 2017, and
incorporated herein by reference.
Share Repurchase Agreement by and among Praesidium Investment Management Company LLC, Quanex
Building Products Corporation, Kevin Oram and Peter Uddo, effective October 9, 2018, filed as Exhibit
10.1 of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913) as filed with the Securities and
Exchange Commission on October 12, 2018, and incorporated herein by reference.
Agreement between Quanex Building Products Corporation and Mark A. Livingston, effective January
30, 2019.
Agreement between Quanex Building Products Corporation and Mark Livingston, effective November 1,
2019, filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed
with the Securities and Exchange Commission on November 1, 2019, and incorporated herein by
reference.
Indemnity Agreement between Quanex Building Products Corporation and Mark Livingston, effective
November 1, 2019, the form of which is filed as Exhibit 10.2 of the Registrant's Current Report on Form
8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on August 29, 2008,
and incorporated herein by reference.
Agreement between Quanex Building Products Corporation and Paul Cornett, effective November 1,
2019, filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed
with the Securities and Exchange Commission on November 1, 2019, and incorporated herein by
reference.
Indemnity Agreement between Quanex Building Products Corporation and Paul Cornett, effective
November 1, 2019, the form of which is filed as Exhibit 10.2 of the Registrant's Current Report on Form
8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on August 29, 2008,
and incorporated herein by reference.
Subsidiaries of the Registrant.
Consent of Grant Thornton LLP.
Certification by chief executive officer pursuant to Rule 13a-14(a)/15d-14(a).
Certification by chief financial officer pursuant to Rule 13a-14(a)/15d-14(a).
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
*101.SCH
XBRL Taxonomy Extension Schema Document
*101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
*101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
*101.LAB
XBRL Taxonomy Extension Label Linkbase Document
*101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
*
† Management Compensation or Incentive Plan
91
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EXHIBIT INDEX
Exhibit Number
Description of Exhibits
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has not filed with this Annual Report on Form 10-K
certain instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries because the total amount
of securities authorized under any of such instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries
on a consolidated basis. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission
upon request.
92