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, 2020
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
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report. Yes ☒ No ¨
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of April 30, 2020, computed by reference to the
closing price for the Common Stock on the New York Stock Exchange, Inc. on that date, was $403,851,329. Such calculation assumes only the
registrant’s officers and directors at such date were affiliates of the registrant.
At December 4, 2020 there were outstanding 32,828,337 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 2021 Annual Meeting of Stockholders to be filed with the Commission within 120 days
of October 31, 2020 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
Page
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15
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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:
• impacts from public health issues (including pandemics, such as the recent COVID-19 pandemic and quarantines) on
the economy, demand for our products or our operations, including the responses of governmental authorities to
contain such public health issues;
• 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.
As of October 31, 2020, we operated 31 manufacturing facilities located in 15 states in the U.S., two facilities in the U.K.,
and one in Germany. These facilities feature efficient plant design and flexible manufacturing processes, enabling us to produce
a wide variety of custom engineered products and components primarily focused on the window and door segment of the
residential building products markets. We are able to maintain minimal levels of finished goods inventories at most locations
because we typically manufacture products upon order to customer specifications. We believe the primary drivers of our
operating results are residential remodeling and replacement activity and new home construction in the markets we serve.
Our Industry
Our business is largely based in North America and dependent upon the spending and growth activity levels of our
customers which include national and regional residential window, door and cabinet manufacturers. Our international presence
includes vinyl extruded lineals for large house systems to smaller individual customers. We also have insulating glass
businesses in the U.K. and Germany.
We use data related to housing starts and window shipments in the U.S., as published by or derived from third-party
sources, to evaluate the fenestration market. We also use data related to cabinet demand in the U.S. to evaluate the residential
cabinet market.
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The following table presents calendar-year annual housing starts information as of November 2020 from 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
Annual Data - Forecast
2016
2017
2018
2019
2020
2021
2022
785
851
872
893
947
971
993
10%
8%
2%
2%
6%
3%
2%
392
356
376
403
396
335
360
(1)%
(9)%
6%
7%
1%
(15)%
7%
81
93
96
95
94
114
120
14%
15%
3%
(1)%
(1)%
21%
5%
1,259
1,300
1,344
1,391
1,437
1,420
1,473
Ducker Worldwide LLC, a consulting and research firm, indicated in November 2020 that window shipments in the
residential remodeling and replacement (R&R) market are expected to decrease slightly during the remaining calendar year
2020, increase 2% during 2021 and increase 3% during 2022. Derived from reports published by Ducker, the overall decline in
window shipments for the trailing twelve months ended September 30, 2020 was 0.3%. During this period, new construction
activity increased 1.1% and R&R replacement decreased 1.4% respectively.
According to data from Catalina Research, a consulting and research firm, U.S. residential cabinet demand is expected to
increase through 2021. Projections from Catalina Research as of November 2020 include growth rates for the stock, semi-
custom (the cabinet market we primarily operate in) and custom cabinet markets, which are presented in the table below:
Cabinet Market Annual Growth Rates
Period
Stock
Semi-Custom
Custom
Overall
Annual Data
Annual Data - Forecast
2016
2017
2018
2019
2020
2021
5.5%
8.5%
7.9%
3.1%
2.9%
8.8%
1.0%
5.7%
(1.6)%
(3.2)%
(5.5)%
3.7%
8.7%
(0.9)%
3.8%
2.2%
(2.5)%
2.6%
4.6%
6.6%
4.9%
1.5%
0.3%
7.0%
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
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the short- to mid-term.
Strategy
Our vision is to be the preferred supplier to our customers in each market we serve. Our strategy to achieve this vision
includes the following:
• focus on organic growth with our current customer base and expand our market share with national and regional
customers by providing: (1) a quality product; (2) a high level of customer service; (3) product choices at different
price points; and (4) new products or enhancements to existing product offerings. These enhancements may include
higher thermal efficiency, enhanced functionality, improved weatherability, better appearance and best-in-class quality
for our fenestration and cabinet door products;
• realize improved profitability in our manufacturing processes through: (1) ongoing preventive maintenance programs;
(2) better utilization of our capacity by focusing on operational efficiencies and reducing scrap; (3) marketing our
value added products; and (4) focusing on employee safety;
• offer logistics solutions that provide our customers with just-in-time service which can reduce their processing costs;
• 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, Profine UK Extrustions Ltd., Eurocell and others. Primary competitors in the cabinet door business in the
U.S. include Conestoga, Appalachian Wood, Olon, Northern Contours and others.
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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 $30 million as of
October 31, 2020. 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 2021 in accordance with our revenue recognition accounting policy.
Seasonal Nature of Business
Our business is impacted by seasonality. We have historically experienced lower sales for our products during the first
half of our fiscal year as winter weather reduces homebuilding and home improvement activity. Our operating income tends to
decline during this period of lower sales because a higher percentage of our operating expenses are fixed overhead. We
typically experience more favorable results in the third and fourth quarters of the fiscal year. Our exposure to seasonality was
somewhat tempered with the entry into the kitchen and bathroom cabinet door industry, which is focused "inside the house" and
less susceptible to inclement weather. Expenses for labor and other costs are generally semi-variable throughout the year.
Working Capital
We fund operations through a combination of available cash and cash equivalents, cash flow generated from our
operations, and borrowings from our revolving credit facility. We extend credit to our domestic customers in the ordinary
course of business generally for a term of 30 days, while the terms for our international customers vary from cash advances to
90 days. Inventories of raw materials are carried in quantities deemed necessary to ensure a smooth production process, some of
which are governed by consignment agreements with suppliers. We strive to maintain minimal finished goods inventories,
while ensuring an adequate supply on hand to service customer needs.
Service Marks, Trademarks, Trade Names, and Patents
Our federally registered trademarks or service marks include QUANEX, QUANEX and design, "Q" design, TRUSEAL
TECHNOLOGIES, DURASEAL, DURALITE, SOLARGAIN, ENVIROSEALED WINDOWS, EDGETHERM, EDGETECH,
ECOBLEND, SUPER SPACER, TSS, TRUE WARM, E & Design, QUIET EDGE, HEALTH SMART WINDOWS,
ENERGY WISE WINDOWS, DESI-ROPE, 360 and design, INTELLICLIP, SUSTAINAVIEW, MIKRON, MIKRONWOOD,
MIKRONBLEND, MIKRON BLEND and design, ENERGYCORE, FUSION INSULATED SYSTEM, AIRCELL,
SUPERCOAT, SUPERCAP, STYLELOCK, STYLELOCK and design, MIKRON and design, HOMESHIELD,
HOMESHIELD and design, STORM SEAL, and TENON. We consider the following marks, design marks and associated trade
names to be valuable in the conduct of our business: HOMESHIELD, TRUSEAL TECHNOLOGIES, EDGETECH, MIKRON,
WOODCRAFT and QUANEX. Through Liniar, we hold a number of registered designs, patents and trademarks registered in
the U.K., which include: MODLOK, LINIAR, SUPER CUT, ENERGY PLUS & Device, FLAMSTEAD HOLDINGS &
Device, HL PLASTICS & Device, VINTAGE WINDOWS & Device, RESURGENCE, FUSE, ELEVATE, SWITCHBOARD
and various other trademarks and patents which are pending approval. Generally, our business does not depend on patent
protection, but patents obtained with regard to our vinyl extrusion products and processes, fabricated metal components and IG
spacer products business remain a valuable competitive advantage over other building products manufacturers. We obtain
patent protection for various dyes and other tooling created in connection with the production of customer-specific vinyl profile
designs and vinyl extrusions. Our fabricated metal components business obtains patent protection for its thresholds. Our
window sealant business unit relies on patents to protect the design of several of its window spacer products. Although we hold
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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.
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 2021. While we will continue to have future expenditures
related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our
experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect
on our operations, financial condition or cash flows.
Human Capital
We track human capital metrics that we consider to be key to our business, including employee headcount, temporary
workers, health and safety, and turnover. As of October 31, 2020, we had 3,767 employees. Of these employees, 2,980 were
domiciled in the U.S., 694 in the U.K., and 93 in Germany. Generally, the total number of employees of Quanex and its
subsidiaries does not significantly fluctuate throughout the year. Currently, none of our employees are subject to collective
bargaining agreements.
Employee turnover rates are monitored monthly at the division and plant levels. Both voluntary and involuntary
terminations, including retirements, are used to calculate the turnover rate. Our human capital objectives include attracting,
developing, motivating, rewarding, and retaining our existing and new employees. We offer our employees online training
courses and on-the-job training on job duties, safety requirements, and leadership skills. The health and safety of our employees
is our high priority and in particular, in response to the COVID-19 pandemic. We have taken additional measures to limit
possible infections at the workplace. See Part 2 Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Notable Items - COVID-19 Impacts," elsewhere in this Annual Report on Form 10-K for related
disclosure.
For Investors
We periodically file or furnish documents to the Securities and Exchange Commission (SEC), including our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports as required. These
reports are also available free of charge from the Investor Relations Section of our website at http://www.quanex.com, as soon
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as reasonably practicable after we file such material or furnish it to the SEC. As permitted by the SEC rules, we post relevant
information on our website. However, the information contained on our website is not incorporated by reference into this
Annual Report on Form 10-K and should not be considered part of this report.
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Item 1A. Risk Factors.
The following risk factors, along with other information contained elsewhere in this Annual Report on Form 10-K
and our other public filings with the SEC, should be carefully considered before deciding to invest in our securities.
Additional risks and uncertainties that are not currently known to us or that we may view as immaterial could impair
our business if such risks were to develop into actual events. Therefore, any of these risks could have a material adverse
effect on our financial condition, results of operations and cash flows. This listing of risk factors is not all-inclusive and
is not necessarily presented in order of importance.
Industry Risks
Any sustained decline in residential remodeling, replacement activities, or housing starts could have a material adverse
effect on our business, financial condition and results of operations.
The primary drivers of our business are residential remodeling, replacement activities and housing starts. The home
building and residential construction industry is cyclical and seasonal, and product demand is based on numerous factors such
as interest rates, general economic conditions, consumer confidence and other factors beyond our control. Declines in the
number of housing starts and remodeling expenditures resulting from such factors could have a material adverse effect on our
business, results of operations and financial condition.
If the availability of critical raw materials were to become scarce or if the price of these items were to increase
significantly, we might not be able to timely produce products for our customers or maintain our profit levels.
We purchase from outside sources significant amounts of raw materials, such as butyl, titanium dioxide, vinyl resin,
aluminum, steel, silicone and wood products for use in our manufacturing facilities. Because we do not have long-term
contracts for the supply of many of our raw materials, their availability and price are subject to market fluctuation and may be
subject to curtailment or change. Any of these factors could affect our ability to timely and cost-effectively manufacture
products for our customers.
Compliance with, or liabilities under, existing or future environmental laws and regulations could significantly increase
our costs of doing business.
We are subject to extensive federal, state and local laws and regulations concerning the discharge of materials into the
environment and the prevention and/or remediation of chemical contamination. To satisfy such requirements, we must make
capital and other expenditures on an 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 could record future impairment charges. Goodwill totaled $146.2 million at October 31, 2020. The results
of goodwill impairment testing are described in the accompanying notes to the audited financial statements, Note 6, "Goodwill
and Intangible Assets" of the accompanying financial statements in this Annual Report on Form 10-K.
We may not be able to protect our intellectual property.
We rely on a combination of copyright, patent, trade secrets, confidentiality procedures and contractual commitments to
protect our proprietary information. However, these measures can only provide limited protection and unauthorized third parties
may try to copy or reverse engineer portions of our products or may otherwise obtain and use our intellectual property. If we
cannot protect our proprietary information against unauthorized use, we may not be able to retain a perceived competitive
advantage and we may lose sales to the infringing sellers, which may have a material adverse effect on our financial condition,
results of operations and cash flows.
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We are subject to various existing and contemplated laws, regulations and government initiatives that may materially
impact the demand for our products, our profitability or our costs of doing business.
Our business may be materially impacted by various governmental laws, regulations and initiatives that may artificially
create, deflate, accelerate, or decelerate consumer demand for our products. For example, when the government issues tax
credits designed to encourage increased homebuilding or energy-efficient window purchases, the credits may create a spike in
demand that would not otherwise have occurred and our production capabilities may not be able to keep pace, which could
materially impact our profitability. Likewise, when such laws, regulations or initiatives expire, our business may experience a
material loss in sales volume or an increase in production costs as a result of the decline in consumer demand.
Our operations outside the U.S. require us to comply with a number of U.S. and international anti-corruption
regulations, violations of which could have a material adverse effect on our consolidated results of operations and
consolidated financial condition.
Our international operations require us to comply with a number of U.S. and international regulations, including the
Foreign Corrupt Practices Act (FCPA) and the United Kingdom Bribery Act 2010. While we have implemented appropriate
training and compliance programs to prevent violations of these anti-bribery regulations, we cannot ensure that our policies,
procedures and programs will always protect us from reckless or criminal acts committed by our employees or agents.
Allegations of violations of applicable anti-corruption laws, may result in internal, independent, or government investigations,
and violations of anti-corruption laws may result in severe criminal or civil sanctions or other liabilities which could have a
material adverse effect on our business, consolidated results of operations and financial condition.
Our operations within the U.K. may be negatively affected as a result of the U.K.'s exit from the European Union (E.U.),
(commonly referred to as Brexit).
We have operations located within the U.K., and as such, our business and financial results may be negatively impacted as
a result of Brexit, resulting primarily from (a) continued depression in the value of the British Pound Sterling as compared to
the United States Dollar; and (b) potential price increases or unavailability of supplies purchased by our U.K. businesses from
companies located in the E.U. or elsewhere. If the value of the British Pound Sterling continues to fluctuate as a result of Brexit,
unfavorable exchange rate changes may negatively affect the value of our operations and businesses located in the U.K., as
translated to our reporting currency, the United States Dollar, in accordance with U.S. GAAP, which may impact the revenue
and earnings we report. For more information with respect to Exchange Rate risk applicable to us, please see Part 2 Item 7A.
"Market Risk Disclosures," elsewhere in this Annual Report on Form 10-K. Continued fluctuations in the British Pound
Sterling may also result in the imposition of price adjustments by E.U.-based suppliers to our U.K. businesses, as those
suppliers seek to compensate for the changes in value of the British Pound Sterling as compared to the European Euro.
Failure to achieve and maintain effective internal controls could have a material adverse effect on our business and on
our stock price.
Effective internal controls are necessary for us to effectively monitor our business, prevent fraud or theft, remain in
compliance with our credit facility covenants, and provide reliable financial reports, both to the public and to our lenders. If we
fail to maintain the adequacy of our internal controls, both in accordance with current standards and as standards are modified
over time, we could trigger an event of default under our credit facilities or lose the confidence of the investing community,
both of which could result in a material adverse effect on our stock price, limit our ability to borrow funds, or result in the
application of unfavorable commercial terms to borrowings then outstanding.
The impact of foreign trade relations and associated tariffs could adversely impact our business.
We currently source a number of raw materials from international suppliers. Import tariffs, taxes, customs duties and/or
other trading regulations imposed by the U.S. government on foreign countries, or by foreign countries on the U.S., could
significantly increase the prices we pay for certain raw materials, such as aluminum and wood, that are critical to our ability to
manufacture our products. In addition, we may be unable to find a domestic supplier to provide the necessary raw materials on
an economical basis in the amounts we require. If the cost of our raw materials increases, or if we are unable to procure the
necessary raw materials required to manufacture our products, then we could experience a negative impact on our operating
results, profitability, customer relationships and future cash flows.
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Company Risks
Our business will suffer if we are unable to adequately address potential supplier or customer pricing pressures, both
with respect to OEMs that have significant pricing leverage over suppliers, and to large suppliers who have significant
pricing leverage over their customers.
Our primary customers are OEMs, who have substantial leverage in setting purchasing and payment terms. In addition,
many of our suppliers are large international conglomerates with numerous customers that are much larger than us, which
lessens our leverage in pricing and supply negotiations. We attempt to manage this pricing pressure and to preserve our
business relationships with suppliers and OEMs by negotiating reasonable price concessions when needed, and by reducing our
production costs through various measures, which may include managing our purchase process to control the cost of our raw
materials and components, maintaining multiple supply sources where possible, and implementing cost-effective process
improvements. However, our efforts in this regard may not be successful and our operating margins could be negatively
impacted.
Our revenues could decline or we may lose business if our customers vertically integrate their operations, diversify their
supplier base, or transfer manufacturing capacity to other regions.
Certain of our businesses or product lines are largely dependent on a relatively few large customers. Although we believe
we have an extensive customer base, if we were to lose one of these large customers or if one such customer were to materially
reduce its purchases as a result of vertical integration, supplier diversification, or a shift in regional focus, our revenue, general
financial condition and results of operations could be adversely affected.
Our credit facility contains certain operational restrictions, reporting requirements, and financial covenants that limit
the aggregate availability of funds.
Our revolving credit facility contains certain financial covenants and other operating and reporting requirements that
could present risk to our operating results or limit our ability to access capital for use in the business. For a full discussion of
the various covenants and operating requirements imposed by our revolving credit facility and information related to the
potential limitations on our ability to access capital, see Item 7, "Management’s Discussion and Analysis of Financial
Conditions and Results of Operations-Liquidity and Capital Resources," included elsewhere in this Annual Report on Form 10-
K.
We may not be able to successfully manage or integrate acquisitions, and if we are unable to do so, then our profitability
could be adversely affected.
We cannot provide assurance that we will successfully manage or integrate acquisition targets once we have purchased
them. If we acquire a business for which we do not fully understand or appreciate the specific business risks, if we overvalue or
fail to conduct effective due diligence on an acquisition, or if we fail to effectively and efficiently integrate a business that we
acquire, then there could be a material adverse effect on our ability to achieve the projected growth and cash flow goals
associated with the new business, which could result in an overall material adverse effect on our long-term profitability or
revenue generation.
If our information technology systems fail, or if we experience an interruption in our operations due to an aging
information system infrastructure, then our results of operations and financial condition could be materially adversely
affected.
The failure of our information technology systems, our inability to successfully maintain, enhance and/or replace our
information technology systems when necessary, or a significant compromise of the integrity or security of the data that is
generated from our information technology systems, could adversely affect our results of operations and could disrupt business
and prevent or severely limit our ability to respond to data requests from our customers, suppliers, auditors, shareholders,
employees or government authorities.
We are subject to data security and privacy risks that could negatively affect our results or operations.
In addition to our own sensitive and proprietary business information, we collect transactional and personal information
about our customers and employees. Any breach 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
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customer relationships, and could also result in unwanted media attention, reputational damage, or the imposition of fines,
lawsuits, or significant legal or remediation expenses.
Epidemics, pandemics or other disease outbreaks could significantly disrupt our operations or those of our customers or
suppliers.
If the COVID-19 coronavirus continues to spread worldwide, or if similar widespread disease outbreaks occur in the
future, our business, financial condition and results of operations could be negatively affected to the extent such event harms
the worldwide economy or region in which we operate.
Our business could be materially and adversely affected by the occurrence of a widespread health epidemic or pandemic.
In particular, any outbreak or resurgence of COVID-19, or any governmental imposition of mandatory or voluntary closures in
areas where our manufacturing facilities, suppliers or customers are located, could severely disrupt our operations and result in
(a) plant slowdowns or shutdowns, (b) difficulty obtaining necessary supplies, and (c) reduced customer orders and revenues.
In addition to this potential direct impact on our facilities and operations, continuing outbreaks of the virus could negatively
impact our industry and end markets as a whole, or result in a longer-term economic recession. Any of these factors could
negatively affect our business, financial condition, cash flows, profitability, and results of operations.
The COVID-19 pandemic could also create inefficiencies or interruptions in the supply chain as our suppliers may be
forced to close their own plants or prove unable to obtain their own raw materials. If our suppliers are unable to timely meet
our supply needs, it could impact our ability to provide our customers with high quality products on a timely basis, which could
result in order cancellations, delivery refusals, price concessions, or other negative customer outcomes, any of which could
negatively impact our business, revenues, financial condition, results of operations and liquidity. We could also be forced to pay
higher prices for the supplies we purchase, which could negatively impact our results of operations and profitability.
We may not have the right personnel in place to achieve our operating goals, and the rural location of some of our
operations may make it difficult to locate or hire highly skilled employees.
We operate in some rural areas and small towns where the competition for labor can be fierce, and where the pool of
qualified employees may be very small. If we are unable to obtain or retain skilled workers and adequately trained
professionals to conduct our business, we may not be able to manage our business to the necessary high standards. In addition,
we may be forced to pay higher wages or offer other benefits that might impact our cost of labor and thereby negatively impact
our profitability.
Equipment failures or catastrophic loss at any of our manufacturing facilities could prevent us from producing our
products.
An interruption in production capabilities at any of our facilities due to equipment failure, catastrophic loss, or other
reasons could result in our inability to manufacture products, which could severely affect delivery times, return or cancellation
rates, and future sales, any of which could result in lower sales and earnings or the loss of customers. Although we have a
disaster recovery plan in place, we currently have one plant which is the sole source for our insulating glass spacer business in
the U.S. If that plant were to experience a catastrophic loss and our disaster recovery plan were to fail, it could have a material
adverse effect on our results of operations or financial condition.
Product liability claims and product replacements could harm our reputation, revenue generation and financial
condition, or could result in costs related to litigation, warranty claims, or customer accommodations.
We have, on occasion, found flaws and deficiencies in the manufacturing, design, testing or installation of our products,
which may result from a product defect, a defect in a component part provided by our suppliers, or as a result of the product
being installed incorrectly by our customer or an end user. The failure of products before or after installation could result in
litigation or claims by our customers or other users of the products, or in the expenditure of costs related to warranty coverage,
claim settlement, litigation, or customer accommodation. In addition, we are currently party to certain legal claims related to a
commercial sealant product, and there is no assurance that we will prevail on those claims. We may be required to expend legal
fees, expert costs, and other costs associated with defending the claims and/or lawsuits. We may elect to enter into legal
settlements or be forced to pay any judgments that result from an adverse court decision. Any such settlements, judgments, fees
and/or costs could negatively impact our profitability, results of operations, cash flows and financial condition.
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Our insurance coverage may be inapplicable or inadequate to cover certain liabilities, and our insurance policies may
exclude coverage for certain matters.
While we maintain a robust insurance program that is reasonably designed to cover our known and unknown risks, there
is no assurance that our insurance carriers will voluntarily agree to cover every potential liability, or that our insurance policies
include limits high enough to cover all liabilities associated with our business or products. In addition, coverage under our
insurance policies may be unavailable in the future for certain products. For example, during a prior renewal of our insurance
program, our insurance carriers excluded future coverage of a product line we no longer manufacture or sell. If our insurers
refuse to cover claims, in whole or in part, or if we exhaust our available insurance coverage at some point in the future, then
we might be forced to expend legal fees and settlement or judgment costs, which could negatively impact our profitability,
results of operations, cash flows and financial condition.
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
37,296,166 were issued at October 31, 2020. 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, 2020.
Location
Executive Offices
Houston, Texas*
North American Fenestration Segment
Character & Use of Property
Executive corporate office
Akron, Ohio*
Rice Lake, Wisconsin
Cambridge, Ohio*
Richmond, Kentucky
Kent, Washington*
European Fenestration Segment
Denby, United Kingdom*
Heinsberg, Germany*
North American Cabinet Components Segment
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
St. Cloud, Minnesota
Hardwood doors & components for kitchen and bath
* These locations are leased as of October 31, 2020.
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 11 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 February 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 2020, on a consolidated basis, our facilities operated at approximately 58% 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 2018,
2019 and 2020, 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.
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We reserve for litigation loss contingencies that are both probable and reasonably estimable. We do not expect that losses
resulting from any current legal proceedings will have a material adverse effect on our consolidated financial statements if or
when such losses are incurred.
For discussion of environmental issues, see Item 1, "Business - Environmental and Employee Safety Matters,” discussed
elsewhere in this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures.
Not Applicable.
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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 1,783 holders of our common stock (excluding individual participants in securities positions listings)
on record as of December 4, 2020.
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, 2020:
(a)
(b)
(c)
Plan Category
Equity compensation plans approved by security holders
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights(1)
Weighted-average
exercise price of
outstanding options,
warrants and rights(2)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
1,095,329 $
18.88
1,799,174
(1) Column (a) includes securities that may be issued upon future vesting of performance share awards that have been
previously granted to key employees and officers. The number of securities reflected in this column includes the
maximum number of shares that would be issued pursuant to these performance share awards assuming the performance
measures are achieved. The performance measures may not be achieved.
(2) The weighted-average exercise price in column (b) does not include the impacts of the performance share awards or
any securities that may be issued thereunder. For additional details, see Note 13, "Stock-Based Compensation," of the
accompanying financial statements in this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
Set forth below is a table summarizing the program and the repurchase of shares during the quarter ended October 31,
2020.
Period
August 2020
September 2020
October 2020
Total
(a) Total Number
of Shares
Purchased (1)
(b) Average Price
Paid per Share(1)
(c) Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs(1)
(d) Maximum US
Dollars Remaining
that May Yet Be Used
to Purchase Shares
Under the Plans or
Programs(1)
—
30,001
200
30,201
—
$17.89
$18.27
$17.89
—
30,001
200
30,201
$11,722,595
$11,185,997
$11,182,343
(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, 2020 and 2019, we purchased 450,000 and 583,398 shares, respectively, at a cost of
$7.2 million and $9.6 million, respectively, under this program.
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Stock Performance Graph
The following chart represents a comparison of the five year total return of our common stock to the Standard & Poor’s
500 Index (S&P 500 Index), the Russell 2000 Index, and a peer group index selected by us, which includes companies offering
similar products and services to ours. The companies in our peer group for the year ended October 31, 2020 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., L.B. Foster
Company, Masonite International Corp, Mueller Water Products, Inc., Patrick Industries Inc., PGT Innovations, Inc., Simpson
Manufacturing Company Inc., and Trex Company Inc.
INDEXED RETURNS
Company Name / Index
Quanex Building Products Corporation
S&P 500 Index
Russell 2000 Index
New Peer Group
For the Years Ended
10/31/2015
10/31/2016
10/31/2017
10/31/2018
10/31/2019
10/31/2020
$
$
$
$
100.00 $
87.15 $
118.28 $
80.68 $
107.13 $
103.24
100.00 $
104.51 $
129.21 $
138.70 $
158.57 $
173.97
100.00 $
104.11 $
133.09 $
135.57 $
142.22 $
142.03
100.00 $
116.92 $
149.71 $
137.91 $
173.41 $
204.17
18
Comparison of Cumulative Five Year Total ReturnQuanex Building Products CorporationS&P 500 IndexRussell 2000 IndexPeer Group10/31/201510/31/201610/31/201710/31/201810/31/201910/31/2020$50$75$100$125$150$175$200$225 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, 2020, 2019, 2018, 2017 and 2016 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, 2020. The following information should be read in conjunction with Item 7, “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.
2020(1)(2)
Fiscal Years Ended October 31,
2018(2)(4)(5)
2017(2)
2019(2)(3)
2016(2)(6)(7)
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 income (loss)
Non-operating (expense) income:
Interest expense
Other, net
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Earnings per share:
Basic earnings (loss) per share
Diluted earnings (loss) per share
Cash dividends declared per share
Other Financial & Operating Data
(Dollars in thousands, except per share data)
$
851,573 $
893,841 $
889,785 $
866,555 $
928,184
658,750
89,707
622
47,229
—
694,420
101,292
370
49,586
74,600
55,265
(26,427)
(5,245)
280
50,300
(11,804)
(9,643)
116
(35,954)
(10,776)
697,022
103,758
1,486
51,822
—
35,697
(11,100)
1,156
25,753
800
672,488
98,085
4,550
57,495
—
33,937
(9,595)
1,160
25,502
(6,819)
710,947
115,012
529
53,146
12,602
35,948
(36,498)
(5,074)
(5,624)
3,765
38,496 $
(46,730) $
26,553 $
18,683 $
(1,859)
1.18 $
1.17 $
0.32 $
(1.42) $
(1.42) $
0.32 $
0.77 $
0.76 $
0.20 $
0.55 $
0.54 $
0.16 $
(0.05)
(0.05)
0.16
$
$
$
$
Cash provided by operating activities
$
100,796 $
96,372 $
104,611 $
79,778 $
87,341
Cash used for investing activities
Cash (used for) provided by financing activities
Acquisitions, net of cash acquired
Capital expenditures
Selected Consolidated Balance Sheet Data
Cash and cash equivalents
Total assets
Long-term debt, excluding current portion
$
$
(25,224)
(55,122)
—
(23,559)
(71,264)
—
(26,052)
(65,817)
—
(32,627)
(55,133)
(282,103)
195,448
—
(245,904)
25,726 $
24,883 $
26,484 $
34,564 $
37,243
51,621 $
30,868 $
29,003 $
17,455 $
25,526
691,585
116,728
645,110
156,414
743,214
209,332
774,944
218,184
781,418
259,011
Total liabilities
335,826 $
412,742
(1) The results for 2020 include impacts of the COVID-19 pandemic. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Notable Items," included elsewhere in this Annual Report on Form 10-K.
347,992 $
314,923 $
367,252 $
$
(2) Restructuring costs were incurred associated with the closure of several plant facilities. See Note 1, "Nature of Operations,
Basis of Presentation and Significant Accounting Policies - Restructuring," of the accompanying financial statements in this
Annual Report on Form 10-K.
(3) In 2019, we recorded goodwill impairment charges of $74.6 million associated with our cabinet components business.
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(4) 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 Finance Lease Obligations," included elsewhere in this Annual Report on Form 10-K.
(5) 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.
(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 Finance 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.
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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 the "Cautionary Note Regarding
Forward-Looking Statements" discussed elsewhere within this Annual Report on Form 10-K. For a listing of potential risks and
uncertainties which impact our business and industry, see "Item 1A. Risk Factors." Actual results could differ from our
expectations due to several factors which include, but are not limited to: the impact of the ongoing COVID-19 pandemic,
market price and demand for our products, economic and competitive conditions, capital expenditures, new technology,
regulatory changes and other uncertainties. Unless otherwise required by law, we undertake no obligation to publicly update
any forward-looking statements, even if new information becomes available or other events occur in the future.
Our Business
We manufacture components for original equipment manufacturers in the building products industry. These components
can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of
fenestration components include (1) energy-efficient flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window
and door screens, and (4) precision-formed metal and wood products. In addition, we provide certain other non-fenestration
components and products, which include solar panel sealants, trim moldings, vinyl decking, fencing, water retention barriers,
and conservatory roof components. We use low-cost production processes and engineering expertise to provide our customers
with specialized products for their specific window, door, and cabinet applications. We believe these capabilities provide us
with unique competitive advantages. We serve a primary customer base in North America and the U.K., and also serve
customers in international markets through our operating plants in the U.K. and Germany, as well as through sales and
marketing efforts in other countries.
We continue to invest in organic growth initiatives and we intend to continue evaluating business acquisitions that allow
us to expand our existing fenestration and cabinet component footprint, enhance our product offerings, provide new
complementary technology, enhance our leadership position within the markets we serve, and expand into new markets or
service lines. We have disposed of non-core businesses in the past, and continue to evaluate our business portfolio to ensure
that we are investing in markets where we believe there is potential future growth.
We currently have three reportable business segments: (1) North American Fenestration segment (“NA Fenestration”),
comprising three operating segments, manufacturing vinyl profiles, IG spacers, screens and other fenestration components; (2)
European Fenestration segment (“EU Fenestration”), comprising our U.K.-based vinyl extrusion business, manufacturing vinyl
profiles and conservatories, and the European insulating glass business manufacturing IG spacers; and (3) North American
Cabinet Components segment (“NA Cabinet Components”), comprising our North American cabinet door and components
business and two wood-manufacturing plants. We maintain a grouping called Unallocated Corporate & Other, which includes
transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock
and other factors, certain severance and legal costs not deemed to be allocable to all segments, depreciation of corporate assets,
interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical
expense fluctuations relative to planned costs as determined during the annual planning process. Other corporate general and
administrative costs have been allocated to the reportable business segments, based upon a relative measure of profitability in
order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to
businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as
those used to prepare our accompanying consolidated financial statements. Corporate general and administrative expenses
allocated during the years ended October 31, 2020, 2019 and 2018 were $21.7 million, $18.3 million and $18.7 million,
respectively.
Notable Items
COVID-19 Impacts
On March 11, 2020, the World Health Organization,(WHO), declared the outbreak of COVID-19 to be a global pandemic
and recommended containment and mitigation measures. Our first priority with regard to the COVID-19 pandemic is to do
everything we can to ensure the safety, health and welfare of our employees, customers, suppliers and other partners. With the
implementation of health and safety practices at our facilities, we are continuing to supply the industry during this uncertain
time, recognizing the essential role the construction industry plays in providing housing and necessary infrastructure.
As federal, state and local governments react to the public health crisis, significant uncertainties have been created in the
economy. The COVID-19 pandemic and its related effects continue to have a significant adverse effect on many sectors of the
economy and we may be further impacted.
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As part of our response to the COVID-19 pandemic, we have taken the following measures:
• We are continuing to provide our products to support critical infrastructure needs while following national, state, and
local guidelines required to continue operations during the existence of the pandemic and related local declarations of
emergency. All manufacturing facilities in the United States and Germany remained operational for the duration of the
pandemic while both U.K. plants shut down in late March 2020 and became operational again during May 2020.
However, local or regional hotspots of the pandemic could result in other locations being temporarily idled due to the
need to deep clean areas where an employee who has tested positive for COVID-19 worked.
• While we currently expect any negative impact on sales to be temporary and minimal, the duration of the COVID-19
pandemic, the actions to contain the pandemic and treat its impacts, and the effects on our operations are highly
uncertain and cannot be predicted at this time.
• We reassessed and adjusted our operational needs, including reducing our 2020 capital expenditure plans by
approximately 25% to 30%.
• We have taken precautionary measures intended to help minimize the risk of the virus to our employees, including
temporarily requiring some employees to work remotely.
• We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities,
including federal, state and local public health authorities and may take additional actions based on their
recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our
operating plan.
Tax Cuts and Job Act
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 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 in the U.S. We obtain market data from Catalina research, a consulting
and research firm, for insight into the U.S. residential wood cabinet demand.
In November 2020, the NAHB forecasted calendar-year housing starts (excluding manufactured units) to be 1.4 million in
2020, 1.3 million in 2021, and 1.4 million in 2022. The November 2020 Ducker forecast indicated that window shipments in
the R&R market are expected to decrease approximately 1% for calendar year 2020 and increase 2% and 3% in 2021 and 2022,
respectively. Derived from reports published by Ducker, the overall decrease in window shipments for the trailing twelve
months ended September 30, 2020 was 0.3%. During this period, new construction activities increased 1.1% and R&R
decreased 1.4%. In November 2020, Catalina Research estimated that residential semi-custom cabinet demand in the U.S. will
decline approximately 6% in 2020, however, 2021 is estimated to grow 3.7%. In line with market forecasts, we expect that
some sales originally planned for the year ended October 31, 2020 may be realized during the years ended October 31, 2021
and 2022.
Our U.K. vinyl business (commonly referred to as "Liniar") is largely focused on the sale of vinyl house systems under
the trade name “Liniar” to smaller window manufacturers in the U.K. Liniar is one of the larger providers of vinyl extruded
products in the U.K. in terms of volume shipped. Currently, the U.K. is experiencing a shortage in affordable housing, with
rising demand due in part to a growing immigrant population. Liniar’s current primary customers are smaller window
fabricators, as opposed to the larger OEMs that comprise a large portion of the North American market. These manufacturers
seek the quality and technology of the specific products identified by the Liniar trade name. In addition, Liniar services non-
fenestration markets including the manufacture of roofing for conservatories, vinyl decking and vinyl water retention barriers
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used for landscaping. We believe there are growth opportunities within these markets in the U.K. and potential synergies which
may enable us to sell complementary products.
NA Cabinet Components manufactures kitchen and bathroom cabinet doors and components, amongst other products,
using a variety of woods from traditional hardwoods to engineered wood products. Currently, most of the revenue in the NA
Cabinet Components is earned in the U.S., so domestic housing starts and R&R activity constitute the primary drivers of this
business as well. The cabinet door market is stratified as follows: stock (low-cost, low-variations), semi-custom (more
customized, just-in-time manufacturing, higher price point) and custom (precise customer specifications, just-in-time
manufacturing, high-end price point). NA Cabinet Component's primary market is semi-custom.
Our business is seasonal, particularly our fenestration business, as inclement weather during the winter months tends to
slow down construction, particularly as related to “outside of the house” construction. To some extent, we believe our kitchen
and bathroom cabinet door business lessens the impact of seasonality on our operating results, as the cabinet business is “inside
of the house” and less susceptible to weather.
We are impacted by regulation of energy standards. Although the U.S. government has been less aggressively pursuing
higher energy efficiency standards in recent years, other countries have implemented higher energy efficiency standards which
should bode well for our fenestration-related business in these markets, particularly our warm-edge spacer products.
Several commodities in our business are subject to pricing fluctuations, including polyvinyl resin (PVC), titanium dioxide
(TiO2), petroleum products, aluminum and wood. For the majority of our customers and critical suppliers, we have price
adjusters in place which effectively share the base pass-through price changes for our primary commodities with our customers
commensurate with the market at large. Our long-term exposure to these price fluctuations is somewhat mitigated due to the
contractual component of the adjuster program. However, these adjusters are not in place with all customers and for all
commodities, and there is a level of exposure to such volatility due to the lag associated with the timing of price updates in
accordance with our customer agreements, particularly with regard to hardwoods. In addition, some of these commodities, such
as silicone, are in high demand, particularly in Europe, which can affect the cost of the raw materials, a portion of which we
may not be able to fully recover. Thus far we have not experienced any supply or logistics disruptions as lower demand has not
required us to source the same level of supply.
On June 23, 2016, citizens of the U.K. voted to exit the European Union (E.U.) (referred to as Brexit). In October 2019,
the U.K. and E.U. ratified a withdrawal agreement, and subsequently the U.K. left the E.U. on January 31, 2020. A transition
period is in place until December 31, 2020 while the U.K. and E.U. negotiate additional arrangements. The current E.U. rules
for trade, travel, and business for the U.K. will lapse on December 31, 2020 with any new rules taking effect January 1, 2021.
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, 2020. 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 risk mitigation 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 use are being sourced from outside of the U.K., which could expose us to
cross-border issues and raw material price impacts. We will mitigate this potential impact of Brexit on the import of goods to
the U.K. by strategically managing our inventory levels and logistical channels.
In February 2020, the U.K. announced its intention to introduce border controls and our U.K. businesses have positioned
themselves well to cope with additional demands and tariffs that this will bring in order to comply and facilitate the flow of
goods in and out of the U.K. We are still clarifying what the impact of associated tariffs could be.
The global economy remains uncertain due to currency devaluations, political unrest, terror threats, global pandemics
such as COVID-19, and even the political landscape in the U.S. These and other macro-economic factors have impacted the
global financial markets, which may have contributed to significant changes in foreign currencies. We continue to monitor our
exposure to changes in exchange rates.
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Comparison of the fiscal years ended October 31, 2020 and 2019
This table sets forth our consolidated results of operations for the twelve-month periods ended October 31, 2020 and
2019.
Net sales
$ 851.6
100% $ 893.8
100% $
(42.2)
(5)%
2020
For the Years Ended October 31,
2019
2020 vs. 2019
Amounts
% of Sales
Amounts
% of Sales
$ Change
Variance %
(Dollars in millions)
Cost of sales (excluding depreciation and amortization)
Selling, general and administrative
Restructuring charges
Depreciation and amortization
Asset impairment charges
Operating income (loss)
Interest expense
Other, net
Income tax expense
Net income (loss)
$
77%
658.8
11%
89.7
0.6 —%
6%
47.2
— —%
6%
55.3
(5.2)
(1)%
0.2 —%
(1)%
5%
(11.8)
38.5
$
694.4
101.2
78%
11%
0.4 —%
6%
49.6
8%
74.6
(3)%
(26.4)
(9.6)
(1)%
0.1 —%
(1)%
(5)%
(10.8)
(46.7)
(35.6)
(11.5)
0.2
(2.4)
(74.6)
81.7
4.4
0.1
(1.0)
85.2
5%
11%
(50)%
5%
100%
309%
46%
100%
(9)%
182%
$
Our year-over-year results by reportable segment follow. Our comparison of the results for the fiscal years ended
October 31, 2019 and 2018 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, 2019.
Changes Related to Operating Income by Reportable Segment:
NA Fenestration
For the Years Ended October 31,
2020
2019
$ 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
$
$
483.4
371.8
47.8
0.3
23.6
39.9
$
$
503.8
386.2
50.4
0.4
27.0
39.8
$
$
8 %
8 %
(20.4)
(14.4)
(2.6)
(0.1)
(3.4)
0.1
(4)%
4%
5%
25%
13%
—%
Net Sales. Net sales decreased $20.4 million, or 4%, for the twelve months ended October 31, 2020 compared to the same
period in 2019, which was primarily driven by a decrease in volumes of $22.9 million, which includes the impacts of
COVID-19. The decrease in volume was partially offset by increases in prices and surcharges of $2.5 million.
Cost of Sales. Cost of sales decreased $14.4 million, or 4%, for the twelve months ended October 31, 2020 compared to
the same period in 2019. Cost of sales decreased due to lower volumes during the period, including a corresponding decrease
in selling expenses as a result of the impacts of COVID-19 as mentioned above.
Selling, General and Administrative. Our selling, general and administrative expenses decreased by $2.6 million, or 5%,
for the twelve months ended October 31, 2020 compared to the same period in 2019. This decrease was due primarily to lower
general expenses due to COVID-19 restrictions and lower compensation and benefits year-over-year.
Restructuring Charges. Restructuring charges incurred during the twelve months ended October 31, 2020 and 2019 relate
to facility lease expense for a vinyl extrusion plant in the U.S. which was closed in January 2017 that has not been sublet or
otherwise exited as of October 31, 2020.
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EU Fenestration
For the Years Ended October 31,
2020
2019
$ 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
$
$
161.1
108.8
22.7
9.5
20.1
$
$
164.9
114.1
23.0
8.8
19.0
$
$
12 %
12 %
(3.8)
(5.3)
(0.3)
0.7
1.1
(2)%
5%
1%
(8)%
6%
Net Sales. Net sales decreased $3.8 million, or 2%, when comparing the twelve months ended October 31, 2020
compared to the same period in 2019. A decrease in volumes of $5.5 million year-over-year, which includes of the impacts of
COVID-19 was partially offset by $1.1 million of base price increases and $0.6 million of favorable foreign currency rate
changes.
Cost of Sales. The cost of sales decreased $5.3 million for the twelve months ended October 31, 2020 compared to the
same period in 2019. Cost of sales decreased due to lower volumes during the period, including a corresponding decrease in
selling expenses as a result of the impacts of COVID-19 as mentioned above.
Selling, General and Administrative. Our selling, general and administrative expense decreased $0.3 million for the
twelve months ended October 31, 2020 compared to the same period in 2019. The decrease is due to savings incurred from
reduced marketing and other general expenses as a result of COVID-19 restrictions, reimbursements for labor costs in the U.K.
from government aid for COVID-19 furloughs, and lower incentive compensation.
NA Cabinet Components
For the Years Ended October 31,
2020
2019
$ 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
$
$
210.1
179.8
18.7
0.3
13.7
—
(2.4)
$
$
229.6
197.2
18.8
—
13.2
74.6
(74.2)
$
$
(1) %
(32) %
(19.5)
(17.4)
(0.1)
0.3
0.5
(74.6)
71.8
(8)%
9%
1%
(100)%
(4)%
100%
97%
Net Sales. Net sales decreased $19.5 million for the twelve months ended October 31, 2020 compared to the same period
in 2019. Approximately $14.0 million of the decrease in sales was due to lower volume related to customer strategic shifts and
the impacts of COVID-19. Sales declined an additional $5.5 million due to lower price impacts.
Cost of Sales. The cost of sales decreased $17.4 million for the twelve months ended October 31, 2020 compared to the
same period in 2019 as a result of lower volume, including a corresponding decrease in selling expenses as a result of the
impacts of COVID-19 as mentioned above.
Selling, General and Administrative. Our selling, general and administrative expense remained relatively flat for the
twelve months ended October 31, 2020 compared to the same period in 2019.
Restructuring Charges. Restructuring charges of $0.3 million in the twelve months ended October 31, 2020 related to
severance, equipment moving and other charges incurred for a plant closure.
Asset Impairment Charge. Asset impairment charges incurred during the twelve months ended October 31, 2019 related
to goodwill impairment charges. There were no corresponding asset impairment charges incurred during the twelve months
ended October 31, 2020. For further information, see Note 6, "Goodwill and Intangible Assets," of the accompanying financial
statements in this Annual Report on Form 10-K.
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Unallocated Corporate & Other
For the Years Ended October 31,
2020
2019
$ Change
Variance %
Net sales
Cost of sales (excluding depreciation and amortization)
Selling, general and administrative
Depreciation and amortization
Operating loss
$
$
(3.0)
(1.6)
0.5
0.4
(2.3)
$
$
$
(Dollars in millions)
(4.5)
(3.1)
9.0
0.6
(11.0)
$
1.5
1.5
(8.5)
(0.2)
8.7
33%
(48)%
94%
33%
79%
Net Sales. Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the twelve
months ended October 31, 2020 and 2019.
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 decreased $8.5 million, for the
twelve months ended October 31, 2020 compared to the same period in 2019. This decrease is attributable to $4.4 million of
lower medical expenses, $2.0 million of lower compensation expense primarily related to the valuations of our stock based
compensation awards, lower transaction costs of $1.4 million and lower severance costs related to executive severance and
headcount reduction.
Changes Related to Non-Operating Items:
Interest Expense. Interest expense decreased $4.4 million for the twelve months ended October 31, 2020 compared to the
same period in 2019 primarily due to lower interest rates and lower overall debt outstanding. The weighted average interest rate
for borrowings outstanding for the twelve months ended October 31, 2020 was 2.45% compared with 4.07% for the twelve
months ended October 31, 2019.
Other, net. Other, net increased $0.1 million for the twelve months ended October 31, 2020 compared to the same period
in 2019. Improvements in the impacts of foreign currency transactions were partially offset by a decrease in pension benefits
year-over-year.
Income Taxes. We recorded income tax expense of $11.8 million on pre-tax income of $50.3 million for the twelve
months ended October 31, 2020, an effective rate of 23.5%, and income tax expense of $10.8 million on pre-tax loss of $36.0
million for the twelve months ended October 31, 2019, an effective rate of 30.0%. The effective rate for the twelve months
ended October 31, 2020 was impacted by the true-up of our accruals and related deferred taxes from prior year filings and
settled audits. The effective rate for the twelve months ended October 31, 2019 was primarily impacted by the $74.6 million
asset impairment charge in the NA Cabinet Components segment which did not generate a tax benefit, and a net charge of $1.2
million related to GILTI and FDII.
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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, 2020, we had $51.6 million of cash and cash equivalents, $103.0 million outstanding under
our credit facilities, $4.8 million of outstanding letters of credit and $15.3 million outstanding under finance leases. We had
$217.2 million available for use under a revolving credit facility at October 31, 2020.
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, 2020 and
2019 was 2.45% and 4.07%, respectively. We were in compliance with our debt covenants as of October 31, 2020. For
additional details of the Credit Agreement, see "Item 1A. Risk Factors," included elsewhere within this Annual Report on Form
10-K.
We expect to repatriate excess cash moving forward and use the funds to retire debt or meet current working capital
needs. Funds from operations may be impacted by softer demand and liquidity concerns of our customers as a result of
COVID-19. In the U.K., we insure against a portion of our credit losses. In light of the COVID-19 pandemic, the Company has
implemented a range of actions aimed at reducing costs and preserving liquidity. We believe our business model, our current
cash reserves and the recent steps we have taken to strengthen our balance sheet leave us well-positioned to manage our
business as a going concern and remain in compliance with our debt covenants through the COVID-19 crisis as it continues to
unfold.
Analysis of Cash Flow
The following table summarizes our cash flow results for the years ended October 31, 2020, 2019, and 2018:
Cash flows provided by operating activities
Cash flows used for investing activities
Cash flows used for financing activities
Year Ended October 31,
2020
2019
(In millions)
2018
$
$
$
100.8
(25.2)
(55.1)
$
$
$
96.4
(23.6)
(71.3)
$
$
$
104.6
(26.1)
(65.8)
Our year-over-year cash flow analysis follows. Our cash flow analysis for the fiscal years ended October 31, 2019 and
2018 for the prior year comparative periods can be found in the annual report on Form 10-K for the year ended October 31,
2019.
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Operating Activities
Operating cash flow for the year ended October 31, 2020 increased $4.4 million while cash flow for the year ending
October 31, 2019 decreased by $8.2 million. Our ability to continue operations and deliver orders as an essential service
provider mitigated some of the effects of COVID-19. Our efforts to maintain operating levels in accordance with demand
allowed us to remain efficient with our working capital and use inventory effectively. To date, slower paying customers as a
result of COVID-19 have not significantly impacted our liquidity, but this could become a concern in the future.
Investing Activities
Cash used for investing activities for the year ended October 31, 2020 increased $1.7 million compared to the year ended
October 31, 2019 due to an increase of $0.8 million in our investment in capital expenditures and a decline in proceeds from the
disposition of capital assets of $0.8 million.
At October 31, 2020, we had firm purchase commitments of approximately $2.2 million for the purchase or construction
of capital assets. We plan to fund these capital expenditures through cash from operations or borrowings under our revolving
credit facility.
Financing Activities
In 2020, cash used for financing activities was $55.1 million and related primarily to net debt repayments of $40.5
million, payment of dividends of $10.5 million, and share repurchases of $7.2 million. 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.
Liquidity Requirements
Our strategy for deploying cash is to invest in organic growth opportunities, develop our infrastructure, and explore
strategic acquisitions. Other uses of cash include paying cash dividends to our shareholders and repurchasing our own stock.
We maintain cash balances in foreign countries which totaled $16.8 million and $9.8 million as of October 31, 2020 and 2019.
During the years ended October 31, 2020 and 2019, we repatriated $31.9 million and $24.2 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 Credit
Facility contains appropriate provisions to substitute LIBOR with a replacement rate upon transition away from LIBOR. These
provisions include a temporary conversion of applicable interest for all borrowings outstanding to be calculated as base rate
loans until such time that the replacement rate is agreed upon.
The 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.
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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 October 31, 2020 and 2019, we purchased 450,000 shares and 583,398 shares, respectively, at a cost of $7.2
million and $9.6 million, respectively, under this program.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amount of assets,
liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. Estimates and assumptions about
future events and their effects cannot be perceived with certainty. Estimates may change as new events occur, as more
experience is acquired, as additional information becomes available and as our operating environment changes. We base our
estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, and
that we believe provide a basis for making judgments about the carrying value of assets and liabilities that are not readily
available through open market quotes. We must use our judgment with regard to uncertainties in order to make these estimates.
Actual results could differ from these estimates.
We believe the following are the most critical accounting policies used in the preparation of our consolidated financial
statements as well as the significant judgments and uncertainties affecting the application of these policies. We consider an
estimate to be critical if it is subjective and if changes in the estimate using different assumptions would result in a material
impact to our financial position or results of operations.
While there have been no changes in the application of principles, methods, and assumptions used to determine our
significant estimates, we may be required to revise certain accounting estimates and judgments related to the economic and
business impact of the COVID-19 pandemic, such as, but not limited to, those related to the valuation of goodwill, intangibles,
long-lived assets, accounts receivable, and inventory, which could have a material adverse effect on our financial position and
results of operations.
Revenue from Contracts with Customers
Revenue recognition
We recognize revenue that reflects the consideration we expect to receive for product sales upon transfer to customers.
Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we 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.
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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
consolidated statements of income (loss).
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 window 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.
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 been less than 0.1% of sales for the
years ended October 31, 2020, 2019 and 2018. If bad debt expense increased by 1% of net sales, the impact on operating
results would have been a decrease in net income of $6.4 million for the year ended October 31, 2020, 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 for the year ended October 31,
2018.
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 use a reasonable measurement period to record any adjustment related to the
opening balance sheet (generally, less than one year). After the measurement period, changes to the opening balance sheet can
result in the recognition of income or expense as period costs. To the extent these items stem from contingencies that existed at
the balance sheet date, but are contingent upon the realization of future events, the cost is charged to expense at the time the
future event becomes known. If our purchase accounting estimates are not correct, or if we do not recognize contingent assets
or liabilities accurately, we may incur losses.
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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, 2020, 2019 and 2018.
We monitor relevant circumstances, including industry trends, general economic conditions, and the potential impact that
such circumstances might have on the valuation of our identifiable intangibles. Events and changes in circumstances that may
cause a triggering event and necessitate such a review include, but are not limited to: a decrease in sales for certain customers,
improvements or changes in technology, and/or a decision to phase-out a trademark or trade name. Such events could
negatively impact the carrying value of our identifiable intangibles. It is possible that changes in such circumstances or in the
numerous variables associated with the judgments, assumptions, and estimates made by us in assessing the appropriate
valuation of our identifiable intangibles could require us to further write down a portion of our identifiable intangibles and
record related non-cash impairment charges in the future. We apply a variety of techniques to establish the carrying value of our
intangible assets, including the relief from royalty and excess current year earnings methods.
Goodwill
We use the acquisition method to account for business combinations and, to the extent that the purchase price exceeds the
fair value of the net assets acquired, we record goodwill. In accordance with U.S. GAAP, we are required to evaluate our
goodwill at least annually. We perform our annual goodwill assessment as of August 31, or more frequently if indicators of
impairment exist. Qualitative factors that indicate impairment could include, but are not limited to, (i) macroeconomic
conditions, (ii) industry and market considerations, (iii) cost factors, (iv) overall financial performance of the reporting unit, and
(v) other relevant entity-specific events. The first step in our annual goodwill assessment is to perform the optional qualitative
assessment allowed by ASC Topic 350 “Intangibles - Goodwill and Other” (ASC 350). In our qualitative assessment, we
evaluate relevant events or circumstances to determine whether it is more likely than not (i.e., greater than 50%) that the fair
value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, ASC 350 requires us to compare the fair value of such reporting unit to its
carrying value including goodwill. To determine the fair value of our reporting units, we use multiple valuation techniques
including a discounted cash flow analysis, using the applicable weighted average cost of capital, in combination with a market
approach that uses market multiples and a selection of guideline public companies. This test requires us to make assumptions
about the future growth of our business and the market in general, as well as other variables such as the level of investment in
capital expenditure, growth in working capital requirements and the terminal or residual value of our reporting units beyond the
periods of estimated annual cash flows. We use a third-party valuation firm to assist us with this analysis. If the fair value of
each reporting unit exceeds its carrying value, no action is required. Otherwise, an impairment loss is recorded to the extent that
the carrying amount of the reporting unit including goodwill exceeds the fair value of that reporting unit. We believe the
estimates and assumptions used in our impairment assessment are reasonable based on available market information, but
variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether
or not an impairment is indicated during current or future periods.
As a result of quantitative assessments performed during the year ended October 31, 2019, we recorded impairment
charges totaling $74.6 million during the year ended October 31, 2019, reducing the goodwill balance applicable to the
reporting unit included in our NA Cabinet Components operating segment from $113.7 million to $39.1 million.
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For the year ended October 31, 2020, the World Health Organization's declaration of COVID-19 as a global pandemic
also created significant changes in market conditions that were indicators of triggering events which necessitated an evaluation
of certain long-term assets, including goodwill, for potential impairment. We performed quantitative assessments based upon
undiscounted cash flows we expected to realize associated with these assets over the remaining useful lives of the primary
operating assets to the net book value of the long-term assets, including goodwill, and determined that these assets, including
goodwill, were not impaired.
At our annual testing date, August 31, 2020, we had five reporting units with goodwill balances: two reporting units
included in our NA Fenestration operating segment, two reporting units included in our EU Fenestration operating segment, and
one reporting unit included in our NA Cabinet Components operating segment. We performed a qualitative assessment of the
two reporting units in the NA Fenestration segment and one of the reporting units in the EU Fenestration segment. This review
included an analysis of historical goodwill test results, operating results relative to forecast, projected results over the next five
years, and other measures and concluded that there were no indicators of potential impairment associated with these reporting
units. Therefore, no additional testing was deemed necessary for the reporting units in the NA Fenestration segment and the EU
Fenestration segment that were assessed qualitatively. We also updated the quantitative assessments for the reportable unit in
the NA Cabinet Compnents segment and the second reportable unit in the EU Fenestration segment. We determined the fair
value of these reportable units exceeded the carrying value by 5% and 36%, respectively, and concluded that no impairment
was necessary.
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.
Leases
Effective November 1, 2019, we adopted Accounting Standards Codification Topic 842, "Leases" (ASC Topic 842),
which requires leases to be recognized on the balance sheet. We recognize a right-of-use (ROU) asset and lease liability for
each operating and finance lease with a contractual term greater than 12 months at the time of lease inception. We include
ROU assets and lease liabilities for leases that exist within other contracts. Leases with an original term of 12 months or less
are not recognized on the balance sheet, and the rent expense related to those short-term leases is recognized over the lease
term. We do not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any
underlying asset class.
We lease certain manufacturing plants, warehouses, office space, vehicles and equipment under finance and operating
leases. Lease commencement occurs on the date we take possession or control of the property or equipment. Original terms for
our real estate-related leases are generally between five and twenty years. Original terms for equipment-related leases, primarily
manufacturing equipment and vehicles, are generally between one and ten years. Some of our leases also include rental
escalation clauses. Renewal options are included in the determination of lease payments when management determines the
options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital.
If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however,
substantially all of our leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable,
our estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on
information available at lease commencement.
Total lease costs recorded include fixed operating lease costs and variable lease costs. Most of our real estate leases
require we pay certain expenses, such as common area maintenance costs, of which the fixed portion is included in operating
lease costs. We recognize operating lease costs on a straight-line basis over the lease term. In addition to the above costs,
variable lease costs are recognized when probable and are not included in determining the present value of our lease liability.
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The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the
lease commencement date and initial direct costs. For operating leases, ROU assets are reduced over the lease term by the
recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest
method. For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased
asset or the lease term. Interest expense on each finance lease liability is recognized utilizing the effective interest method. ROU
assets are tested for impairment in the same manner as long-lived assets. Additionally, we monitor for events or changes in
circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required.
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, 2020 and 2019 totaled $0.5 million and $0.6 million, respectively, 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, 2020. 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 Liniar. We believe that it is more likely than not that our deduction with regard to this position would be sustained
upon examination. Our deferred tax assets at October 31, 2020 and 2019 totaled $20.1 million and $21.0 million, respectively,
against which we had recorded a valuation allowance of $1.5 million and $1.6 million, respectively.
Insurance
We manage our costs of workers’ compensation, group medical, property, casualty and other liability exposures through a
combination of self-insurance retentions and insurance coverage with third-party carriers. Liabilities associated with our portion
of this exposure are not discounted. We estimate our exposure by considering various factors which may include: (1) historical
claims experience, (2) severity factors, (3) estimated claims incurred but not reported and (4) loss development factors, which
are used to estimate how claims will develop over time until settled or closed. While we consider a number of factors in
preparing our estimate of risk exposure, we must use our judgment to determine the amounts to accrue in our financial
statements. Actual claims can differ significantly from estimated liabilities if future claims experience differs from historical
experience, and if we determine that our assumptions used for analysis or our development factors are flawed. We do not
recognize insurance recoveries until any contingencies relating to the claim have been resolved.
Inventory
We record inventory at the lower of cost or net realizable value. Inventories are valued using the first-in first-out (FIFO)
method. Fixed costs related to excess manufacturing capacity have been expensed in the period, and therefore, are not
capitalized into inventory. Inventory quantities are regularly reviewed and provisions for excess or obsolete inventory are
recorded primarily based on our forecast of future demand and market conditions. Significant unanticipated changes to our
forecasts or changes in the net realizable value of our inventory would require a change in the provision for excess or obsolete
inventory. For the years ended October 31, 2020, 2019 and 2018, our inventory reserves are approximately 10%, 5%, and 6% of
gross inventory, respectively. Assuming an increase in obsolescence equal to 1% of gross inventory, net income would have
decreased by $0.5 million for the year ended October 31, 2020, 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 for the year ended October 31, 2018.
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Retirement Plans
We sponsor a defined benefit pension plan and an unfunded postretirement plan that provides health care and life
insurance benefits for a limited pool of eligible retirees and dependents. On January 1, 2020, we enacted changes to our pension
plan whereby the benefits for all participants were frozen and thereafter those participants will receive increased benefits in the
company sponsored defined contribution plan in lieu of participation in a defined benefit plan. The measurement of liabilities
related to these plans is based on our assumptions related to future events, including expected return on plan assets and
healthcare cost trend rates. The discount rate reflects the rate at which benefits could be effectively settled on the measurement
date. We determine our discount rate using a RATE: Link Model whereby target yields are developed from bonds across a
range of maturity points, and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the
curve and used to discount benefit payments associated with each future year. This model assumes spot rates will remain level
beyond the 30-year point. We determine the present value of plan benefits by applying the discount rates to projected benefit
cash flows. Actual pension plan asset investment performance, as well as other economic experience such as discount rate and
demographic experience, will either reduce or increase unamortized pension losses at the end of any fiscal year, which
ultimately affects future pension costs.
As of October 31, 2020, our projected benefit obligation (PBO) and accumulated benefit obligation (ABO) each exceeded
the fair value of the plan assets by $10.7 million. As a comparison, our PBO and ABO exceeded the fair value of plan assets by
$13.1 million and $12.1 million, respectively, as of October 31, 2019. During fiscal 2020, we contributed $3.7 million to the
pension plan to meet minimum contribution requirements. Expected contributions are dependent on many variables, including
the variability of the market value of the assets as compared to the obligation and other market or regulatory conditions. In
addition, we take into consideration our business investment opportunities and our cash requirements. Accordingly, actual
funding may differ greatly from current estimates. As of October 31, 2020, a 1% decrease in the discount rate would result in
an increase in the PBO of $5.8 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, 2020
and 2019, a net actuarial loss of $9.9 million and $6.7 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,
2020 and 2019. The effect on fiscal years after 2020 will depend on the actual experience of the plans.
Mortality assumptions used to determine the obligations for our pension plans are based on the Pri-2012 base mortality
table with MP-2018 mortality improvement scale.
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.
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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, 2020 and 2019, included elsewhere within this Annual
Report on Form 10-K.
In addition, we have granted performance share awards which settle in cash and shares upon vesting. The award granted
during the year ended October 31, 2018 has vesting criteria based on a market condition (relative total shareholder return) and
an internal performance condition (earnings per share growth). The awards granted during the years ended October 31, 2020
and 2019 use return on net assets as the vesting condition and settle in cash. We use a Monte Carlo simulation model to value
the market condition and our stock price on the date of grant to value the internal performance condition. 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, 2020, we do not expect any performance share
awards to vest.
We also awarded performance restricted stock units to key employees and officers in December 2019, 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 use 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. As of October 31, 2020, we have deemed 32,322 shares related to the
December 2017 grants of performance restricted stock units as probable to vest.
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Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments include unconditional purchase obligations which consist of
commitments to buy miscellaneous parts, inventory, and expenditures related to capital projects in progress. In addition, during
fiscal 2021, we expect to contribute approximately $0.5 million to our pension plan to meet our minimum contribution
requirements. Pension contributions beyond 2021 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, 2020, we have recorded a long-term liability for deferred pension and postretirement benefits
totaling $10.9 million. We believe the effect of the plans on liquidity is not significant to our overall financial condition.
Our supplemental benefit plan and deferred compensation plan liabilities fluctuate based on changes in the market value
of certain equity securities, including our common stock. As of October 31, 2020, our liability under the supplemental benefit
plan and the deferred compensation plan was approximately $2.6 million and $3.3 million, respectively.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined in the rules promulgated by the SEC, that 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. Although we use
contractual price indexing along with periodic base price increases to minimize the effect of inflation on our results, we have
not been able to fully recover all of the inflationary cost increases. We 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.
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 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 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 material impact on our consolidated financial statements.
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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, 2020, a hypothetical 1.0% increase or decrease in interest rates could result
in approximately $1.0 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, 2020.
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. Less than $0.1 million of foreign exchange derivatives
were included in total assets as of October 31, 2019. There were no corresponding derivatives outstanding as of October 31,
2020. These foreign currency derivative contracts hedge cross-border intercompany and commercial activity for our insulating
glass spacer business. Although these derivatives hedge our exposure to fluctuations in foreign currency rates, we do not apply
hedge accounting and therefore, the change in the fair value of these foreign currency derivatives is recorded directly to other,
net in the accompanying consolidated statements of income (loss). To the extent the gain or loss on the derivative instrument
offsets the gain or loss from the remeasurement of the underlying foreign currency balance, changes in exchange rates should
have no effect.
During October 2018, we settled an unhedged foreign currency intercompany loan which facilitated the Liniar acquisition.
For the year ended October 31, 2018, we realized a loss of less than $0.1 million related to this foreign currency exposure.
Since the 2016 Brexit vote, the primary impact on Quanex’s 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.
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 have historically charged certain customers a surcharge related to petroleum-based raw materials. The surcharge was
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 increases in oil-based raw material prices is significantly
reduced under this surcharge program, but given the recent disruptions in the oil and gas market, we bear an obligation to repay
customers for the fall in commodity price that is not reflected in the pricing of products sold to them. In March and October
2020, we sent a notice to our customers on this to address the mismatch.
Similarly, NA Cabinet Components includes a price index provision in the majority of its customer arrangements to
insulate against significant fluctuations in the price for various hardwood products used as the primary raw material for kitchen
and bathroom cabinet doors. Like our vinyl extrusion business, we are exposed to short-term volatility in wood prices due to a
lag in the timing of price updates which generally could extend for up to three months.
While we maintain surcharges and other adjusters to manage our exposure to changes in the prices of our critical raw
materials, we use several commodities in our business that are not covered by contractual surcharges or adjusters for which
pricing can fluctuate, including titanium dioxide (TiO2), silicone and other inputs.
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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 Income (Loss)
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statement of Stockholders’ Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
Page
39
43
44
45
46
47
48
49
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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, 2020 and 2019, the related consolidated statements of
income (loss), comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period
ended October 31, 2020, 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, 2020 and
2019, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2020, 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, 2020, 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 11, 2020 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note 19 to the consolidated financial statements, the Company has changed its method of accounting for
leases due to the adoption of the new leasing standard. The Company adopted the new leasing standard by recognizing a
cumulative catch-up adjustment to the opening balance sheet as of November 1, 2019.
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 regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements
that were 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 matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
Qualitative goodwill impairment assessment
As described further in Note 1 to the financial statements, the Company is required to evaluate goodwill for impairment
annually or more frequently if indicators of impairment exist. In evaluating whether it is more likely than not that the fair
value of the reporting unit is less than its carrying amount, the Company performed a qualitative assessment of relevant
events and circumstances that could impact the fair value of such reporting unit. If, after assessing the totality of events and
circumstances, it is deemed more likely than not that the fair value of the reporting unit is less than its carrying amount, the
Company estimates the fair value of the reporting unit by performing a quantitative goodwill impairment assessment. The
Company determined that indicators of impairment existed as of March 31, 2020 for all reporting units. As such, the
Company performed a qualitative assessment for each of the reporting units. As a result of the analysis, the Company
determined for each of the reporting units that the goodwill was not more likely than not impaired, and no quantitative
39
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assessment was necessary. We identified the Company’s assessment of qualitative factors for the March 31, 2020 goodwill
impairment assessment as a critical audit matter.
The principal consideration for our determination that the assessment of qualitative factors for the March 31, 2020 goodwill
impairment assessment is a critical audit matter is that there are significant judgments management made in assessing and
weighting the relevant qualitative factors in determining whether it was more likely than not that the fair value of its reporting
units was less than its carrying amount. As disclosed by management, qualitative factors may include, but are not limited to,
(i) macroeconomic conditions, (ii) industry and market considerations, (iii) cost factors, (iv) overall financial performance of
the reporting unit and (v) other relevant entity-specific events.
Our audit procedures related to the relevant qualitative factors for each reporting unit included in the March 31, 2020
goodwill impairment assessment to evaluate whether it is more likely than not the fair value of each reporting unit is less than
the carrying value included the following, among others.
• We tested the design and operating effectiveness of controls related to the evaluation of the assumptions and inputs
used as part of management’s review of the qualitative assessment.
• We evaluated the qualitative factors used by management for reasonableness, which included a consolidated market
capitalization reconciliation and an assessment of the macroeconomic conditions and forecasted performance for
each reporting unit.
• We compared the actual results of each reporting unit to the Company’s historical forecasted performance to
evaluate the accuracy of management’s estimates.
Quantitative goodwill impairment assessment of the reporting unit included in the North American Cabinet Components
operating segment
As described further in Note 1 to the financial statements, the Company performs its annual goodwill impairment test as of
August 31. The Company performed a quantitative assessment of the reporting unit in the North American (NA) Cabinet
Components primarily due to the recent impairment of goodwill during the second and fourth quarters of 2019 and the history
of narrow margin of fair value above carrying value in the quantitative assessments performed in prior years. 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 quantitative goodwill impairment assessment 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. Auditing the fair value of the reporting unit
involved a high degree of auditor judgment, subjectivity and audit effort in evaluating management’s significant assumptions,
including future 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.
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◦
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 11, 2020
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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, 2020, 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, 2020, 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, 2020, and our
report dated December 11, 2020 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 11, 2020
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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, 2020
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, 2020, 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.
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QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of October 31, 2020 and 2019
Current assets:
Cash and cash equivalents
ASSETS
Accounts receivable, net of allowance for doubtful accounts of $161 and $393
Inventories, net
Prepaid and other current assets
Total current assets
Property, plant and equipment, net of accumulated depreciation of $340,144 and $317,568
Operating lease right-of-use assets
Goodwill
Intangible assets, net
Other assets
Total assets
Current liabilities:
Accounts payable
Accrued liabilities
Income taxes payable
LIABILITIES AND STOCKHOLDERS' EQUITY
$
77,335
$
Current maturities of long-term debt
Current operating lease liabilities
Total current liabilities
Long-term debt
Noncurrent operating lease liabilities
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 37,296,166 and 37,370,402
respectively; outstanding 32,804,737 and 33,021,789, respectively
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive loss
Less: Treasury stock at cost, 4,491,429 and 4,348,613 shares, respectively
Total stockholders’ equity
Total liabilities and stockholders' equity
See notes to consolidated financial statements.
44
October 31,
2020
2019
(In thousands, except share
amounts)
$
51,621
$
88,287
61,181
6,217
207,306
184,104
51,824
146,154
93,068
9,129
30,868
82,946
67,159
9,353
190,326
193,600
—
145,563
107,297
8,324
$
691,585
$
645,110
38,289
6,465
692
7,459
130,240
116,728
44,873
10,923
19,116
522
13,424
335,826
—
373
253,458
213,517
(33,024)
(78,565)
355,759
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
$
691,585
$
645,110
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QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Years Ended October 31, 2020, 2019 and 2018
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 income (loss)
Non-operating income (expense):
Interest expense
Other, net
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Weighted-average common shares outstanding:
Basic
Diluted
Year Ended October 31,
2020
2019
2018
(In thousands, except per share amounts)
$
851,573
$
893,841
$
889,785
658,750
89,707
622
47,229
—
55,265
(5,245)
280
50,300
(11,804)
694,420
101,292
370
49,586
74,600
(26,427)
(9,643)
116
(35,954)
(10,776)
697,022
103,758
1,486
51,822
—
35,697
(11,100)
1,156
25,753
800
$
$
$
38,496
$
(46,730)
$
26,553
1.18
$
(1.42)
$
0.77
1.17
$
(1.42)
$
0.76
32,689
32,821
32,960
32,960
34,701
35,025
Cash dividends per share
$
0.32
$
0.32
$
0.20
See notes to consolidated financial statements.
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QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended October 31, 2020, 2019 and 2018
Net income (loss)
Other comprehensive income (loss):
Year Ended October 31,
2020
2019
2018
(In thousands)
$
38,496
$
(46,730)
$
26,553
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 income (loss), net of tax
1,078
(376)
91
793
1,864
(6,572)
1,596
(3,112)
(6,640)
2,253
(1,242)
(5,629)
Comprehensive income (loss)
$
39,289
$
(49,842)
$
20,924
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, 2020, 2019 and 2018
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, 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)
Treasury shares purchased, at cost
Expense related to stock-based
compensation
Stock options exercised
Restricted stock awards granted
Performance share awards vested
Other
—
—
—
—
—
—
—
—
(75,060)
—
—
—
—
—
—
—
—
(1)
—
—
—
—
26,553
—
—
(7,020)
—
(6,640)
1,011
—
—
—
—
—
—
—
—
—
26,553
(6,640)
1,011
(7,020)
1,874
—
(149)
(2,141)
(1,371)
(473)
(922)
—
—
(37)
(1,900,000)
(32,034)
(32,034)
—
—
—
—
—
—
377,218
73,400
25,340
—
—
7,036
1,371
473
—
1,874
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 of benefit of $1,596)
Common dividends ($0.32 per share)
Expense related to stock-based
compensation
Treasury shares purchased, at cost
Stock options exercised
Restricted stock awards granted
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
Other
(63,415)
(1)
—
—
—
—
(46,730)
—
—
(10,644)
2,045
—
—
(1,720)
(330)
—
—
(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)
2,045
(9,551)
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
Net income
Foreign currency translation adjustment
Change in pension from net unamortized
loss (net of tax benefit of $91)
Common dividends ($0.32 per share)
Treasury shares purchased, at cost
Expense related to stock-based
compensation
Stock options exercised
Restricted stock awards granted
Performance share awards vested
Other
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(74,236)
(1)
—
—
—
—
—
879
66
(1,212)
(495)
(453)
38,496
—
—
(10,534)
—
—
(242)
94
—
—
—
1,078
(285)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
38,496
1,078
(285)
(10,534)
(450,000)
(7,233)
(7,233)
—
215,733
63,400
28,051
—
3,801
1,118
495
—
879
3,625
—
—
(454)
Balance at October 31, 2020
37,296,166 $
373 $ 253,458 $ 213,517 $
(33,024)
(4,491,429) $ (78,565) $ 355,759
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, 2020, 2019 and 2018
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) 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:
(Increase) decrease in accounts receivable
Decrease in inventory
Decrease (increase) in other current assets
Increase in accounts payable
(Decrease) increase in accrued liabilities
Increase in income taxes payable
(Decrease) increase in deferred pension and postretirement benefits
(Decrease) increase 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
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 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,
2020
2019
(In thousands)
2018
$
38,496
$
(46,730)
$
26,553
47,229
—
879
(189)
—
—
1,689
(5,766)
6,119
2,896
15,922
(3,156)
237
(2,775)
(236)
(549)
100,796
(25,726)
502
(25,224)
114,500
(154,000)
—
(1,027)
(10,534)
3,626
(454)
(7,233)
(55,122)
303
20,753
30,868
51,621
$
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
$
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 16, "Segment Information." We use low-cost production processes and engineering expertise to provide our
customers with specialized products for their specific window, door, and cabinet applications. We believe these capabilities
provide us with unique competitive advantages. We serve a primary customer base in North America and the United Kingdom
(U.K.), and also serve customers in international markets through our operating plants in the U.K. and Germany, as well as
through sales and marketing efforts in other countries.
Unless the context indicates otherwise, references to "Quanex", the "Company", "we", "us" and "our" refer to the
consolidated business operations of Quanex Building Products Corporation and its subsidiaries.
Basis of Presentation and Principles of Consolidation
Our consolidated financial statements have been prepared by us in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). We consolidate our wholly-owned subsidiaries and eliminate
intercompany sales and transactions. We have no cost or equity investments in companies that are not wholly-owned. In our
opinion, these audited financial statements contain all adjustments necessary to fairly present our financial position, results of
operations and cash flows for the periods presented.
Use of Estimates
In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets
and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the
reporting period. We review our estimates on an ongoing basis, including those related to impairment of long lived assets and
goodwill, pension and retirement liabilities, contingencies and income taxes. Changes in facts and circumstances may result in
revised estimates and actual results may differ from these estimates. During the year ended October 31, 2018, 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
Revenue recognition
We recognize revenue that reflects the consideration we expect to receive for product sales upon transfer to customers.
Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we are
entitled to consideration in exchange for such transfer. We account for a contract when a customer provides us with a firm
purchase order that identifies the products to be provided, the payment terms for those products, and when collectability of the
consideration due is probable.
Performance obligations
A performance obligation is a promise to provide the customer with a good or service. Our performance obligations
include product sales, with each product included in a customer contract being recognized as a separate performance obligation.
For contracts with multiple performance obligations, the standalone selling price of each product is generally readily
observable.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance
with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances
to account for product returns related to general returns and product nonconformance.
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 account for shipping and handling services as fulfillment services; accordingly, freight revenue is combined with the
product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement.
Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract
and are included in cost of sales in the accompanying consolidated statements of income.
Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for
which we have received consideration.
Disaggregation of revenue
We produce a wide variety of products that are used in the fenestration industry, including insulating glass spacer systems;
extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we produce certain non-
fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape,
plastic decking, fencing, water retention barriers, conservatory roof components, and other products.
The following table summarizes our product sales for the three years ended October 31, 2020, 2019, and 2018 into
groupings by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows
are affected by economic factors. For further details regarding our results by segment, refer to Note 16, “Segment
Information."
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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:
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,
2020
2019
2018
(in thousands)
$ 427,616
$
439,536
$
412,000
28,585
19,279
7,935
31,106
17,061
16,134
39,309
18,211
15,846
$ 483,415
$
503,837
$
485,366
134,432
26,622
139,638
25,359
135,415
24,558
$ 161,054
$
164,997
$
159,973
$
11,842
$
13,144
$
14,596
196,479
1,778
214,211
2,289
232,990
2,227
$ 210,099
$
229,644
$
249,813
$
$
(2,995) $
(4,637) $
(2,995) $
(4,637) $
(5,367)
(5,367)
$ 851,573
$
893,841
$
889,785
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 year ended
October 31, 2020, one customer provided more than 10% of our consolidated net sales. For the years ending October 31, 2019
and 2018, 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, 2020.
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.
Long-Lived Assets
Property, Plant and Equipment and Intangible Assets with Defined Lives
We make judgments and estimates related to the carrying value of property, plant and equipment, intangible assets with
defined lives, and long-lived assets, which include determining when to capitalize costs, the depreciation and amortization
methods to use and the useful lives of these assets. We evaluate these assets for impairment when there are indicators that the
carrying values of these assets might not be recoverable. Such indicators of impairment may include changes in technology,
significant market fluctuations, historical losses or loss of a significant customer, or other changes in circumstance that could
affect the assets’ ability to generate future cash flows. When we evaluate these assets for impairment, we compare the sum of
the undiscounted cash flows expected to result from the use and eventual disposition of the asset to its carrying value. If the
carrying value exceeds the sum of the undiscounted cash flows, and there is no alternative use for the asset, we determine that
the asset is impaired. To measure the impairment charge, we compare the carrying amount of the long-lived asset to its fair
value, as determined by quoted market prices in active markets, if available, or by discounting the projected future cash flows.
This calculation of fair value requires us to develop and employ long-term forecasts of future operating results related to these
assets. These forecasts are based on assumptions about demand for our products and future market conditions. Future events
and unanticipated changes to these assumptions could require a provision for impairment, resulting in a charge to net income
during the period of the change.
We monitor relevant circumstances, including industry trends, general economic conditions, and the potential impact that
such circumstances might have on the valuation of our identifiable intangible assets with finite lives. Events and changes in
circumstance that may cause a triggering event and necessitate such a review include, but are not limited to: a decrease in sales
for certain customers, improvements or changes in technology, and/or a decision to discontinue the use of a trademark or trade
name, or allow a patent to lapse. Such events could negatively impact the fair value of our identifiable intangible assets. In such
circumstances, we may evaluate the underlying assumptions and estimates made by us in order to assess the appropriate
valuation of these identifiable intangible assets and compare to the carrying value of the assets. We may be required to write
down these identifiable intangible assets and record a non-cash impairment charge. When we originally value our intangible
assets, we use a variety of techniques to establish the carrying value of the assets, including the relief from royalty method,
excess current year earnings method and income method.
Changes in market conditions throughout 2019 impacted our long-term forecasts of future operating results with regard to
the reduction of significant sales volume to a large customer of our United States (U.S.) vinyl operations, and lower-than-
expected operating performance of our NA Cabinet Components business. The World Health Organization's (WHO),
declaration of COVID-19 as a global pandemic also created significant changes in market conditions throughout 2020. We
determined that these conditions were indicators of triggering events which necessitated an evaluation of certain long-term
assets used in these businesses for potential impairment. We compared the projected undiscounted cash flows we expected to
realize associated with these assets over the remaining useful lives of the 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, 2020 and 2019. 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.
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
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2020 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. Qualitative factors that indicate impairment could include, but are not limited to, (i) macroeconomic
conditions, (ii) industry and market considerations, (iii) cost factors, (iv) overall financial performance of the reporting unit, and
(v) other relevant entity-specific events. The first step in our annual goodwill assessment is to perform the optional qualitative
assessment allowed by ASC Topic 350 “Intangibles - Goodwill and Other” (ASC 350). In our qualitative assessment, we
evaluate relevant events or circumstances to determine whether it is more likely than not (i.e., greater than 50%) that the fair
value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, ASC 350 requires us to compare the fair value of such reporting unit to its
carrying value including goodwill. To determine the fair value of our reporting units, we use multiple valuation techniques
including a discounted cash flow analysis, using the applicable weighted average cost of capital, in combination with a market
approach that uses market multiples and a selection of guideline public companies. This test requires us to make assumptions
about the future growth of our business and the market in general, as well as other variables such as the level of investment in
capital expenditure, growth in working capital requirements and the terminal or residual value of our reporting units beyond the
periods of estimated annual cash flows. We use a third-party valuation firm to assist us with this analysis. If the fair value of
each reporting unit exceeds its carrying value, no action is required. Otherwise, an impairment loss is recorded to the extent that
the carrying amount of the reporting unit including goodwill exceeds the fair value of that reporting unit. We believe the
estimates and assumptions used in our impairment assessment are reasonable based on available market information, but
variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether
or not an impairment is indicated during current or future periods.
As a result of quantitative assessments performed during the year ended October 31, 2019, we recorded impairment
charges totaling $74.6 million during the year ended October 31, 2019, reducing the goodwill balance applicable to the
reporting unit included in our NA Cabinet Components operating segment from $113.7 million to $39.1 million.
During the three months ended April 30, 2020, we determined the WHO's characterization of the outbreak of COVID-19
as a global pandemic was a triggering event which could indicate that the carrying value of our goodwill was no longer greater
than the fair value. As a result of this determination, we performed a qualitative assessment for each of the five goodwill
reportable units. As a result of this analysis, we determined that our goodwill was not more likely than not impaired and no
quantitative assessment was necessary.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At our annual testing date, August 31, 2020, we had five reporting units with goodwill balances: two reporting units
included in our NA Fenestration operating segment, two reporting units included in our EU Fenestration operating segment, and
one reporting unit included in our NA Cabinet Components operating segment. We performed a qualitative assessment of the
two reporting units in the NA Fenestration segment and one of the reporting units in the EU Fenestration segment. This review
included an analysis of historical goodwill test results, operating results relative to forecast, projected results over the next five
years, and other measures and concluded that there were no indicators of potential impairment associated with these reporting
units. Therefore, no additional testing was deemed necessary for these three reporting units. Also, at our annual testing date, we
performed a quantitative assessment of the reporting unit in our NA Cabinet Components segment primarily due to the recent
impairment of goodwill during the second and fourth quarters of 2019 and the history of a narrow margin of fair value above
carrying value in quantitative assessments performed in prior years. We also elected to update the quantitative assessment of the
other reportable unit in the EU Fenestration operating segment. We determined that the fair value of these reporting units
exceeded their carrying values by approximately 5% and 36%, respectively. We concluded that no impairment was necessary.
Restructuring
We accrue one-time severance costs pursuant to an approved plan of restructuring at the communication date, when
affected employees have been notified of the potential severance and sufficient information has been provided for the employee
to calculate severance benefits, in the event the employee is involuntarily terminated. In addition, we accrue costs associated
with the termination of contractual commitments including leases at the time the lease is terminated pursuant to the lease
provisions or in accordance with another agreement with the landlord. Otherwise, we continue to recognize lease expense
through the cease-use date. After the cease-use date, we determine if our operating lease payments are at market. We assume
sublet of the facility at the market rate. To the extent our lease obligations exceed the fair value rentals, we discount to arrive at
the present value and record a liability. If the facility is not sublet, we expense the amount of the assumed sublet in the current
period. For other costs directly related to the restructuring effort, such as equipment moving costs, we expense in the period
incurred.
COVID-19 Impact
On March 11, 2020, the WHO declared the outbreak of COVID-19 as a global pandemic and advised aggressive
containment action. In response to this declaration and the rapid global spread of COVID-19, national, state, and local
governments have taken extraordinary and continuously evolving measures to limit the outbreak and spread of the virus,
including travel bans, quarantines, "stay-at-home" orders and similar mandates imposing varying degrees of restrictions on
social and non-essential commercial activity to promote social distancing. Measures providing for business shutdowns
generally exclude certain essential services commonly including critical infrastructure such as construction and the businesses
that support that critical infrastructure. To date, we have not experienced significant challenges or expenses implementing crisis
management plans intended to meet government requirements for containment and prevention.
The COVID-19 pandemic and actions taken in response thereto are continuing to have an adverse effect on many sectors
of the economy. We initially reduced operating schedules and implemented furloughs to balance production and demand, but
all facilities were operational as of October 31, 2020. However, the duration and severity of the COVID-19 pandemic, the
actions to contain the pandemic and treat its impacts, and the effects on our operations are highly uncertain and cannot be
predicted at this time. Therefore, while we expect some negative impacts on our business, results of operations, cash flows and
financial position, the overall financial impact cannot be reasonably estimated at this time.
Additionally, in response to the business environment impacted by COVID-19 during 2020, we reduced capital
expenditures and discretionary spending during the second and third quarters of the year. We have currently resumed our
normal business operations but we continue to closely monitor our working capital needs as events unfold.
As a result of the economic and business impact of COVID-19, we may be required to revise certain accounting estimates
and judgments such as, but not limited to, those related to the valuation of goodwill, intangibles, right-of-use assets, long-lived
assets, accounts receivable (including allowances for doubtful accounts), and inventory, which could have a material adverse
effect on our financial position and results of operations.
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Insurance
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Retirement Plans
We sponsor a defined benefit pension plan and an unfunded postretirement plan that provides health care and life
insurance benefits for a limited pool of eligible retirees and dependents. To measure our liabilities associated with these plans,
we make assumptions related to future events, including expected return on plan assets, rate of compensation increases, and
healthcare cost trend rates. The discount rate reflects the rate at which benefits could be effectively settled on the measurement
date. We determine our discount rate using a RATE: Link Model whereby target yields are developed from bonds across a
range of maturity points, and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the
curve and used to discount benefit payments associated with each future year. Actual pension plan asset investment
performance, as well as other economic experience such as discount rate and demographic experience, will either reduce or
increase unamortized pension losses at the end of any fiscal year, which ultimately affects future pension costs.
Warranty Obligations
We accrue warranty obligations when we recognize revenue for certain products. Our provision for warranty obligations
is based on historical costs incurred for such obligations and is adjusted, where appropriate, based on current conditions and
factors. Our ability to estimate our warranty obligations is subject to significant uncertainties, including changes in product
design and our overall product sales mix.
Income Taxes
We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and the
amounts reported in our consolidated balance sheets, as well as net operating losses and tax credit carry forwards. We evaluate
the carrying value of the net deferred tax assets and determine whether we will be able to generate sufficient future taxable
income to realize our deferred tax assets. We perform this review for recoverability on a jurisdictional basis, whereby we
consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given
to the positive and negative evidence is commensurate with the extent to which the evidence can be objectively verified.
Cumulative losses in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a
valuation allowance is not needed against deferred tax assets. Thus, it is generally difficult for positive evidence regarding
projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence
of recent financial reporting losses. We recorded net income for the years ended October 31, 2020 and October 31, 2018 and net
loss for the year ended October 31, 2019. We have recorded pre-tax cumulative income from operations of $40.1 million for
the three-year period ended October 31, 2020. 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% for each of the fiscal years ended October 31, 2020 and 2019, respectively. For the fiscal
year ended October 31, 2018 we used a rate of 23.3%, which reflects the period of November 1, 2017 through December 31,
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2017 at the previous 35% rate, and the period of January 1, 2018 through October 31, 2018 at the new 21% rate. 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."
Final regulations were published by the Internal Revenue Service regarding Uniform Capitalization (UNICAP) that
became effective during fiscal 2020. Also, on March 27, 2020, The Coronavirus Aid, Relief, and Economic Security (CARES)
Act was signed into law. We are evaluating these regulations but do not believe they will result in a material impact on our
consolidated financial statements.
Derivative Instruments
We have historically used financial and commodity-based derivative contracts to manage our exposure to fluctuations in
foreign currency exchange rates and aluminum prices. All derivatives are measured at fair value on a recurring basis. We have
not designated the derivative instruments we use as cash flow hedges under ASC Topic 815 "Derivatives and Hedging” (ASC
815). Therefore, all gains and losses, both realized and unrealized, are recognized in the consolidated statements of income
(loss) in the period of the change as the underlying assets and liabilities are marked-to-market. We do not enter into derivative
instruments for speculative or trading purposes. As such, these instruments are considered economic hedges, and are reflected
in the operating activities section of the consolidated statements of cash flow.
Foreign Currency Translation
Our consolidated financial statements are presented in our reporting currency, the United States Dollar. Our German and
U.K. operations are measured using the local currency as the functional currency. The assets and liabilities of our foreign
operations which are denominated in other currencies are translated to United States Dollars using the prevailing exchange rates
as of the balance sheet date. Revenues and expenses are translated at the average exchange rates for the applicable period. The
resulting translation adjustments are recorded as a component of accumulated other comprehensive loss on the consolidated
balance sheets.
Occasionally, we enter into transactions that are denominated in currencies other than our functional currency. At each
balance sheet date, we translate these asset or liability accounts to our functional currency and record unrealized transaction
gains or losses. When these assets or liabilities settle, we record realized transaction gains or losses. These realized and
unrealized gains or losses are included in the accompanying consolidated statements of income (loss) under the caption, “Other,
net.”
Stock–Based Compensation
We have issued stock-based compensation in the form of stock options to directors, employees and officers, and non-
vested restricted stock awards to certain key employees and officers. We apply the provisions of ASC Topic 718
“Compensation - Stock Compensation” (ASC 718), to determine the fair value of stock option awards on the date of grant using
the Black-Scholes valuation model. We recognize the fair value as compensation expense on a straight-line basis over the
requisite service period of the award based on awards ultimately expected to vest. Stock options granted to directors vest
immediately while the stock options granted to our employees and officers typically vest ratably over a three-year period with
service and continued employment as the vesting conditions. For new option grants to retirement-eligible employees, we
recognize expense and vest immediately upon grant, consistent with the retirement vesting acceleration provisions of these
grants. For employees near retirement age, we amortize such grants over the period from the grant date to the retirement-
eligibility date if such period is shorter than the standard vesting schedule. For grants of non-vested restricted stock, we
calculate the compensation expense at the grant date as the number of shares granted multiplied by the closing stock price of
our common stock on the date of grant. This expense is recognized ratably over the vesting period. Our non-vested restricted
stock grants to officers and employees cliff vest over a three-year period with service and continued employment as the only
vesting criteria. Our fair value determination of stock-based payment awards on the date of grant using an option-pricing model
is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected
employee stock option exercise behavior over the expected term, our dividend rate, risk-free rate and expectation with regards
to forfeitures. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or
hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are
significantly different from traded options, and because changes in the subjective assumptions can materially affect the
estimated value, the valuation models may not provide an accurate measure of the fair value of our employee stock options.
Accordingly, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2020 and 2019. See Note 15, “Stock-
based Compensation.”
In addition, we have granted performance share awards which settle in cash and shares upon vesting. The award granted
during the year ended October 31, 2018 has vesting criteria based on a market condition (relative total shareholder return) and
an internal performance condition (earnings per share growth). The awards granted during the years ended October 31, 2020
and 2019 use return on net assets as the vesting condition and settle in cash. We use a Monte Carlo simulation model to value
the market condition and our stock price on the date of grant to value the internal performance condition. 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 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 used 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, 2020, 2019 and
2018 (in thousands):
Year Ended October 31,
2019
2018
2020
Cash paid for interest
Cash paid for income taxes
Cash received from income tax refunds
Noncash investing and financing activities:
$ 4,715
$ 9,020
$ 7,890
12,118
5,081
4,217
352
1,020
95
Increase in capitalized expenditures in accounts payable and accrued liabilities
$ 2,370
$ 2,897
$
264
Related Party Transactions
During the year ended October 31, 2018, 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 related to the related party leases for the year ended October 31, 2018. We did not
participate in any related party transactions during the years ended October 31, 2020 and 2019.
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Subsequent Events
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
2. Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consisted of the following as of October 31, 2020 and 2019 (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 (in thousands):
October 31,
2020
2019
$
88,287
$
82,745
161
88,448
161
594
83,339
393
$
88,287
$
82,946
Beginning balance as of November 1, 2019, 2018 and 2017, respectively $
Bad debt expense
Amounts written off
Recoveries
Balance as of October 31,
3. Inventories
$
Year Ended October 31,
2020
2019
2018
393
262
(494)
—
161
$
$
325
700
(916)
284
393
$
$
333
46
(54)
—
325
Inventories consisted of the following at October 31, 2020 and 2019 (in thousands):
Raw materials
Finished goods and work in process
Supplies and other
Total
Less: Inventory reserves
Inventories, net
The changes in our inventory reserve accounts were as follows (in thousands):
October 31,
2020
2019
$
33,298
$
32,347
2,020
67,665
6,484
$
61,181
$
32,818
35,538
2,593
70,949
3,790
67,159
Beginning balance as of November 1, 2019, 2018 and 2017, respectively
$
Charged to cost of sales
Write-offs
Other
Balance as of October 31,
Year Ended October 31,
2020
2019
2018
3,790
2,713
—
(19)
$
4,375
$
341
(939)
13
4,620
1,201
(1,415)
(31)
$
6,484
$
3,790
$
4,375
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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, 2020 and 2019 (in thousands):
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,
2020
2019
$
10,298
$
100,576
398,950
14,424
524,248
340,144
$
184,104
$
10,298
101,569
386,953
12,348
511,168
317,568
193,600
Depreciation expense for the years ended October 31, 2020, 2019, and 2018 was $31.8 million, $34.3 million and $35.6
million, respectively.
If there are indicators of potential impairment, we evaluate our property, plant and equipment for recoverability over the
remaining useful lives of the assets. We did not incur impairment losses associated with these assets for the years ended
October 31, 2020, 2019, and 2018. See further discussion at Note 1, "Nature of Operations, Basis of Presentation and
Significant Accounting Policies - Long-Lived Assets - Property, Plant and Equipment and Intangible Assets with Defined
Lives."
5. Leases
Effective November 1, 2019, we adopted Accounting Standards Codification Topic 842, "Leases" (ASC Topic 842),
which requires leases to be recognized on the balance sheet. We recognize a right-of-use (ROU) asset and lease liability for
each operating and finance lease with a contractual term greater than 12 months at the time of lease inception. We include
ROU assets and lease liabilities for leases that exist within other contracts. Leases with an original term of 12 months or less
are not recognized on the balance sheet, and the rent expense related to those short-term leases is recognized over the lease
term. We do not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any
underlying asset class.
We lease certain manufacturing plants, warehouses, office space, vehicles and equipment under finance and operating
leases. Lease commencement occurs on the date we take possession or control of the property or equipment. Original terms for
our real estate-related leases are generally between five and twenty years. Original terms for equipment-related leases, primarily
manufacturing equipment and vehicles, are generally between one and ten years. Some of our leases also include rental
escalation clauses. Renewal options are included in the determination of lease payments when management determines the
options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital.
If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however,
substantially all of our leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable,
our estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on
information available at lease commencement.
Total lease costs recorded include fixed operating lease costs and variable lease costs. Most of our real estate leases
require we pay certain expenses, such as common area maintenance costs, of which the fixed portion is included in operating
lease costs. We recognize operating lease costs on a straight-line basis over the lease term. In addition to the above costs,
variable lease costs are recognized when probable and are not included in determining the present value of our lease liability.
The ROU asset is measured at the initial amount of the lease liability (calculated as the present value of lease payments
over the term of the lease) adjusted for lease payments made at or before the lease commencement date and initial direct costs.
For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount
of accretion of the lease liability determined using the effective interest method. For finance leases, ROU assets are amortized
on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each finance
lease liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
long-lived assets. Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of
our leases and determine if a remeasurement is required.
The table below presents the lease-related assets and liabilities recorded on the balance sheet at October 31, 2020 (in
thousands):
Leases
Assets
Classification
October 31, 2020
Operating lease assets
Operating lease right-of-use assets
Finance lease assets
Property, plant and equipment (less accumulated depreciation of $1,089)
Total lease assets
Liabilities
Current
Operating
Finance
Noncurrent
Operating
Finance
Total lease liabilities
Current operating lease liabilities
Current maturities of long-term debt
Noncurrent operating lease liabilities
Long-term debt
The table below presents the components for the year ended October 31, 2020 (in thousands):
Components of lease costs
Operating lease cost
Finance lease cost
Amortization of leased assets
Interest on lease liabilities
Variable lease costs
Total lease cost
$
$
$
$
51,824
15,609
67,433
7,459
962
44,873
14,236
67,530
Year Ended
October 31, 2020
$
8,866
1,181
557
748
8,316
$
The table below presents supplemental cash flow information related to leases for the year ended October 31, 2020 (in
thousands):
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of lease liabilities:
Finance leases - financing cash flows
Finance leases - operating cash flows
Operating leases - operating cash flows
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases
Finance Leases
Year Ended
October 31, 2020
$
$
$
$
$
1,092
557
8,681
19,559
398
The table below presents the weighted average remaining lease terms and weighted average discount rates for the
Company's leases as of October 31, 2020:
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Weighted average remaining lease term (in years)
Operating leases
Financing leases
Weighted average discount rate
Operating leases
Financing leases
Year Ended
October 31, 2020
7.8
15.25
3.52 %
3.62 %
The table below presents the maturity of the lease liabilities as of October 31, 2020 (in thousands):
Operating Leases
Finance Leases
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: present value discount
Total lease liabilities
$
$
9,191 $
8,754
8,340
7,581
6,166
19,941
59,973
7,641
52,332 $
1,496
1,449
1,350
1,247
1,188
12,768
19,498
4,300
15,198
As a result of the adoption of ASC Topic 842, we are required to present future minimum lease payments for operating
and financing obligations having initial or remaining non-cancelable lease terms in excess of one year. These future minimum
lease payments were previously disclosed in our 2019 Annual Report on Form 10-K and accounted for under previous lease
guidance. Commitments as of October 31, 2019 were as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total
Less: amount representing interest
Present value of minimum lease payments
Operating Leases
Finance Leases
$
$
9,121 $
6,981
6,012
5,506
4,699
15,220
47,539 $
$
1,020
810
815
973
713
11,392
15,723
5,064
10,659
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the years ended October 31, 2020 and 2019 was as follows (in
thousands):
Beginning balance as of November 1, 2020 and 2019
Goodwill impairment charge
Foreign currency translation adjustment
Balance as of October 31, 2020
Year Ended October 31,
2020
2019
$
145,563 $
219,627
—
591
(74,600)
536
$
146,154 $
145,563
At our annual testing date, August 31, 2020, 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 $17.4 million, and our NA Cabinet Components
segment had one unit with a goodwill balance of $39.1 million. During the year ended October 31, 2019, we recorded
impairment charges of $74.6 million associated with our NA Cabinet Components segment. The details of the impairment
charges, as well as the results of our goodwill assessments during the year ended October 31, 2020 are more fully described at
Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Goodwill." For
a summary of the change in the carrying amount of goodwill by segment, see Note 17, "Segment Information."
Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of October 31, 2020 and 2019 (in thousands):
Customer relationships
Trademarks and trade names
Patents and other technology
Total
October 31, 2020
October 31, 2020
October 31, 2019
Remaining Weighted
Average Useful Life
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
9 years
9 years
3 years
$
154,004 $
80,441 $
153,950 $
55,745
22,386
37,314
21,312
55,745
22,386
70,103
35,210
19,471
$
232,135 $
139,067 $
232,081 $
124,784
We do not estimate a residual value associated with these intangible assets. See additional disclosure at Note 1, "Nature
of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring."
During the year ended October 31, 2019, we retired fully amortized identifiable intangible assets of $0.3 million related to
customer relationships and patents and other technology. We retired $0.3 million of fully amortized identifiable assets related to
customer relationships during the year ended October 31, 2020.
The aggregate amortization expense associated with identifiable intangible assets for the years ended October 31, 2020,
2019, and 2018 was $14.3 million, $15.3 million and $16.2 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):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2021
2022
2023
2024
2025
Thereafter
Total
Estimated
Amortization Expense
$
$
12,573
11,941
11,194
10,464
9,239
37,657
93,068
We did not incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2020,
2019, and 2018.
7. Accrued Liabilities
Accrued liabilities consisted of the following at October 31, 2020 and 2019 (in thousands):
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
8. Debt
October 31,
2020
2019
$
16,000 $
19,637
5,108
6,297
192
763
81
1,562
4,000
4,286
3,514
6,323
1,231
1,251
136
2,561
2,403
2,165
$
38,289 $
39,221
Long-term debt consisted of the following at October 31, 2020 and 2019 (in thousands):
Revolving Credit Facility
Finance lease obligations and other
Unamortized deferred financing fees
Total debt
Less: Current maturities of long-term debt
Long-term debt
Revolving Credit Facility
October 31,
2020
2019
$
103,000 $
142,500
15,321
(901)
117,420
692
15,865
(1,205)
157,160
746
$
116,728 $
156,414
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%).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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 are outlined in the following table:
Pricing Level
Consolidated Leverage Ratio
Commitment Fee
LIBOR Rate Loans
Base Rate Loans
I
II
III
IV
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
0.200%
0.225%
0.250%
0.300%
1.25%
1.50%
1.75%
2.00%
0.25%
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 used as
collateral for the Credit Agreement.
Our initial borrowings from the 2018 Credit Facility were $205.0 million and along with additional funding of $10.0
million of cash on hand, was used to repay outstanding borrowings under 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, 2020, we had $103.0 million of borrowings outstanding under the 2018 Credit Facility (reduced by
unamortized debt issuance costs of $0.9 million), $4.8 million of outstanding letters of credit and $15.3 million outstanding
under finance leases. We had $217.2 million available for use under the 2018 Credit Facility at October 31, 2020. The
borrowings outstanding as of October 31, 2020 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, 2020 and 2019 was 2.45% and
4.07%, respectively. We were in compliance with our debt covenants as of October 31, 2020.
We maintain certain finance lease obligations related to equipment purchases, vehicles, and warehouse space. Refer to
Note 5 "Leases" for further information regarding our finance leases.
The table below presents the scheduled maturity dates of our long-term debt outstanding (excluding deferred loan costs of
$0.9 million ) at October 31, 2020 (in thousands):
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2021
2022
2023
2024
2025
Thereafter
Total debt payments
Less: present value discount of finance leases
Total
9. Retirement Plans
Revolving Credit
Facility
Finance Leases and
Other Obligations
Aggregate Maturities
$
— $
—
103,000
—
—
—
103,000
—
$
103,000 $
1,529 $
1,482
1,383
1,271
1,188
12,768
19,621
(4,300)
15,321 $
1,529
1,482
104,383
1,271
1,188
12,768
122,621
(4,300)
118,321
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 NA Cabinet Component employees who are not currently participating. On January 1, 2020 we
enacted changes to our pension plan whereby the benefits for all participants were frozen and thereafter those participants will
receive increased benefits in the Company sponsored defined contribution plan in lieu of participation in a defined benefit plan.
Every year, the participants will receive an interest related credit on their respective balance equivalent to the prevailing 30-year
Treasury rate. Of our pension plan participants, 99% have their benefit determined pursuant to the cash balance formula. For
the remaining 1% of participants, the benefit formula is a traditional formula for retirement benefits, whereby the plan pays
benefits to employees upon retirement, using a formula which considers years of service and pensionable compensation prior to
retirement.
As a result of this action, we remeasured the pension assets and obligations for the pension plan, which resulted in a
decrease to our projected benefit obligation and a corresponding net actuarial gain that was recorded in accumulated other
comprehensive income (loss). This remeasurement is included in the tables below, which reflect the full impact of pension plan
results and accounting measurements for the year ended October 31, 2020.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law on December 8, 2003.
This Act introduces a Medicare prescription-drug benefit beginning in 2006 as well as a federal subsidy to sponsors of retiree
health care plans that provide a benefit at least “actuarially equivalent” to the Medicare benefit. We concluded that our plans are
at least “actuarially equivalent” to the Medicare benefit. For those who are otherwise eligible for the subsidy, we have not
included this subsidy per the Act in our benefit calculations. The impact to net periodic benefit cost and to benefits paid did not
have a material impact on the consolidated financial statements.
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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 (in thousands):
Change in Benefit Obligation:
October 31,
2020
2019
Beginning balance as of November 1, 2019 and 2018, respectively
$
44,323
$
35,959
Service cost
Interest cost
Actuarial loss
Benefits paid
Administrative expenses
Curtailments
Settlements
Projected benefit obligation at October 31,
Change in Plan Assets:
Beginning balance as of November 1, 2019 and 2018, respectively
Actual return on plan assets
Employer contributions
Benefits paid
Administrative expenses
Settlements
Fair value of plan assets at October 31,
Noncurrent liability - Funded Status
1,262
1,139
2,823
(712)
(785)
(1,141)
(2,084)
44,825
31,212
2,789
3,700
(712)
(785)
(2,084)
34,120
(10,705)
$
$
$
$
3,629
1,456
7,690
(3,581)
(830)
—
—
44,323
32,064
2,869
690
(3,581)
(830)
—
31,212
(13,111)
$
$
$
$
As of October 31, 2020 and 2019, included in our accumulated comprehensive loss was a net actuarial loss of $9.9 million
and $6.7 million, respectively. There were no net prior service costs or transition obligations for the years ended October 31,
2020 and 2019.
As of October 31, 2020 and 2019, the accumulated benefit obligation was $44.8 million and $43.3 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, 2020, 2019 and 2018, was as follows (in thousands):
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss
Settlements
Net periodic benefit cost
Year Ended October 31,
2020
2019
2018
$
1,262
$
3,629 $
1,139
(2,006)
162
462
1,456
(1,977)
125
—
3,908
1,130
(2,172)
64
—
$
1,019
$
3,233 $
2,930
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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, 2020, 2019 and 2018 were as follows (in thousands):
Net loss (gain) arising during the period
Less: Amortization of net loss
Less: Curtailments
Less: Settlements
Year Ended October 31,
2020
2019
2018
$
2,141 $
6,697 $
(2,189)
162
1,141
462
125
—
—
64
—
—
Total recognized in other comprehensive loss
$
376 $
6,572 $
(2,253)
Measurement Date and Assumptions
We generally determine our actuarial assumptions on an annual basis, with a measurement date of October 31. The
following table presents our assumptions for pension benefit calculations for the years ended October 31, 2020, 2019 and 2018:
Weighted Average Assumptions:
Discount rate
Rate of compensation increase
Expected return on plan assets
For the Year Ended October 31,
2020
2019
2018
2020
2019
2018
Benefit Obligation
Net Periodic Benefit Cost
3.22%
—%
n/a
3.10%
3.00%
n/a
4.44%
3.00%
n/a
3.10%
—%
6.50%
4.44%
3.00%
6.50%
3.68%
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.
Plan Assets
The following tables provide our target allocation for the year ended October 31, 2020, as well as the actual asset
allocation by asset category and fair value measurements as of October 31, 2020 and 2019:
Equity securities
Fixed income
Target Allocation
Actual Allocation
October 31, 2020
October 31, 2020
October 31, 2019
60.0 %
40.0 %
60.0 %
40.0 %
61.0 %
39.0 %
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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)
Fair Value Measurements at
October 31, 2020
October 31, 2019
$
(In thousands)
3,532
$
7,954
2,407
6,130
1,853
$
18,344
$
9,743
1,249
1,252
$
$
12,244
34,120
$
$
574
8,092
2,489
6,219
1,848
18,648
9,525
1,228
1,237
11,990
31,212
(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, 2020, 2019 and 2018, we made total
pension contributions of $3.7 million, $0.7 million and $0.8 million, respectively.
During fiscal 2021, we expect to contribute approximately $0.5 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):
2021
2022
2023
2024
2025
2026 - 2030
Total
Defined Contribution Plan
Pension Benefits
3,036
2,583
2,404
2,376
2,394
10,910
23,703
$
$
We also sponsor two defined contribution plans into which we and our employees make contributions. As of January 1,
2020, we match 100% up to the first 5% of employee annual salary deferrals under our plan for all employees excluding NA
Cabinet Components participants, who receive a 100% match up to 4% of employee annual salary deferrals. Between January
1, 2018 and January 1, 2020, we matched 50% up to the first 5% of employee salary deferrals. We do not offer our common
stock as a direct investment option under these plans. For the years ended October 31, 2020, 2019 and 2018, we contributed
approximately $4.8 million, $2.7 million and $2.6 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, 2020
October 31, 2019
Accrued liabilities
Deferred pension and postretirement benefits
Total
$
$
$
(In thousands)
49
218
267
$
49
311
360
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 $2.6 million and $4.2 million as of October 31, 2020 and 2019, and our liability under the deferred
compensation plan was approximately $3.3 million and $3.8 million, respectively. As of October 31, 2020 and 2019, 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.
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10. Income Taxes
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2020, 2019 and 2018 (in thousands):
Year Ended October 31,
2020
2019
2018
Current
Federal
State and local
Non-United States
Total current
Deferred
Federal
State and local
Non-United States
Total deferred
$
6,043
1,505
4,445
11,993
(64)
(315)
190
(189)
$
3,338
$
299
3,879
7,516
1,497
1,087
676
3,260
Total income tax expense (benefit)
$
11,804
$
10,776
$
983
417
3,356
4,756
(5,828)
670
(398)
(5,556)
(800)
For financial reporting purposes, income (loss) before income taxes for the years ended October 31, 2020, 2019 and 2018
includes the following components (in thousands):
Domestic
Foreign
Total income (loss) before income taxes
Year Ended October 31,
2020
2019
2018
$
$
26,229
$
(58,247)
$
24,071
22,293
50,300
$
(35,954)
$
9,721
16,032
25,753
The following table reconciles our effective income tax rate to the federal statutory rate for the years ended October 31,
2020, 2019 and 2018:
United States tax at statutory rate
State and local income tax
Non-United States income tax
General business credits
Other permanent differences
Deferred rate impact of enactment of tax reform
Foreign tax positions under the Act (GILTI and FDII)
Impact of deemed repatriation
Asset impairment charges
Return to actual adjustments
Effective tax rate
Year Ended October 31,
2020
2019
2018
21.0 %
1.7 %
(0.8) %
(2.3) %
1.7 %
— %
2.5 %
— %
— %
(0.3) %
23.5 %
21.0 %
1.6 %
(0.5) %
(4.7) %
3.0 %
— %
3.3 %
(1.1) %
(50.7) %
(1.9) %
(30.0) %
23.3 %
3.3 %
(1.6) %
(0.4) %
— %
(30.5) %
— %
4.8 %
(1.5) %
(0.5) %
(3.1) %
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. This Act reduced our federal income tax
statutory rate from 35.0% to 21.0% for the fiscal years ending October 31, 2020 and 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. This Act also imposed additional tax law changes that
became effective during fiscal 2019, which include new requirements for a global intangible low-taxed income provision
(GILTI) and a deduction for foreign-derived intangible income (FDII). We elected to account for the tax on GILTI as a period
cost and therefore have not recorded deferred taxes related to GILTI on our foreign subsidiaries.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The October 31, 2020 effective tax rate was impacted by the true-up of our accruals and related deferred taxes from prior
year filings and settled tax audits as well as $0.6 million related to the vesting or exercise of equity-based compensation awards.
The October 31, 2019 effective rate was primarily impacted by a net charge of $1.2 million related to GILTI and FDII, as
well as discrete charge of $0.4 million for the adjustment of the one-time mandatory transition tax on deemed repatriation of
previously tax-deferred and unremitted foreign earnings and $0.6 million related to the vesting or exercise of equity-based
compensation awards. Additionally, during the year ended October 31, 2019, we recorded a $74.6 million asset impairment
charge, which was primarily non-deductible, in the NA Cabinet Components segment, as further explained in Note 6,
"Goodwill and Intangible Assets."
Discrete items contributing to the October 31, 2018 income tax benefit included $7.7 million for the remeasurement 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.
Given the significance of the Tax Cuts and Jobs Act, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118),
which allows registrants to record provisional amounts during a one year “measurement period." As of October 31, 2019, we
have completed the accounting for the tax effects of the Act.
In light of the Tax Cuts and Jobs Act, we repatriated $31.9 million and $24.2 million of foreign earnings from our
international operations during the years ended October 31, 2020 and 2019, 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 would not incur a residual U.S. tax liability.
Significant components of our net deferred tax liabilities and assets were as follows (in thousands):
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
Net deferred tax liabilities
October 31,
2020
2019
$
$
6,634
1,471
3,303
471
2,331
103
14,313
1,493
12,820
10,465
21,471
31,936
$
19,116
$
7,227
1,646
4,365
632
2,915
110
16,895
1,560
15,335
11,075
23,623
34,698
19,363
At October 31, 2020, state operating loss carry forwards totaled $30.1 million. The majority of these losses begin to expire
in 2025. Tax credits available to offset future tax liabilities totaled $0.6 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, 2020 and 2019, totaling $1.5 million and
$1.6 million, respectively ($1.2 million net of federal taxes for each year) for the respective periods. In assessing the need for a
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax
assets.
The following table shows the change in the unrecognized income tax benefit associated with uncertain tax positions for
the years ended October 31, 2020, 2019 and 2018 (in thousands):
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
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, 2020
Unrecognized
Income Tax Benefits
$
$
$
$
591
—
15
606
—
16
(66)
556
—
15
(49)
522
As of October 31, 2020, our unrecognized tax benefit (UTB) relates to certain state tax items regarding the interpretation
of tax laws and regulations. At October 31, 2020, $0.5 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, 2020 will be recognized within the next twelve months.
11. Commitments and Contingencies
Purchase Obligations
We are a party to non-cancelable purchase obligations primarily for door hardware, primary and secondary steel and
primary and secondary aluminum used in our manufacturing processes, as well as expenditures related to capital projects in
progress. We paid $9.0 million and $11.1 million pursuant to these arrangements for the years ended October 31, 2020 and
2019, respectively. These obligations total $22.4 million and $18.7 million at October 31, 2020 and 2019, respectively, and
extend through fiscal 2021. Future amounts paid pursuant to these arrangements will depend, to some extent, on our usage.
Asset Retirement Obligation
We maintain an asset retirement obligation associated with a leased facility in Kent, Washington. We have estimated our
future cash flows associated with this asset retirement obligation and recorded an asset and corresponding liability. We are
depreciating the asset and accreting the liability over a seven year term, to culminate in an asset retirement obligation of $2.3
million as of February 2025.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Remediation and Environmental Compliance Costs
Under applicable state and federal laws, we may be responsible for, among other things, all or part of the costs required to
remove or remediate wastes or hazardous substances at locations we, or our predecessors, have owned or operated. From time
to time, we also have been alleged to be liable for all or part of the costs incurred to clean up third-party sites where there might
have been an alleged improper disposal of hazardous substances. At present, we are not involved in any such matters.
From time to time, we incur routine expenses and capital expenditures associated with compliance with existing
environmental regulations, including control of air emissions and water discharges, and plant decommissioning costs. We have
not incurred any material expenses or capital expenditures related to environmental matters during the past three fiscal years,
and do not expect to incur a material amount of such costs in fiscal 2021. 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 year ended October 31, 2018 our
insurance carrier reimbursed fees and expenses originally incurred as part of our defense of these various commercial sealant
claims totaling $0.5 million. There were no corresponding reimbursements during the years ended October 31, 2020 or 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. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of October 31, 2020 no instruments were being measured on a recurring basis. For the year ended October 31, 2019,
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. There were no outstanding foreign currency
derivatives as of October 31, 2020. 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.
Carrying amounts reported on the balance sheets for cash, cash equivalents, accounts receivable and accounts payable
approximate fair value due to the short-term maturity of these instruments. Our outstanding debt is variable rate debt that re-
prices frequently, thereby limiting our exposure to significant changes in interest rate risk. As a result, the fair value of our debt
instruments approximates carrying value at October 31, 2020 and 2019 (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 13. Stock-Based
Compensation - Performance Share Awards."
13. Stock-Based Compensation
We have established and maintain an Omnibus Incentive Plan (2020 Plan) that provides for the granting of restricted stock
awards, stock options, restricted stock units, performance share awards, performance restricted stock units, and other stock-
based and cash-based awards. The 2020 Plan is administered by the Compensation and Management Development Committee
of the Board of Directors.
The aggregate number of shares of common stock authorized for grant under the 2020 Plan is 3,139,895 as approved by
the shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 2020 Plan. We grant
restricted stock units to non-employee directors on the first business day of each fiscal year. As approved by the Compensation
& Management Development Committee of our Board of Directors annually, we grant a mix of restricted stock awards,
performance shares and/or performance restricted stock units to officers, management and key employees. We also historically
granted stock options to certain officers, directors and key employees. Occasionally, we may make additional grants to key
employees at other times during the year.
Restricted Stock Awards
Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a three-year
period with service and continued employment as the only vesting criteria. The recipient of a restricted stock award is entitled
to all of the rights of a shareholder, except that the awards are nontransferable during the vesting period. The fair value of the
restricted stock award is established on the grant date and then expensed over the vesting period resulting in an increase in
additional paid-in-capital. Shares are generally issued from treasury stock at the time of grant.
A summary of non-vested restricted stock award activity during the years ended October 31, 2020, 2019 and 2018,
follows:
Restricted Stock
Awards
Weighted Average
Grant Date Fair Value
per Share
Non-vested at October 31, 2017
284,300
$
Granted
Vested
Forfeited
Non-vested at October 31, 2018
Granted
Vested
Forfeited
Non-vested at October 31, 2019
Granted
Vested
Cancelled
73,400
(111,800)
(28,700)
217,200
124,800
(42,500)
(69,400)
230,100
63,400
(51,000)
(55,000)
Non-vested at October 31, 2020
187,500
$
74
19.66
20.70
20.16
19.66
19.76
13.78
17.87
19.19
17.02
18.82
17.30
19.45
16.82
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The total weighted average grant-date fair value of restricted stock awards that vested during the years ended October 31,
2020, 2019 and 2018 was $1.1 million, $1.3 million and $2.3 million, respectively. As of October 31, 2020, total unrecognized
compensation cost related to unamortized restricted stock awards totaled $1.2 million. We expect to recognize this expense
over the remaining weighted average period of 1.7 years.
Stock Options
Historically, stock options have been awarded to key employees, officers and non-employee directors. In December 2017,
the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term
incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted
stock units as further described below. As a result, stock options were not granted during the years ended October 31, 2020,
2019, and 2018. Stock options typically vested ratably over a three-year period with service and continued employment as the
vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of
the stock options was determined on the grant date and expensed over the vesting period resulting in an increase in additional
paid-in-capital. We used the Black-Scholes pricing model to estimate the grant date fair value. The inputs to this model
included expected volatility, expected term, a risk-free rate and expected dividend rate at the time of grant. For employees who
were nearing retirement-eligibility, we recognized stock option expense ratably over the shorter of the vesting period or the
period from the grant-date to the retirement-eligibility date.
The following table summarizes our stock option activity for the years ended October 31, 2020, 2019 and 2018.
Outstanding at October 31, 2017
Granted
Exercised
Forfeited/Expired
Outstanding at October 31, 2018
Granted
Exercised
Forfeited/Expired
Outstanding at October 31, 2019
Granted
Exercised
Forfeited/Expired
Outstanding at October 31, 2020
Vested at October 31, 2020
Exercisable at October 31, 2020
Stock Options
Weighted Average
Exercise Price
2,152,758
$
—
(377,218)
(21,884)
1,753,656
$
—
(204,770)
(132,700)
1,416,186
$
—
(215,733)
(105,124)
1,095,329
1,095,329
1,095,329
$
$
$
17.44
—
12.58
19.28
18.47
—
15.76
20.01
18.71
—
17.09
20.28
18.88
18.88
18.88
Weighted Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value (000s)
5.2
$
9,700
5.0
$
51
4.2
$
1,449
3.6
3.6
3.6
$
$
$
561,000
561,000
561,000
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, 2020, 2019 and 2018, the total intrinsic value of our stock options
that were exercised totaled $0.5 million, $0.4 million and $2.9 million, respectively. The total fair value of stock options vested
during the years ended October 31, 2020, 2019 and 2018, was $0.6 million, $1.1 million and $1.5 million, respectively. As of
October 31, 2020, all compensation cost related to stock options has been recognized.
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Restricted Stock Units
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2020, 2019 and 2018, 25,621, 34,050 and 18,050 restricted stock units, respectively,
were granted with corresponding weighted average grant date fair value of $18.18, $15.51, and $21.85, respectively. As of
October 31, 2019, there were 4,616 non-vested restricted stock units from the fiscal 2019 grant that will vest in December 2020.
As of October 31, 2020 there were 21,774 unvested restricted stock units from the fiscal 2020 grant. During the year ended
October 31, 2019, we paid less than $0.4 million to settle restricted stock units. During the year ended October 31, 2020, we
paid $0.2 million to settle restricted stock units. There were no payments to settle restricted stock units during the year ended
October 31, 2018.
Performance Share Awards
We have awarded annual grants of performance shares to key employees and officers. Awards issued during the year
ended October 31, 2018 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 years ended October 31, 2020 and October 31, 2019 vest with return on net
assets (RONA) as the performance condition, and pay out 100% in cash.
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). For awards issued during the year ended October 31, 2018, 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 used 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
December 7, 2017
December 5, 2018
December 5, 2019
Grant Date Fair Value
Shares
Awarded
146,500
131,500
55,900
EPS
R-TSR
RONA
Forfeited
$
$
$
20.70
—
—
$
$
$
21.81
—
—
$
$
$
—
13.63
19.40
54,008
40,900
5,300
On November 30, 2019, a total of 56,103 shares vested pursuant to the November 2016 grant, which were settled with
28,051 shares of common stock and a cash payment of $0.6 million.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the 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, 2020, we have deemed that no shares related to the
December 2017 grants of performance shares are probable to vest. For the year ended October 31, 2019 there were 28,051
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 awarded performance restricted stock units may vest. Specifically, the awards vest on a continuum with the
following Absolute Total Shareholder Return (A-TSR) milestones:
Vesting Level
Vesting Criteria
Percentage of Award Vested
Level 1
Level 2
Level 3
Level 4
A-TSR greater than or equal to 50%
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%
150%
100%
50%
—%
The following table summarizes our performance restricted stock unit grants and the grant date fair value for the A-TSR
performance metric:
Grant Date
December 7, 2017
December 5, 2018
December 5, 2019
Shares
Awarded
Grant Date
Fair Value
Shares
Forfeited
78,200 $
89,200 $
17.76
13.63
35,000 $
19.40
28,854
25,500
—
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.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes amounts expensed as selling, general and administrative expense related to restricted
stock awards, stock options, restricted stock units, performance share awards and performance restricted stock units for the
years ended October 31, 2020, 2019 and 2018 (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
14. Stockholders' Equity
Year Ended October 31,
2020
2019
2018
$
$
625
10
186
(170)
515
1,166
274
892
$
1,018
$
1,462
158
950
1,131
708
3,965
997
467
(364)
(944)
401
1,022
(35)
$
2,968
$
1,057
As of October 31, 2020, 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, 2020 and 2019, we had
37,296,166 and 37,370,402 shares of common stock issued, respectively, and 32,804,737 and 33,021,789 shares of common
stock outstanding, respectively. There were no shares of preferred stock issued or outstanding at October 31, 2020 and 2019.
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, 2020 and 2019, we purchased 450,000 shares and 583,398 shares, respectively, at a cost of
$7.2 million and $9.6 million respectively, under this program.
We record treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as
treasury stock. Shares are generally issued from treasury stock at the time of grant of restricted stock awards, upon the exercise
of stock options, and upon the vesting of performance shares and performance restricted stock units. On the subsequent
issuance of treasury shares, we record proceeds in excess of cost as an increase in additional paid in capital. A deficiency of
such proceeds relative to costs would be applied to reduce paid-in-capital associated with prior issuances to the extent available,
with the remainder recorded as a charge to retained earnings. We recorded a charge to retained earnings of $0.1 million,
$0.3 million and $2.1 million, in the years ended October 31, 2020, 2019, and 2018, respectively.
For a summary of treasury stock activity for the years ended October 31, 2020, 2019 and 2018, refer to the Consolidated
Statement of Stockholders' Equity located elsewhere herein.
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15. Other, net
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other income included under the caption "Other, net" on the accompanying consolidated statements of income (loss),
consisted of the following (in thousands):
Foreign currency transaction (losses) gains
Foreign currency exchange derivative losses
Pension service benefit
Interest income
Other
Other income
16. Segment Information
Year Ended October 31,
2020
2019
2018
$
(42)
(15)
243
28
66
$
(187) $
(197)
396
63
41
113
(11)
978
69
7
$
280
$
116
$
1,156
We present three reportable business segments: (1) NA Fenestration, comprising three operating segments primarily
focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens & other
fenestration components; (2) EU Fenestration, comprising our U.K.-based vinyl extrusion business, manufacturing vinyl
profiles & conservatories, and the European insulating glass business manufacturing insulating glass spacers; and (3) NA
Cabinet Components, comprising our cabinet door and components segment. We maintain a grouping called Unallocated
Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on the
performance of our common stock and other factors, certain severance and legal costs not deemed to be allocable to all
segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and
executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual
planning process. Other general and administrative costs associated with the corporate office are allocated to the reportable
segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's
administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The
accounting policies of our operating segments are the same as those used to prepare the accompanying consolidated financial
statements. Corporate general and administrative expenses allocated during the years ended October 31, 2020, 2019 and 2018
were $21.7 million, $18.3 million and $18.7 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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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Segment information for the years ended October 31, 2020, 2019 and 2018 was as follows (in thousands):
Year Ended October 31, 2020
Net sales
Depreciation and amortization
Operating income (loss)
Capital expenditures
Total assets
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
NA
Fenestration
EU
Fenestration
NA Cabinet
Comp.
Unallocated
Corp. & Other
Total
$
483,415
$
161,054
$
210,099
$
(2,995) $
851,573
23,555
39,909
15,761
9,468
20,076
5,435
13,732
(2,502)
4,423
474
(2,218)
107
47,229
55,265
25,726
$
252,703
$
223,248
$
174,713
$
40,921
$
691,585
$
503,837
$
164,997
$
229,644
$
(4,637) $
893,841
27,054
39,765
12,984
8,845
19,040
6,365
13,178
(74,236)
5,383
509
(10,996)
151
49,586
(26,427)
24,883
$
226,243
$
212,239
$
181,416
$
25,212
$
645,110
$
485,366
$
159,973
$
249,813
$
(5,367) $
889,785
27,248
30,633
9,607
12,702
14,401
3,167
566
(10,805)
51,822
35,697
$
13,929
$
5,450
$
6,965
$
140
$
26,484
The following table summarizes the change in the carrying amount of goodwill by segment for the years ended
October 31, 2020 and 2019 (in thousands):
NA
Fenestration
EU
Fenestration
NA Cabinet
Comp.
Unallocated
Corp. & Other
Balance as of October 31, 2018
$
38,712
$
67,168
$
113,747
$
Asset impairment charge
Foreign currency translation adjustment
—
—
—
536
(74,600)
—
Balance as of October 31, 2019
$
38,712
$
67,704
$
39,147
$
Foreign currency translation adjustment
—
591
—
Balance as of October 31, 2020
$
38,712
$
68,295
$
39,147
$
—
—
—
—
—
—
For further details of Goodwill, see Note 6, "Goodwill and Intangible Assets", located herewith.
Total
$
219,627
(74,600)
536
$
145,563
591
$
146,154
We did not allocate non-operating expense or income tax expense to the reportable segments. The following table
reconciles operating income (loss) as reported above to net income (loss) for the years ended October 31, 2020, 2019 and 2018
(in thousands):
Operating income (loss)
Interest expense
Other, net
Income tax (expense) benefit
Net income (loss)
Year Ended October 31,
2020
2019
2018
$
55,265
$
(26,427) $
35,697
(5,245)
280
(9,643)
(11,100)
116
1,156
800
(11,804)
(10,776)
$
38,496
$
(46,730) $
26,553
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Geographic Information
Our manufacturing facilities and all long-lived assets are located in the U.S., U.K. and Germany. We attribute our net
sales to a geographic region based on the location of the customer. The following tables provide information concerning our net
sales for the years ended October 31, 2020, 2019 and 2018, and our long-lived assets as of October 31, 2020 and 2019 (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,
2020
2019
2018
$
654,802
$
683,204
$
676,776
158,829
162,106
159,652
18,213
11,504
8,223
20,088
18,360
10,083
23,610
18,584
11,163
$
851,573
$
893,841
$
889,785
October 31,
2020
2019
$
307,534
$
288,722
25,519
142,097
16,899
140,839
$
475,150
$
446,460
Long-lived assets, net includes: property, plant and equipment, net; goodwill; and intangible assets, net. Beginning in the
year ended October 31, 2020, this amount also includes operating lease right-of-use assets.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Earnings Per Share
We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted earnings per common and potential common shares include the weighted average
of additional shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock as
determined using the treasury stock method prescribed by U.S. GAAP and contingent shares associated with performance share
awards, if dilutive.
The computation of basic and diluted earnings per share for the years ended October 31, 2020, 2019 and 2018 follows (in
thousands, except per share data):
Year Ended October 31, 2020
Basic earnings per common share
Effect of dilutive securities:
Stock options
Restricted stock
Performance restricted stock units
Diluted loss per common share
Year Ended October 31, 2019
Basic loss per common share
Diluted loss per common share
Effect of anti-dilutive securities: (1)
Stock options
Restricted stock
Performance share awards
Year Ended October 31, 2018
Basic earnings per common share
Effect of dilutive securities:
Stock options
Restricted stock
Net Income
(Loss)
Weighted
Average
Shares
Per Share
$ 38,496
32,689
$
1.18
10
90
32
$ 38,496
32,821
$
1.17
$ (46,730)
$ (46,730)
32,960
32,960
$
$
(1.42)
(1.42)
40
113
28
$ 26,553
34,701
$
0.77
198
126
Diluted earnings per common share
$ 26,553
35,025
$
0.76
(1) The computation of diluted earnings per share excludes outstanding stock options and other common stock equivalents when
their inclusion would be anti-dilutive.
For the years ended October 31, 2020, 2019 and 2018, we had 1,032,201, 1,267,141, and 1,000,356 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)
18. Unaudited Quarterly Data
Selected quarterly financial data for the years ended October 31, 2020 and 2019 was as follows (amounts in thousands,
except per share amounts):
For the Quarter Ended
Net sales
January 31,
2020
April 30,
2020
July 31,
2020
October 31,
2020
$ 196,597 $ 187,475 $ 212,096 $ 255,405
Cost of sales (excluding depreciation and amortization)
157,427
149,732
162,427
189,164
Depreciation and amortization
Operating income
Net income
Basic earnings per share
Diluted earnings per share
12,905
1,980
11,886
8,893
11,060
16,563
11,378
27,829
$
10 $
5,501 $ 10,833 $ 22,152
—
—
0.17
0.17
0.33
0.33
0.68
0.68
0.08
Cash dividends paid per common share
$
0.08 $
0.08 $
0.08 $
For the Quarter Ended
Net sales
January 31,
2019
April 30,
2019
July 31,
2019
October 31,
2019
$ 196,808 $ 218,203 $ 238,461 $ 240,369
Cost of sales (excluding depreciation and amortization)
158,557
171,378
181,357
183,128
Depreciation and amortization
Operating (loss) income
Net (loss) income
Basic (loss) earnings per share
Diluted (loss) earnings per share
12,572
12,404
12,182
12,428
(2,450)
(19,363)
19,110
(23,724)
$
(3,649) $ (23,974) $ 11,841 $ (30,948)
(0.11)
(0.11)
(0.73)
(0.73)
0.36
0.36
(0.94)
(0.94)
Cash dividends paid per common share
$
0.08 $
0.08 $
0.08 $
0.08
Quarterly earnings (loss) per share results may not sum to the consolidated earnings per share results on the
accompanying consolidated statements of income (loss) due to rounding and changes in weighted average shares during the
respective periods.
19. New Accounting Guidance
Accounting Standards Recently Adopted
Effective November 1, 2019 we adopted ASC Topic 842, using the modified retrospective approach and did not have a
cumulative-effect adjustment in retained earnings as a result of the adoption. Topic 842 significantly changes accounting for
leases by requiring that lessees recognize a liability representing the obligation to make lease payments and a related ROU asset
for virtually all lease transactions. Upon adoption, we implemented policy elections and practical expedients which include the
following:
• package of practical expedients which allows us to avoid reassessing contracts that commenced prior to adoption that
were properly evaluated under legacy lease accounting guidance;
• excluding ROU assets and lease liabilities for leases with terms that are less than one year;
• combining lease and non-lease components and accounting for them as a single lease (elected by asset class);
• excluding land easements that existed or expired prior to adoption; and
• policy election that eliminates the need for adjusting prior period comparable financial statements prepared under
legacy (Accounting Standards Codification Topic 840) lease accounting guidance.
As a result of adopting ASC Topic 842, we recorded additional lease liabilities of approximately $39.3 million and ROU
assets of approximately $38.9 million on our consolidated balance sheet. The difference between the lease liabilities and ROU
assets is due to rent holiday and lease build-out incentives that were recorded as deferred lease liabilities under legacy
accounting guidance. The adoption of ASC Topic 842 did not materially change our consolidated statements of income or
consolidated statements of cash flows. See Note 5. "Leases," for further discussion.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accounting Standards Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (FASB) issued 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
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 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 material impact on our consolidated financial statements.
84
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, 2020. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of October 31, 2020, 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.
85
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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 2021 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, 2020.
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 2021 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, 2020.
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 2021 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, 2020.
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
2021 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, 2020.
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 2021 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, 2020.
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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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 11, 2020
/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
/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
/s/ William E. Waltz
William E. Waltz
/s/ George L. Wilson
George L. Wilson
Chairman of the Board
December 11, 2020
Director
Director
Director
Director
Director
Director
Director
President and Chief Executive Officer
(Principal Executive Officer)
December 11, 2020
December 11, 2020
December 11, 2020
December 11, 2020
December 11, 2020
December 11, 2020
December 11, 2020
December 11, 2020
/s/ Scott M. Zuehlke
Scott M. Zuehlke
Senior Vice President - Chief Financial Officer and Treasurer
(Principal Financial Officer)
December 11, 2020
/s/ Mark A. Livingston
Mark A. Livingston
Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)
December 11, 2020
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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
4.3
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.
Fourth Amended and Restated Bylaws of the Registrant dated as of February 27, 2020, filed as Exhibit 3.2
of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-33913) for the quarter ended January 31,
2020.
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.
Amendment No. 1 to Amended and Restated Credit Agreement, by and among the Company; the lenders
party thereto; and Wells Fargo Bank, National Association, as Agent (portions redacted). filed as Exhibit 4.3
of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-33913) for the quarter ended July 31,
2020.
†10.1
†10.2
†10.3
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 27, 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.
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EXHIBIT INDEX
Exhibit Number
Description of Exhibits
†10.4
†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
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.
Form of Executive Severance Policy applicable to the Registrant and certain of its executive officers, 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 March 2, 2020 and incorporated herein by reference.
Form of Indemnity Agreement between the Registrant and each of its independent directors, 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, 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.
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 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 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.
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EXHIBIT INDEX
Exhibit Number
Description of Exhibits
†10.18
†10.19
†10.20
†10.21
†10.22
10.23
10.24
†10.25
†10.26
†10.27
†10.28
10.29
†10.30
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 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.
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.
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, and herein incorporated by reference.
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 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.
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EXHIBIT INDEX
Exhibit Number
Description of Exhibits
†10.31
†10.32
†10.33
†10.34
†10.35
†10.36
†10.37
†10.38
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.
Quanex Building Products Corporation 2020 Omnibus Incentive Plan 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 March 2, 2020, and incorporated herein by reference.
Form of Restricted Stock Award Agreement for Employees under the Quanex Building Products
Corporation 2020 Omnibus Incentive Plan, filed as Exhibit 10.1 of the Registrant’s Quarterly Report on
Form 10-Q (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on March 6, 2020,
and incorporated herein by reference.
Form of Annual Incentive Award Agreement for Employees under the Quanex Building Products
Corporation 2020 Omnibus Incentive Plan, filed as Exhibit 10.1 of the Registrant’s Quarterly Report on
Form 10-Q (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on June 5, 2020,
and incorporated herein by reference.
Form of Restricted Stock Award Agreement for Employees under the Quanex Building Products
Corporation 2020 Omnibus Incentive Plan, filed as Exhibit 10.2 of the Registrant’s Quarterly Report on
Form 10-Q (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on June 5, 2020,
and incorporated herein by reference.
Form of Restricted Stock Unit Award Agreement for Employees under the Quanex Building Products
Corporation 2020 Omnibus Incentive Plan, filed as Exhibit 10.3 of the Registrant’s Quarterly Report on
Form 10-Q (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on June 5, 2020,
and incorporated herein by reference.
Form of Performance Share Award Agreement for Employees under the Quanex Building Products
Corporation 2020 Omnibus Incentive Plan, filed as Exhibit 10.4 of the Registrant’s Quarterly Report on
Form 10-Q (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on June 5, 2020,
and incorporated herein by reference.
Form of Performance Restricted Stock Unit Award Agreement for Employees under the Quanex Building
Products Corporation 2020 Omnibus Incentive Plan, filed as Exhibit 10.5 of the Registrant’s Quarterly
Report on Form 10-Q (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on June
5, 2020, and incorporated herein by reference.
*†10.39
Form of Restricted Stock Unit Award Agreement for independent Directors under the Quanex Building
Products Corporation 2020 Omnibus Incentive Plan.
*21.1
*23.1
*31.1
*31.2
*32
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
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EXHIBIT INDEX
Exhibit Number
Description of Exhibits
* Filed herewith
† Management Compensation or Incentive Plan
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