UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
(Mark One)
| | | | | |
☒ | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 20182024
| | | | | |
☐ | |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-33913
________________________________________________
QUANEX BUILDING PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
________________________________________________ | | | | | | | | |
Delaware | | 26-1561397 |
| | |
DELAWARE | | 26-1561397 |
(State or other jurisdiction of incorporation or organization)
| | (I.R.S. Employer Identification No.)
|
1800 West Loop South,945 Bunker Hill Road, Suite 1500,900, Houston, Texas 7702777024
(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 | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | NX | | New York Stock Exchange |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Large accelerated filer | | ☒ | | x | Accelerated filer | | ¨☐ |
Non-accelerated filer | | o☐ (Do not check if a smaller reporting company)
| | 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 transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. | | ¨
☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
The number of shares outstanding of each of the issuer’s classes of common stock,registrant's Common Stock as of the latest practicable date.
February 29, 2024 was 33,103,593. | | |
| | |
Class | | Outstanding at March 2, 2018 |
Common Stock, par value $0.01 per share | | 35,075,703 |
QUANEX BUILDING PRODUCTS CORPORATION
INDEX
| | | | | | | | |
| | |
PART I. | | |
| | |
Item 1: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2: | | |
| | |
Item 3: | | |
| | |
Item 4: | | |
| | |
PART II. | | |
| | |
| | |
| | |
| | |
| | |
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds5: | | |
| | |
Item 6: | | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | January 31, 2018 | | October 31, 2017 |
| January 31, 2024 | | | January 31, 2024 | | October 31, 2023 |
| (In thousands, except share amounts) | | (In thousands, except share amounts) |
ASSETS | | | |
Current assets: | | | |
Current assets: | |
Current assets: | |
Cash and cash equivalents | $ | 13,757 |
| | $ | 17,455 |
|
Accounts receivable, net of allowance for doubtful accounts of $377 and $333 | 62,119 |
| | 79,411 |
|
Inventories, net (Note 3) | 95,843 |
| | 87,529 |
|
Cash and cash equivalents | |
Cash and cash equivalents | |
Accounts receivable, net of allowance for credit losses of $986 and $843 | |
Inventories | |
Income taxes receivable | |
Prepaid and other current assets | 7,451 |
| | 7,406 |
|
| Total current assets | 179,170 |
| | 191,801 |
|
Property, plant and equipment, net of accumulated depreciation of $270,490 and $264,047 | 213,014 |
| | 211,131 |
|
Goodwill (Note 4) | 226,927 |
| | 222,194 |
|
Intangible assets, net (Note 4) | 138,743 |
| | 139,778 |
|
Total current assets | |
Total current assets | |
Property, plant and equipment, net of accumulated depreciation of $375,560 and $368,763 | |
Operating lease right-of-use assets | |
Goodwill | |
Intangible assets, net | |
Other assets | 9,180 |
| | 8,975 |
|
| Total assets | |
Total assets | |
Total assets | $ | 767,034 |
| | $ | 773,879 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Current liabilities: | |
Current liabilities: | |
Accounts payable | |
Accounts payable | |
Accounts payable | $ | 39,868 |
| | $ | 44,150 |
|
Accrued liabilities | 29,559 |
| | 38,871 |
|
Income taxes payable (Note 8) | 2,664 |
| | 2,192 |
|
Current maturities of long-term debt (Note 5) | 20,773 |
| | 21,242 |
|
Income taxes payable | |
Current maturities of long-term debt | |
Current operating lease liabilities | |
Total current liabilities | 92,864 |
| | 106,455 |
|
Long-term debt (Note 5) | 215,362 |
| | 218,184 |
|
Deferred pension and postretirement benefits (Note 6) | 5,293 |
| | 4,433 |
|
Deferred income taxes (Note 8) | 14,771 |
| | 21,960 |
|
Long-term debt | |
Noncurrent operating lease liabilities | |
| Deferred income taxes | |
Deferred income taxes | |
Deferred income taxes | |
| Other liabilities | 15,787 |
| | 16,000 |
|
Other liabilities | |
Other liabilities | |
| Total liabilities | 344,077 |
| | 367,032 |
|
Commitments and contingencies (Note 9) |
| |
|
Total liabilities | |
Total liabilities | |
Commitments and contingencies | | 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 37,477,459 and 37,508,877, respectively; outstanding 35,082,403 and 34,838,134, respectively | 375 |
| | 375 |
|
Preferred stock, no par value, shares authorized 1,000,000; issued and outstanding - none | |
Preferred stock, no par value, shares authorized 1,000,000; issued and outstanding - none | |
Common stock, $0.01 par value, shares authorized 125,000,000; issued 37,127,024 and 37,176,958, respectively; outstanding 33,103,593 and 33,011,119, respectively | |
Additional paid-in-capital | 253,638 |
| | 255,719 |
|
Retained earnings | 228,293 |
| | 225,704 |
|
Accumulated other comprehensive loss | (14,623 | ) | | (25,076 | ) |
Less: Treasury stock at cost, 2,395,056 and 2,670,743 shares, respectively | (44,726 | ) | | (49,875 | ) |
Less: Treasury stock at cost, 4,023,431 and 4,165,839 shares, respectively | |
Total stockholders’ equity | 422,957 |
| | 406,847 |
|
Total liabilities and stockholders' equity | $ | 767,034 |
| | $ | 773,879 |
|
The accompanying notes are an integral part of the financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | January 31, |
| | | | | 2024 | | 2023 |
| | | | | (In thousands, except per share amounts) |
Net sales | | | | | $ | 239,155 | | | $ | 261,916 | |
Cost and expenses: | | | | | | | |
Cost of sales (excluding depreciation and amortization) | | | | | 187,723 | | | 210,149 | |
Selling, general and administrative | | | | | 32,363 | | | 36,744 | |
| | | | | | | |
Depreciation and amortization | | | | | 11,152 | | | 10,620 | |
| | | | | | | |
Operating income | | | | | 7,917 | | | 4,403 | |
Non-operating (expense) income: | | | | | | | |
Interest expense | | | | | (1,068) | | | (2,259) | |
Other, net | | | | | 1,042 | | | 218 | |
Income before income taxes | | | | | 7,891 | | | 2,362 | |
Income tax expense | | | | | (1,642) | | | (453) | |
| | | | | | | |
| | | | | | | |
Net income | | | | | $ | 6,249 | | | $ | 1,909 | |
| | | | | | | |
Basic earnings per common share | | | | | $ | 0.19 | | | $ | 0.06 | |
| | | | | | | |
Diluted earnings per common share | | | | | $ | 0.19 | | | $ | 0.06 | |
| | | | | | | |
Weighted-average common shares outstanding: | | | | | | | |
Basic | | | | | 32,825 | | | 32,951 | |
Diluted | | | | | 33,043 | | | 33,137 | |
| | | | | | | |
Cash dividends per share | | | | | $ | 0.08 | | | $ | 0.08 | |
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2018 | | 2017 |
| (In thousands, except per share amounts) |
Net sales | $ | 191,666 |
| | $ | 195,096 |
|
Cost and expenses: | | | |
Cost of sales (excluding depreciation and amortization) | 154,440 |
| | 154,947 |
|
Selling, general and administrative | 24,076 |
| | 27,445 |
|
Restructuring charges | 366 |
| | 1,139 |
|
Depreciation and amortization | 13,273 |
| | 15,406 |
|
Operating loss | (489 | ) | | (3,841 | ) |
Non-operating (expense) income: | | | |
Interest expense | (2,441 | ) | | (2,160 | ) |
Other, net | 317 |
| | 661 |
|
Loss before income taxes | (2,613 | ) | | (5,340 | ) |
Income tax benefit | 7,560 |
| | 1,614 |
|
Net income (loss) | $ | 4,947 |
| | $ | (3,726 | ) |
| | | |
Basic income (loss) per common share | $ | 0.14 |
| | $ | (0.11 | ) |
| | | |
Diluted income (loss) per common share: | $ | 0.14 |
| | $ | (0.11 | ) |
| | | |
Weighted-average common shares outstanding: | | | |
Basic | 34,662 |
| | 34,055 |
|
Diluted | 35,286 |
| | 34,055 |
|
| | | |
Cash dividends per share | $ | 0.04 |
| | $ | 0.04 |
|
The accompanying notes are an integral part of the financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | January 31, |
| | | | | 2024 | | 2023 |
| | | | | (In thousands) |
Net income | | | | | $ | 6,249 | | | $ | 1,909 | |
Other comprehensive income: | | | | | | | |
Foreign currency translation gain | | | | | 6,081 | | | 11,372 | |
| | | | | | | |
| | | | | | | |
Other comprehensive income | | | | | 6,081 | | | 11,372 | |
Comprehensive income | | | | | $ | 12,330 | | | $ | 13,281 | |
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2018 | | 2017 |
| (In thousands) |
Net income (loss) | $ | 4,947 |
| | $ | (3,726 | ) |
Other comprehensive income (loss): | | | |
Foreign currency translation adjustments gain | 11,150 |
| | 2,832 |
|
Change in pension from net unamortized gain tax (expense) | (697 | ) | | — |
|
Other comprehensive income | 10,453 |
| | 2,832 |
|
Comprehensive income (loss) | $ | 15,400 |
| | $ | (894 | ) |
The accompanying notes are an integral part of the financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWFLOWS
(Unaudited)
| | | Three Months Ended |
| Three Months Ended | | | Three Months Ended |
| January 31, | | January 31, |
| 2018 | | 2017 | | 2024 | | 2023 |
| (In thousands) | | (In thousands) |
Operating activities: | | | |
Net income (loss) | $ | 4,947 |
| | $ | (3,726 | ) |
Adjustments to reconcile net income (loss) to cash provided by operating activities: | | | |
Net income | |
Net income | |
Net income | |
Adjustments to reconcile net income to cash provided by operating activities: | |
Depreciation and amortization | |
Depreciation and amortization | |
Depreciation and amortization | 13,273 |
| | 15,406 |
|
Stock-based compensation | 580 |
| | 2,226 |
|
Deferred income tax | (8,483 | ) | | (3,684 | ) |
| Other, net | |
| Other, net | |
| Other, net | 130 |
| | 1,241 |
|
Changes in assets and liabilities: | | | |
Decrease in accounts receivable | 18,378 |
| | 21,143 |
|
Increase in inventory | (6,926 | ) | | (7,622 | ) |
Decrease (increase) in other current assets | 73 |
| | (438 | ) |
Decrease in accounts receivable | |
Decrease in accounts receivable | |
(Increase) decrease in inventory | |
Increase in other current assets | |
Decrease in accounts payable | (4,523 | ) | | (7,232 | ) |
Decrease in accrued liabilities | (10,629 | ) | | (17,971 | ) |
Increase in income taxes payable | 344 |
| | 2,761 |
|
Increase in deferred pension and postretirement benefits | 860 |
| | 837 |
|
Increase in deferred pension benefits | |
Increase in other long-term liabilities | 181 |
| | 366 |
|
Other, net | (13 | ) | | (226 | ) |
Cash provided by operating activities | 8,192 |
| | 3,081 |
|
Investing activities: | | | |
Acquisitions, net of cash acquired | — |
| | (8,497 | ) |
| Business acquisition | |
| Business acquisition | |
| Business acquisition | |
Capital expenditures | (7,811 | ) | | (8,141 | ) |
| Proceeds from disposition of capital assets | |
Proceeds from disposition of capital assets | |
Proceeds from disposition of capital assets | 65 |
| | 390 |
|
Cash used for investing activities | (7,746 | ) | | (16,248 | ) |
Financing activities: | | | |
Borrowings under credit facilities | 9,500 |
| | 24,000 |
|
Borrowings under credit facilities | |
Borrowings under credit facilities | |
Repayments of credit facility borrowings | (13,750 | ) | | (20,875 | ) |
| Repayments of other long-term debt | |
Repayments of other long-term debt | |
Repayments of other long-term debt | (255 | ) | | (429 | ) |
Common stock dividends paid | (1,397 | ) | | (1,372 | ) |
Issuance of common stock | 2,231 |
| | 1,383 |
|
| Payroll tax paid to settle shares forfeited upon vesting of stock | (706 | ) | | (957 | ) |
Payroll tax paid to settle shares forfeited upon vesting of stock | |
Payroll tax paid to settle shares forfeited upon vesting of stock | |
| Cash (used for) provided by financing activities | |
Cash (used for) provided by financing activities | |
Cash (used for) provided by financing activities | (4,377 | ) | | 1,750 |
|
Effect of exchange rate changes on cash and cash equivalents | 233 |
| | (35 | ) |
Decrease in cash and cash equivalents | (3,698 | ) | | (11,452 | ) |
Cash and cash equivalents at beginning of period | 17,455 |
| | 25,526 |
|
Cash and cash equivalents at end of period | $ | 13,757 |
| | $ | 14,074 |
|
The accompanying notes are an integral part of the financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended January 31, 2024 | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Stockholders’ Equity |
| (In thousands, no per share amounts shown except in verbiage) |
Balance at October 31, 2023 | $ | 372 | | | $ | 251,576 | | | $ | 409,318 | | | $ | (38,141) | | | $ | (77,571) | | | $ | 545,554 | |
Net income | — | | | — | | | 6,249 | | | — | | | — | | | 6,249 | |
Foreign currency translation adjustment | — | | | — | | | — | | | 6,081 | | | — | | | 6,081 | |
Common dividends ($0.08 per share) | — | | | — | | | (2,645) | | | — | | | — | | | (2,645) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Stock-based compensation activity: | | | | | | | | | | | |
Expense related to stock-based compensation | — | | | 583 | | | | | — | | | — | | | 583 | |
Stock options exercised | — | | | 22 | | | — | | | — | | | 378 | | | 400 | |
Restricted stock awards granted | — | | | (1,357) | | | — | | | — | | | 1,357 | | | — | |
Performance restricted stock units vested | — | | | (917) | | | — | | | — | | | 917 | | | — | |
Other | (1) | | | (1,192) | | | — | | | — | | | — | | | (1,193) | |
Balance at January 31, 2024 | $ | 371 | | | $ | 248,715 | | | $ | 412,922 | | | $ | (32,060) | | | $ | (74,919) | | | $ | 555,029 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Three Months Ended January 31, 2023 | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Stockholders’ Equity |
| (In thousands, no per share amounts shown except in verbiage) |
Balance at October 31, 2022 | $ | 372 | | | $ | 251,947 | | | $ | 337,456 | | | $ | (49,422) | | | $ | (75,518) | | | $ | 464,835 | |
Net income | — | | | — | | | 1,909 | | | — | | | — | | | 1,909 | |
Foreign currency translation adjustment | — | | | — | | | — | | | 11,372 | | | — | | | 11,372 | |
Common dividends ($0.08 per share) | — | | | — | | | (2,661) | | | — | | | — | | | (2,661) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Stock-based compensation activity: | | | | | | | | | | | |
Expense related to stock-based compensation | — | | | 679 | | | — | | | — | | | — | | | 679 | |
Stock options exercised | — | | | 6 | | | — | | | — | | | 93 | | | 99 | |
Restricted stock awards granted | — | | | (1,752) | | | — | | | — | | | 1,752 | | | — | |
Performance restricted stock units vested | — | | | (605) | | | — | | | — | | | 605 | | | — | |
Other | — | | | (545) | | | — | | | — | | | — | | | (545) | |
Balance at January 31, 2023 | $ | 372 | | | $ | 249,730 | | | $ | 336,704 | | | $ | (38,050) | | | $ | (73,068) | | | $ | 475,688 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended January 31, 2018 | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Stockholders’ Equity |
| (In thousands, no per share amounts shown except in verbiage) |
Balance at October 31, 2017 | $ | 375 |
| | $ | 255,719 |
| | $ | 225,704 |
| | $ | (25,076 | ) | | $ | (49,875 | ) | | $ | 406,847 |
|
Net income | — |
| | — |
| | 4,947 |
| | — |
| | — |
| | 4,947 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | 11,150 |
| | — |
| | 11,150 |
|
Common dividends ($0.04 per share) | — |
| | — |
| | (1,397 | ) | | — |
| | — |
| | (1,397 | ) |
Change in pension from net unamortized gain tax (expense) | — |
| | — |
| | — |
| | (697 | ) | | — |
| | (697 | ) |
Stock-based compensation activity: | | | | | | | | | | |
|
Expense related to stock-based compensation | — |
| | 580 |
| | — |
| | — |
| | — |
| | 580 |
|
Stock options exercised | — |
| | (149 | ) | | (924 | ) | | — |
| | 3,304 |
| | 2,231 |
|
Restricted stock awards granted | — |
| | (1,371 | ) | | — |
| | — |
| | 1,371 |
| | — |
|
Performance share awards vested | — |
| | (473 | ) | | — |
| | — |
| | 473 |
| | — |
|
Other | — |
| | (668 | ) | | (37 | ) | | — |
| | 1 |
| | (704 | ) |
Balance at January 31, 2018 | $ | 375 |
| | $ | 253,638 |
| | $ | 228,293 |
| | $ | (14,623 | ) | | $ | (44,726 | ) | | $ | 422,957 |
|
The accompanying notes are an integral part of the financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Basis of Presentation
Quanex Building Products Corporation is a component supplier toglobal, publicly traded manufacturing company primarily serving original equipment manufacturers (OEMs) in the buildingfenestration, cabinetry, solar, refrigeration and outdoor products industry.markets. 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 custom mixing, solar panel sealants, trim moldings, vinyl decking, vinyl fencing, customized compounds, water retention barriers, and conservatory roof components. We have organized our business into three reportable business segments. For additional discussion of our reportable business segments, see Note 14, "Segment11, “Segment Information."” We use low-cost, short lead-time 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 United KingdomU.K. and Germany, as well as through sales and marketing efforts in other countries.
Unless the context indicates otherwise, references to "Quanex"“Quanex”, the "Company"“Company”, "we"“we”, "us"“us” and "our"“our” refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries.
Basis of Presentation and Principles of Consolidation
The accompanying interim unaudited condensed consolidated financial statements include the accounts of Quanex Building Products Corporation. All intercompany accounts and transactions have been eliminated in consolidation. These financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of October 31, 20172023 was derived from audited financial information but does not include all disclosures required by U.S. GAAP. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.2023. In our opinion, the accompanying financial statements contain all adjustments (which consist of normal recurring adjustments, except as disclosed herein) necessary to fairly present our financial position, results of operations and cash flows for the interim periods. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year or for any future periods.
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 on-going basis, including those related to impairment of long livedlong-lived assets and goodwill, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.
RestructuringRevenue from Contracts with Customers
Revenue recognition
We accrue one-time severancerecognize 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.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
We generally expense incremental costs pursuantof obtaining a contract when incurred because the amortization period would be less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Pricing and sales incentives
Pricing is established at or prior to an approved planthe time of restructuringsale with our customers and we record sales at the communication date, when affected employees have been notifiedagreed-upon net selling price, reflective of current and prospective discounts.
Shipping and handling costs
We account for shipping and handling services as fulfillment services; accordingly, freight revenue is combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the potential severanceagreement. Shipping and sufficient information has been providedhandling costs incurred by us for the employeedelivery of goods to calculate severance benefits,customers are considered a cost to fulfill the contract and are included in cost of sales in the eventaccompanying condensed consolidated statements of income.
Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration.
Disaggregation of revenue
We produce a wide variety of products that are used in the employee is involuntarily terminated.fenestration industry, including window spacer systems; extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we accrue costs associated with the termination of contractual commitmentsproduce certain non-fenestration products, 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 rental in the current period. For other costs directly related to the restructuring effort, such as equipment moving costs, we expense in the period incurred.
We closed a kitchen and bathroombath cabinet door business in Mexico in October 2016doors and another plant in Lansing, Kansas in September 2017. We closed two United States vinyl operations plants in November 2016components, flooring and January 2017. During the three months ended January 31, 2018 and 2017, we expensed $0.4 million and $1.1 million, respectively, pursuant to these restructuring efforts. Our facility lease obligations were deemed to be at fair market value and we have not yet negotiated exit from our remaining lease obligations at two of these facilities. We expect to continue to incur costs related to these operating leasestrim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other costs associated with these restructuring efforts during fiscal 2018.products.
In 2017, we evaluated the remaining depreciable lives
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our product sales for the three months ended January 31, 2017.2024 and 2023 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 11, “Segment Information.”
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | January 31, |
| | | | | 2024 | | 2023 |
| | | | | (In thousands) |
North American Fenestration: | | | | | | | |
United States - fenestration | | | | | $ | 111,634 | | | $ | 120,767 | |
International - fenestration | | | | | 6,144 | | | 5,127 | |
United States - non-fenestration | | | | | 25,791 | | | 23,066 | |
International - non-fenestration | | | | | 4,426 | | | 4,020 | |
| | | | | $ | 147,995 | | | $ | 152,980 | |
European Fenestration: | | | | | | | |
| | | | | | | |
International - fenestration | | | | | $ | 41,751 | | | $ | 42,354 | |
International - non-fenestration | | | | | 7,686 | | | 12,598 | |
| | | | | $ | 49,437 | | | $ | 54,952 | |
North American Cabinet Components: | | | | | | | |
United States - fenestration | | | | | $ | 3,675 | | | $ | 3,908 | |
United States - non-fenestration | | | | | 39,179 | | | 50,049 | |
International - non-fenestration | | | | | 283 | | | 717 | |
| | | | | $ | 43,137 | | | $ | 54,674 | |
Unallocated Corporate & Other | | | | | | | |
Eliminations | | | | | $ | (1,414) | | | $ | (690) | |
| | | | | $ | (1,414) | | | $ | (690) | |
Net sales | | | | | $ | 239,155 | | | $ | 261,916 | |
Allowance for Credit Losses
6
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
In addition, we evaluatedlosses, which represents an estimate of expected losses over the remaining service livescontractual life of intangible assetsour receivables. The allowance is determined using two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, a specific reserve is established for individual accounts where information indicates the customers may have an inability to meet financial obligations. Second, a reserve is determined for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection rates, write-off experience, and forecasts of future economic conditions. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful.
Related Parties
Net sales include transactions with defined lives associated with our United States vinyl extrusion business and recorded a change in estimate associated with the remaining useful lives of a customer relationship intangible andwhich is a utility process intangible asset which resulted in an increase in amortization expenserelated party with one of $0.9 millionour non-employee directors for the three months ended January 31, 2017.2024 and 2023 of approximately $0.2 million, respectively. We doperformed a review of these transactions, of which no single transaction or series of related transactions exceeded $120,000 in amount, and determined that these transactions were enacted independently of each other. We are not expect to incur incremental depreciation and amortization expense in fiscal 2018 associatedaware of any other related party transactions with these restructuring efforts.any of our current non-employee directors or officers outside of their normal business functions or expected contractual duties.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. AcquisitionsAcquisition
On November 1, 2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with LMI Custom Mixing, LLC (“LMI”) and Dispositions
HLP
the equity owners of LMI, Lauren International, Ltd. and Meteor-US-Beteiligungs GMBH. Under the Purchase Agreement, we acquired substantially all of the operating assets comprising LMI’s polymer mixing and rubber compound production business (collectively, the “Purchased Assets”) and also agreed to assume certain liabilities relating to the Purchased Assets (collectively, the “Acquisition”). As more fully described in our Annual Report on Form 10-Kconsideration for the year ended October 31, 2017,Purchased Assets, we acquiredpaid $91.3 million in cash utilizing funds borrowed under our Credit Facility. In connection with the outstanding ownership shares of an extruder of vinyl lineal products and manufacturer of other plastic products incorporated and registered in England and Wales ("HLP") on June 15, 2015. The purchase agreement contained an earn-out provision which is calculated as a percentage of earnings before interest, tax and depreciation and amortization for a specified period, as defined in the purchase agreement. Pursuant to this earn-out provision, the former owner could select a base year upon which to calculate the earn-out (one of the next three succeeding twelve-month periods ended July 31). In August 2016, the former owner selected the twelve-month period ended July 31, 2016 as the measurement periodAcquisition, we amended our existing finance lease with Lauren Real Estate Holding LLC for the earn-out calculation. On November 7, 2016, we paid $8.5 million to settle the earn-out,purpose of adding an additional lease renewal option and increasing rental space by approximately 60,000 square feet of rental space which included a foreign currency adjustment of $0.1 million. We have included this earn-out payment under the caption "Acquisitions, net of cash acquired" in the accompanying cash flow statement for the three months ending January 31, 2017.
We are party to operating leases associated with the HLP acquisition for which our lessors are entities that were either wholly-owned subsidiaries or affiliates of HLP priorwas added to the acquisition, and313,595 square feet of rentable area located in which a former owner, who is now our employee, has an ownership interest. These leases include our primary operating facilities, a finished goods warehouse, a mixing plant, and a manufacturing facility. The lease for the manufacturing facility which has a 20-year term began in 2007, the lease for the manufacturing facility which has a 15-year term began in 2012, the lease for the mixing plant has a 13.5-year term which began in 2013, and the lease for the warehouse has a 20-year life which began in 2017. We have recorded rent expense pursuant to these agreements of approximately $0.6 million and $0.3 million, for the three-month periods ended January 31, 2018 and 2017, respectively. Commitments under these lease arrangements are included in our operating lease commitments as disclosed in our Annual Report on Form 10-K for the year ended October 31, 2017.Cambridge, Ohio.
Shawano
On October 31, 2017, we sold certain net assets of a wood-flooring manufacturing plant in Shawano, Wisconsin to an unrelated equity investment firm for $0.6 million in cash, and the issuance of a receivable totaling $1.2 million. The receivable is collectible over a five-year term, with annual payments equal to 3% of gross sales, with a minimum payment in year five equal to the greater of: (a) $1.6 million less annual payments made during the preceding four years, or (b) 3% of gross sales for year five. The receivable has been discounted at our incremental borrowing rate. We provided transitional services associated with this sale through December 31, 2017 and recorded a current receivable associated with these services of $0.2 million as of January 31, 2018. The transaction was subject to a working capital adjustment as defined in the agreement which totaled less than $0.1 million at January 31, 2018. Pursuant to the agreement, we will supply wood products to this plant at cost throughout fiscal 2018.
3. Inventories
Inventories consisted of the following at January 31, 20182024 and October 31, 2017:2023 (in thousands):
| | | January 31, 2018 | | October 31, 2017 |
| (In thousands) |
| January 31, 2024 | | | January 31, 2024 | | October 31, 2023 |
Raw materials | $ | 52,507 |
| | $ | 50,472 |
|
Finished goods and work in process | 46,438 |
| | 40,087 |
|
Supplies and other | 3,467 |
| | 2,655 |
|
| Total | 102,412 |
| | 93,214 |
|
Less: Inventory reserves | 6,569 |
| | 5,685 |
|
Inventories, net | $ | 95,843 |
| | $ | 87,529 |
|
| Total | |
| Total | |
Fixed costs related to excess manufacturing capacity, if any, have been expensed in the period they were incurred and, therefore, are not capitalized into inventory.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our inventories at January 31, 2018 and October 31, 2017 were valued using the following costing methods:
|
| | | | | | | |
| January 31, 2018 | | October 31, 2017 |
| (In thousands) |
LIFO | $ | 4,564 |
| | $ | 4,444 |
|
FIFO | 91,279 |
| | 83,085 |
|
Total | $ | 95,843 |
| | $ | 87,529 |
|
During interim periods, we estimate a LIFO reserve based on our expectations of year-end inventory levels and costs. If our calculations indicate that an adjustment at year-end will be required, we may record a proportionate share of this amount during the period. At year-end, we calculate the actual LIFO reserve and record an adjustment for the difference between the annual calculation and any estimates recognized during the interim periods. Because the interim projections are subject to many factors beyond our control, the results could differ significantly from the year-end LIFO calculation. We recorded no interim LIFO reserve adjustment for the three-month periods ended January 31, 2018 and 2017.
For inventories valued under the LIFO method, replacement cost exceeded the LIFO value by approximately $1.1 million at January 31, 2018 and October 31, 2017.
4. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the three months ended January 31, 20182024 was as follows:follows (in thousands):
|
| | | |
| Three Months Ended |
| January 31, 2018 |
| (In thousands) |
Beginning balance as of November 1, 2017 | $ | 222,194 |
|
Foreign currency translation adjustment | 4,733 |
|
Balance as of the end of the period | $ | 226,927 |
|
| | | | | |
| Three Months Ended |
| January 31, 2024 |
Beginning balance as of November 1, 2023 | $ | 182,956 | |
| |
| |
Foreign currency translation adjustment | 2,483 | |
Balance as of the end of the period | $ | 185,439 | |
At our last annual test date, August 31, 2017,2023, we evaluated the recoverability of goodwill at each of our five reportablereporting units with goodwill balances. Webalances and determined that our goodwill was not impaired. There have been no triggering events to indicateWe evaluated for indicators of impairment for all reporting units during the three months ended January 31, 2018. Therefore,2024 and determined that there were no triggering events. For additional testing was deemed necessary. Fordiscussion of change in reporting units and a summary of the change in the carrying amount of goodwill by segment, see Note 14, "Segment Information", included herewith.11, “Segment Information.”
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of January 31, 20182024 and October 31, 2017:2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2024 | | October 31, 2023 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Customer relationships | $ | 159,184 | | | $ | 102,324 | | | $ | 157,629 | | | $ | 99,230 | |
Trademarks and trade names | 56,003 | | | 43,824 | | | 55,519 | | | 42,879 | |
Patents and other technology | 25,154 | | | 22,185 | | | 25,127 | | | 22,051 | |
| | | | | | | |
Total | $ | 240,341 | | | $ | 168,333 | | | $ | 238,275 | | | $ | 164,160 | |
|
| | | | | | | | | | | | | | | |
| January 31, 2018 | | October 31, 2017 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| (In thousands) |
Customer relationships | $ | 157,954 |
| | $ | 51,625 |
| | $ | 155,230 |
| | $ | 48,479 |
|
Trademarks and trade names | 56,894 |
| | 30,533 |
| | 56,058 |
| | 29,509 |
|
Patents and other technology | 22,346 |
| | 16,293 |
| | 22,624 |
| | 16,146 |
|
Total | $ | 237,194 |
| | $ | 98,451 |
| | $ | 233,912 |
| | $ | 94,134 |
|
Pursuant to a change in estimate with regard to the remaining service lives of certain intangible assets, we recorded incremental amortization expense of $0.9 million for the three months ended January 31, 2017. See additional disclosure at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring."
During the three months ended January 31, 2018, we retired identifiable intangible assets of $0.3 million related to patents and other technology.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For each of the three-month periods ended January 31, 2018 and 2017, weWe had aggregate amortization expense related to intangible assets for the three months ended January 31, 2024 of $4.1$3.2 million and $5.4$3.1 million respectively.for the comparable prior year period.
Estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for each of thefuture fiscal years ending Octoberas of January 31, is as follows2024 (in thousands):
| | | | | |
| Estimated Amortization Expense |
2024 (remaining nine months) | $ | 8,540 | |
2025 | 10,355 | |
2026 | 10,113 | |
2027 | 10,114 | |
2028 | 4,880 | |
Thereafter | 28,006 | |
Total | $ | 72,008 | |
|
| | | |
| Estimated Amortization Expense |
2018 (remaining nine months) | $ | 12,219 |
|
2019 | 15,587 |
|
2020 | 14,530 |
|
2021 | 12,809 |
|
2022 | 12,185 |
|
Thereafter | 71,413 |
|
Total | $ | 138,743 |
|
5. Debt and CapitalFinance Lease Obligations
DebtLong-term debt consisted of the following at January 31, 20182024 and October 31, 2017:2023 (in thousands):
| | | | | | | | | | | |
| January 31, 2024 | | October 31, 2023 |
Revolving Credit Facility | $ | 10,000 | | | $ | 15,000 | |
| | | |
| | | |
Finance lease obligations and other | 55,211 | | | 55,000 | |
Unamortized deferred financing fees | (1,117) | | | (1,200) | |
Total debt | $ | 64,094 | | | $ | 68,800 | |
Less: Current maturities of long-term debt | 2,500 | | | 2,365 | |
Long-term debt | $ | 61,594 | | | $ | 66,435 | |
|
| | | | | | | |
| January 31, 2018 | | October 31, 2017 |
| (In thousands) |
Revolving Credit Facility | $ | 83,500 |
| | $ | 84,000 |
|
Term Loan A | 135,000 |
| | 138,750 |
|
Capital lease obligations and other | 19,584 |
| | 18,764 |
|
Unamortized deferred financing fees | (1,949 | ) | | (2,088 | ) |
Total debt | $ | 236,135 |
| | $ | 239,426 |
|
Less: Current maturities of long-term debt | 20,773 |
| | 21,242 |
|
Long-term debt | $ | 215,362 |
| | $ | 218,184 |
|
Revolving Credit FacilityAsOn July 6, 2022, we entered into our Second Amended and Restated Credit Agreement (the “Credit Facility”) with Wells Fargo Securities, LLC, as Agent, Swingline Lender and Issuing Lender, and BofA Securities, Inc. serving as Syndication Agent. We capitalized $1.2 million of deferred financing fees related to the Credit Facility. This $325.0 million revolving credit facility has a five-year term, maturing on July 6, 2027, and replaces our previous credit facility. Our previous credit facility is more fully described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017, we maintain a $450.0 million credit agreement comprising a $150.0 million Term Loan A and a $300.0 million revolving credit facility (collectively,2023.
Interest payments for the “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 Credit Agreement has a five-year term, maturing on July 29, 2021, and requires interest paymentsFacility are calculated, at our election and depending upon ourthe Consolidated Net Leverage Ratio, at either a Base Rate (as defined within the Credit Facility) plus an applicable margin or at the LIBORsame rate as Risk-Free Rate (“RFR”) Loans for domestic borrowings or Eurocurrency Rate Loans plus an applicable margin. At the time of the initial borrowing, the applicable rate was LIBOR + 2.00%. In addition, we are subject to commitment fees for the unused portion of the Credit Agreement.Facility.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The applicable margin and commitment fees are outlined in the following table:
|
| | | | | | | | |
Pricing Level | | Consolidated Leverage Ratio | | Commitment Fee | | LIBOR Rate Loans | | Base Rate Loans |
I | | Less than or equal to 1.50 to 1.00 | | 0.200% | | 1.50% | | 0.50% |
II | | Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00 | | 0.225% | | 1.75% | | 0.75% |
III | | Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00 | | 0.250% | | 2.00% | | 1.00% |
IV | | Greater than 3.00 to 1.00 | | 0.300% | | 2.25% | | 1.25% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pricing Level | | Consolidated Net Leverage Ratio | | Commitment Fee | | Eurocurrency Rate Loans and RFR Loans | | | | Base Rate Loans |
I | | Less than or equal to 1.50 to 1.00 | | 0.150% | | 1.25% | | | | 0.25% |
II | | Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00 | | 0.175% | | 1.50% | | | | 0.50% |
III | | Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00 | | 0.200% | | 1.75% | | | | 0.75% |
IV | | Greater than 3.00 to 1.00 | | 0.250% | | 2.00% | | | | 1.00% |
In the event of default, outstanding borrowings would 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.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The term loan portion$10.0 million, up to an aggregate amount of $150.0 million or 100% of Consolidated EBITDA, subject to the lender's discretion to elect or decline the incremental increase. We can also borrow up to the lesser of $15.0 million or the revolving credit commitment, as defined, under a Swingline feature of the Credit Agreement requires quarterly principal payments on the last business day of each fiscal quarter in accordance with a stated repayment schedule. Required aggregate principal repayments total $15.0 million for the succeeding twelve-month period, and are included in the accompanying condensed consolidated balance sheet under the caption “Current Maturities of Long-term Debt.” No stated principal payments are required under the revolving credit portion of the Credit Agreement, except upon maturity. If our Consolidated Leverage Ratio is less than 2.25 to 1.00, then we are required to make mandatory prepayments of “excess cash flow” as defined in the agreement.Facility.
The Credit AgreementFacility contains a: (1) Consolidated Fixed ChargeInterest Coverage Ratio requirement whereby we must not permit the Consolidated Fixed ChargeInterest Coverage Ratio, as defined, to be less than 1.103.00 to 1.00, and (2) Consolidated Net Leverage Ratio requirement, whereby we must not permit the Consolidated Net Leverage Ratio, as summarized by period in the following table:
|
| | |
Period | | Maximum Ratio |
January 31, 2017 through January 30, 2018 | | 3.25 to 1.00 |
January 31, 2018 and thereafter | | 3.00 to 1.00 |
defined, to be greater than 3.25 to 1.00.In addition to maintaining these financial covenants, the Credit AgreementFacility 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 $10.0$25.0 million per year) and other transactions as further defined in the Credit Agreement.Facility. Some of these limitations, however, do not take effect so long as Consolidated Net Leverage Ratio is less than or equal to 2.75 to 1.00 and available liquidity exceeds $25.0 million. Substantially all of our domestic assets, with the exception of real property, are utilizedused as collateral for the Credit Agreement.
As of January 31, 2018,2024, we had $218.5$10.0 million of borrowings outstanding under the Credit AgreementFacility (reduced by unamortized debt issuance costs of $1.9$1.1 million), $5.3$5.1 million of outstanding letters of credit and $19.6$55.2 million outstanding primarily under capital leases.finance leases and other debt. We had $211.2$309.9 million available for use under the Credit AgreementFacility at January 31, 2018.2024. Outstanding borrowings under the Credit AgreementFacility accrue interest at 3.57%6.68% per annum. Our weighted averageweighted-average borrowing rate for borrowings outstanding during the three months ended January 31, 20182024 and 20172023 was 3.40%6.69% and 2.65%5.43%, respectively. We were in compliance with our debt covenants as of January 31, 2018.
Other Debt Instruments
Historically, we have maintained certain capital lease obligations related to equipment purchases. On February 20, 2017, we entered into a capital lease for warehouse space at HLP with a related-party company that is owned by our employee, the former owner of HLP. This new warehouse was anticipated at the time of the HLP acquisition in June 2015, and the lease was negotiated at arms-length. The lease accrues interest at 3.57% per annum, and extends for a twenty-year period through the year 2036. We recorded the leased asset at inception at fair value of $16.6 million and recorded a corresponding liability for our obligation under this lease. We are recognizing interest expense using the effective interest method over the term. Our cash commitments under this lease are £0.9 million per year for an aggregate of £17.8 million (or approximately $25.3 million). The cost and accumulated depreciation of property, plant and equipment under all outstanding capital leases at January 31, 2018 was $19.3 million and $3.4 million, respectively, including $12.8 million and $0.9 million, respectively, related to the HLP warehouse lease. Our total obligations under capital leases and other total $19.6 million at January 31, 2018, of which $1.8 million is classified in the current portion of long-term debt and $17.8 million is classified as long-term debt on the accompanying unaudited condensed consolidated balance sheet. These obligations accrue interest at an average rate of 3.6%, and extend through the year 2036.
2024.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Retirement Plans
Pension Plan
Our non-contributory, single employer defined benefit pension plan covers a majoritycovered certain of our employees in the United States excluding employees of recent acquisitions. Employees of acquired companies may be covered after a transitional period. U.S. During the year ended October 31. 2023, we terminated our defined contribution plan and settled the obligation during the three months ended October 31, 2023. The net periodic pension (benefit) cost for this plan for the three-month periodsthree months ended January 31, 20182024 and 20172023 was as follows:follows (in thousands):
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2018 | | 2017 |
| (In thousands) |
Service cost | $ | 949 |
| | $ | 926 |
|
Interest cost | 215 |
| | 212 |
|
Expected return on plan assets | (466 | ) | | (457 | ) |
Amortization of net loss | 144 |
| | 143 |
|
Net periodic benefit cost | $ | 842 |
| | $ | 824 |
|
During 2017, we contributed $3.6 million to fund our plan, and we expect to make a contribution to our plan in September 2018 of approximately $3.6 million. | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | January 31, |
| | | | | 2024 | | 2023 |
Service cost | | | | | $ | — | | | $ | 96 | |
Interest cost | | | | | — | | | 390 | |
Expected return on plan assets | | | | | — | | | (366) | |
Amortization of net loss | | | | | — | | | 10 | |
Settlement reimbursement | | | | | (765) | | | — | |
Net periodic pension (benefit) cost | | | | | $ | (765) | | | $ | 130 | |
Other Plans
We also have a supplemental benefit plan covering certain executive officers and key employees and a non-qualified deferred compensation plan covering members of the Board of Directors and certain key employees. As of January 31, 20182024 and October 31, 2017,2023, our liability under the supplemental benefit plan was approximately $3.6 million$2.0 million. During the year ended October 31, 2023, the supplemental benefit plan was terminated. Benefits associated with this plan will be distributed in June 2024 in accordance with Internal Revenue Service regulations. As of January 31, 2024 and $3.4 million, respectively. TheOctober 31, 2023, the liability associated with the deferred compensation plan was approximately $4.0$4.5 million as of January 31, 2018 and October 31, 2017.$3.9 million, respectively. We record the current portion of liabilities associated with these plans under the caption "Accrued Liabilities,"“Accrued liabilities,” and the long-term portion under the caption "Other Liabilities"“Other liabilities” in the accompanying condensed consolidated balance sheets.
7. Warranty Obligations
We accrue warranty obligations as we recognize revenue associated with certain products. We make provisions for our warranty obligations based upon historical experience of costs incurred for such obligations adjusted, as necessary, for current conditions and factors. There are significant uncertainties and judgments involved in estimating our warranty obligations, including changing product designs, differences in customer installation processes and future claims experience which may vary from historical claims experience. Therefore, the ultimate amount we incur as warranty costs in the near and long-term may not be consistent with our current estimate.
A reconciliation of the activity related to our accrued warranty, including both the current and long-term portions (reported in accrued liabilities and other liabilities, respectively, on the accompanying condensed consolidated balance sheet) follows:
|
| | | |
| Three Months Ended |
| January 31, 2018 |
| (In thousands) |
Beginning balance as of November 1, 2017 | $ | 323 |
|
Provision for warranty expense | 20 |
|
Warranty costs paid | (4 | ) |
Total accrued warranty as of the end of the period | $ | 339 |
|
Less: Current portion of accrued warranty | 153 |
|
Long-term portion of accrued warranty | $ | 186 |
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Income Taxes
To determine our income tax expense or benefit for interim periods, consistent with accounting standards, we apply the estimated annual effective income tax rate to year-to-date results, plus any applicable discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to year-to-date results.the finalization of tax returns, tax audit settlements, expiration of statutes of limitations, tax benefits on equity compensation, and increase or decrease in valuation allowances on deferred tax assets. Our estimated annual effective tax rates for the three-month periods ended January 31, 2018 and 2017 were 24.0% and 30.2%, respectively, excluding discrete items. The change in the annual rate was due largely to the effect of the Tax Cuts and Jobs Act (the Act) which was signed into law on December 22, 2017.
The Act reduced our federal income tax rate from 35.0% to 23.3% for the fiscal year ending October 31, 2018. Discrete items contributing to the income tax benefitcontinuing operations for the three months ended January 31, 2018 included $7.7 million for the re-measurement of2024 and 2023 were 20.8% and 19.2%, respectively. The difference between our deferred income tax assets and liabilities due to the decrease in the federal corporateeffective income tax rate aand the U.S. federal statutory rate of 21% principally results from discrete tax items, U.S. state tax, non-U.S. tax rate differential and other permanent differences. The primary discrete items affecting the 2024 effective rate were the benefit of $0.3$0.4 million for the true up of our accruals and related deferred taxes from prior year filings and settled tax audits, a benefit of $0.1 million for the excess tax benefits related to the vesting or exercise of equity-based compensation awards, partially offset byand a tax expensecharge of $1.2$0.6 million for the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings.
The following table reconciles our effective income tax benefit raterelated to the federal statutory rate of 23.3% and 35.0% for the three month periods ended January 31, 2018 and 2017, respectively:
|
| | | | | |
| Three months ended January 31, |
| 2018 | | 2017 |
United States tax at statutory rate | 23.3 | % | | 35.0 | % |
State and local income tax | 2.5 |
| | 1.7 |
|
Non-United States income tax | (1.0 | ) | | (6.0 | ) |
General business credits | — |
| | (0.4 | ) |
Other permanent differences | (0.8 | ) | | (0.1 | ) |
Deferred rate impact of enactment of tax reform | 297.4 |
| | — |
|
Tax impact of stock based compensation | 4.2 |
| | — |
|
Impact of deemed repatriation | (46.9 | ) | | — |
|
Return to actual adjustments | 10.6 |
| | — |
|
Effective tax benefit rate | 289.3 | % | | 30.2 | % |
The United States statutory rate of 23.3% 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.
Given the significancetrue up of the Act,deferred tax rate. The primary discrete item affecting the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants2023 effective rate was a benefit of $0.2 million related to record provisional amounts during a one year “measurement period”. During the measurement period, impacts of the Act are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Act.foreign entities true up.
As of January 31, 2018, we have not completed the accounting for the tax effects of the Act. However, we have made an initial assessment of the Act and recorded a discrete benefit of $6.5 million during the three month period ended January 31, 2018. We believe that our assessment of the re-measurement of our deferred income tax assets and liabilities to be complete, while we consider our tax expense related to the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings and our tax benefit of stock based compensation to be provisional. At this time, our estimate does not reflect changes in current interpretations of compensation deduction limitations, effects of any state tax law changes and uncertainties regarding interpretations that may arise as a result of federal tax reform. Any additional impact of the enactment of the Act will be recorded as they are identified during the one-year measurement period provided for in SAB 118.
In light of the Act, we are evaluating our foreign cash position and potential repatriation of foreign earnings during fiscal 2018. With the exception of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
foreign earnings, we do not anticipate any material tax impact from any potential repatriation of previous unremitted foreign earnings.
As of January 31, 2018,2024, our liability for uncertain tax positions (UTP) of $0.6$0.3 million relates to certain U.S. federal and state tax items regarding the interpretation of tax laws and regulations. Judgment is requiredregulations, including a minimal amount of interest and penalties. We include all interest and penalties related to uncertain tax benefits within our income tax provision account. To the extent interest and penalties are not assessed with respect to uncertain tax positions or the uncertainty of deductions in assessing the future, tax consequences of events that have been recognized in our financial statements or tax returns. The final outcomeamounts accrued will be reduced and reflected as a reduction of the futureoverall income 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. The disallowance of the UTP would not materially affect the annual effective tax rate. We do not believe any of the UTP at January 31, 2018 will be recognized within the next twelve months.provision.
We evaluate the likelihood of realization of our deferred tax assets by considering both positive and negative evidence. We believe there is no need for a valuation allowance of the federal net operating losses. We will continue to evaluate our position throughout the year. We maintain a valuation allowance for certain state net operating losses which totaled $1.3$0.6 million atas of January 31, 2018.2024 and October 31, 2023, respectively.
QUANEX BUILDING PRODUCTS CORPORATION 9.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Contingencies
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,Currently, 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 2018.2024. 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.
Spacer Migration
We were notified by certain customers through our German operation that the vapor barrier employed on certain spacer products manufactured prior to March 2014 may permit spacer migration in certain extreme circumstances. This product does not have a specific customer warranty, but we have received claims from customers related to this issue, which we continue to investigate. The balance of the accrual for this matter was $1.3 million and $1.4 million at October 31, 2017 and January 31, 2018. During the three months ended January 31, 2018, we incurred additional claims of $0.5 million, which were offset by payments of $0.5 million. The additional change in the accrual during the three months ended January 31, 2018 reflects the impact of foreign currency exchange rates. We cannot estimate any future liability with regard to unasserted claims. We evaluate this reserve at each balance sheet date. We investigate any claims, but we are not obligated to honor any future claims.
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.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 three months ended January 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 to us and additional payments directly to our external counsel.2000’s. While we believe that our product was not defective and that we would prevail in these commercial sealant product claims if taken to trial, the timing, ultimate resolution and potential impact of these claims is not currently determinable. Nevertheless, after taking into account all currently available information, including our defenses, the advice of our counsel, and the extent and currently-expected availability of our existing insurance coverage, we believe that the eventual outcome of these commercial sealant claims will not have a material adverse effect on our overall financial condition, results of operations or cash flows, and we have not recorded any accrual with regard to these claims.
10. Derivative Instruments
Our derivative activities are subject to the management, direction, and control of the Chief Financial Officer and Chief Executive Officer. Certain transactions in excess of specified levels require further approval from the Board of Directors.
The nature of our business activities requires the management of various financial and market risks, including those related to changes in foreign currency exchange rates. We have historically used foreign currency forwards and options to mitigate or eliminate certain of those risks at our subsidiaries. We use foreign currency contracts to offset fluctuations in the value of accounts receivable and accounts payable balances that are denominated in currencies other than the United States dollar, including the Euro, British Pound and Canadian Dollar. Currently, we do not enter into derivative transactions for speculative or trading purposes. We are exposed to credit loss in the event of nonperformance by the counterparties to our derivative transactions. We attempt to mitigate this risk by monitoring the creditworthiness of our counterparties and limiting our exposure to individual counterparties. In addition, we have established master netting agreements in certain cases to facilitate the settlement of gains and losses on specific derivative contracts.
We have not designated any of our derivative contracts as hedges for accounting purposes in accordance with the provisions under the Accounting Standards Codification Topic 815 "Derivatives and Hedging" (ASC 815). Therefore, changes in the fair value of these contracts and the realized gains and losses are recorded in the unaudited condensed consolidated statements of income (loss) for the three-month periods ended January 31, 2018 and 2017 as follows (in thousands):
|
| | | | | | |
| | Three Months Ended |
| | January 31, |
Location of (losses) gains: | | 2018 | | 2017 |
Other, net | Foreign currency derivatives | (55 | ) | | 144 |
|
We have chosen not to offset any of our derivative instruments in accordance with the provisions of ASC 815. Therefore, the assets and liabilities are presented on a gross basis on the accompanying condensed consolidated balance sheets. Less than $0.1 million of fair value related to foreign currency derivatives was included in prepaid and other current assets as of October 31, 2017. Less than $0.1 million of fair value related to foreign currency derivatives was included in accrued liabilities as of January 31, 2018 and October 31, 2017.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the notional amounts and fair value of outstanding derivative contracts at January 31, 2018 and October 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Notional as indicated | | Fair Value in $ |
| | January 31, 2018 | | October 31, 2017 | | January 31, 2018 | | October 31, 2017 |
Foreign currency derivatives: | | | | | | | | |
Sell EUR, buy USD | EUR | $ | 104 |
| | $ | 1,271 |
| | $ | (1 | ) | | $ | 24 |
|
Sell CAD, buy USD | CAD | 231 |
| | 320 |
| | — |
| | 1 |
|
Sell GBP, buy USD | GBP | 47 |
| | 75 |
| | — |
| | — |
|
Buy EUR, sell GBP | EUR | 36 |
| | 30 |
| | — |
| | (1 | ) |
Buy USD, sell EUR | USD | 1 |
| | — |
| | — |
| | — |
|
Buy GBP, sell EUR | GBP | 1 |
| | — |
| | — |
| | — |
|
For the classification in the fair value hierarchy, see Note 11, "Fair Value Measurement of Assets and Liabilities", included herewith.
11.9. Fair Value Measurement 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 data developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to Level 1 and the lowest priority to Level 3. The three levels of the fair value hierarchy are described below:
•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
•Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
As of January 31, 2018 and October 31, 2017, 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 liabilities as of January 31, 2018 and less than $0.1 million of foreign currency derivatives were included in total assets and total liabilities as of October 31, 2017. 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.
We have recorded land totaling approximately $2.4 million at fair value on a non-recurring basis which is classified as Level 3 measurement as of January 31, 2018 and October 31, 2017. The fair value was based on broker opinions.
Carrying amounts reported on the balance sheet for cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Our outstanding debt is variable rate debt that re-prices frequently, thereby limiting our exposure to significant change in interest rate risk. As a result, the fair value of our debt instrumentsinstrument approximates carrying value at January 31, 2018,2024, and October 31, 20172023 (Level 2 measurement).
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 10, “Stock-Based Compensation - Performance Share Awards.”
We used recognized valuation techniques to determine the preliminary fair value of the assets and liabilities, including the excess earnings method for customer relationships and relief from royalty method for trade names and other technology with a discount rate that reflects the risk of the expected future cash flows (Level 3 measurement). For further information, refer to Note 2, “Acquisition.”
12.10. Stock-Based Compensation
We have established and maintain an Omnibus Incentive Plan (2008(2020 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards, performance restricted stock units, and other stock-based and cash-based awards. The 20082020 Plan is administered by the Compensation and Management Development Committee of the Board of Directors.
The aggregate number of shares of common stock authorized for grant under the 20082020 Plan is 7,650,0003,139,895 as approved by
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 20082020 Plan. We grant restricted stock units to non-employee directors on the first business day of each fiscal year. As approved by the Compensation & Management Development Committee of our Board of Directors annually, we grant stock options,a mix of restricted stock awards, performance shares and/orand performance restricted stock units to officers, management and key employees. We also historically granted stock options to certain officers, directors and key employees. Occasionally, we may make additional grants to key employees at other times during the year.
Restricted Stock Awards
Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a three-year period with service and continued employment as the only vesting criteria. The recipient of the restricted stock award is entitled to all of the rights of a shareholder, except that the award is nontransferable during the vesting period.period and quarterly dividends are not paid until the award vests. The fair value of the restricted stock award is established on the grant date and then expensed over the vesting period resulting in an increase in additional paid-in-capital. Shares are generally issued from treasury stock at the time of grant.
A summary of non-vested restricted stock awards activity during the three months ended January 31, 20182024 is presented below:
| | | | | | | | | | | |
| Restricted Stock Awards | | Weighted-Average Grant Date Fair Value per Share |
Non-vested at October 31, 2023 | 242,300 | | | $ | 22.36 | |
Granted | 72,900 | | | 32.15 | |
Forfeited | (11,800) | | | 22.30 | |
Vested | (66,600) | | | 20.68 | |
Non-vested at January 31, 2024 | 236,800 | | | $ | 25.85 | |
|
| | | | | | |
| Restricted Stock Awards | | Weighted Average Grant Date Fair Value per Share |
Non-vested at October 31, 2017 | 284,300 |
| | $ | 19.66 |
|
Granted | 73,400 |
| | 20.70 |
|
Vested | (61,800 | ) | | 20.28 |
|
Non-vested at January 31, 2018 | 295,900 |
| | $ | 19.79 |
|
The total weighted averageweighted-average grant-date fair value of restricted stock awards that vested during each of the three-month periodsthree months ended January 31, 20182024 and 2017 2023 was $1.3$1.4 million and $1.2$0.9 million, respectively. As of January 31, 2018,2024, total unrecognized compensation cost related to unamortized restricted stock awards was $3.1$4.0 million. We expect to recognize this expense over the remaining weighted averageweighted-average vesting period of 2.12.3 years.
Stock Options
Historically, stock options have been awarded to key employees, officers and non-employee directors. Effective May 2015,In December 2017, the director compensation structure was revisedCompensation & Management Development Committee of the Board of Directors approved a change to eliminate the annuallong-term incentive award program eliminating the grant of stock options to non-employee directors. Officerand replacing this award with a grant of performance restricted stock units and performance shares as further described below. As a result, the final stock options were granted during the fiscal year ended October 31, 2017. Stock options typically vestvested ratably over a three-year period with service and continued employment as the vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of the stock options iswas determined on the grant date and expensed over the vesting period resulting in an
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
increase in additional paid-in-capital. For employees who arewere nearing retirement-eligibility, we recognize stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date. During December 2017, the Compensation & Management 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.
We use a Black-Scholes pricing model to estimate the fair value of stock options. A description of the methodology for the valuation assumptions was disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.2023.
The following table provides a summary of assumptions used to estimate the fair value of our stock options issued during the three-month period ended January 31, 2017.
|
| |
| Three Months Ended |
| January 31, 2017 |
Weighted-average expected volatility | 34.7% |
Weighted-average expected term (in years) | 5.7 |
Risk-free interest rate | 2.0% |
Expected dividend yield over expected term | 1.0% |
Weighted average grant date fair value | $6.25 |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our stock option activity for the three months ended January 31, 2018:2024:
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (000s) |
Outstanding at October 31, 2023 | 107,530 | | | $ | 19.48 | | | | | |
| | | | | | | |
Exercised | (20,280) | | | 19.70 | | | | | |
| | | | | | | |
Outstanding at January 31, 2024 | 87,250 | | | $ | 19.43 | | | 2.2 | | $ | 1,028 | |
Vested at January 31, 2024 | 87,250 | | | $ | 19.43 | | | 2.2 | | $ | 1,028 | |
Exercisable at January 31, 2024 | 87,250 | | | $ | 19.43 | | | 2.2 | | $ | 1,028 | |
|
| | | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (000s) |
Outstanding at October 31, 2017 | 2,152,758 |
| | $ | 17.44 |
| | | | |
Granted | — |
| | — |
| | | | |
Exercised | (176,947 | ) | | 12.61 |
| | | | |
Forfeited/Expired | — |
| | — |
| | | | |
Outstanding at January 31, 2018 | 1,975,811 |
| | $ | 17.88 |
| | 5.2 | | $ | 5,692 |
|
Vested or expected to vest at January 31, 2018 | 1,975,811 |
| | $ | 17.88 |
| | 5.2 | | $ | 5,692 |
|
Exercisable at January 31, 2018 | 1,691,433 |
| | $ | 17.62 |
| | 4.7 | | $ | 5,316 |
|
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. The total intrinsic value of stock options exercised during the three months ended January 31, 20182024 and 20172023 was $1.9 $0.2 million and $0.5 million. The weighted-average grant date fair value of stock options that vested during the three months ended January 31, 2018 and 2017 was $1.5less than $0.1 million, and $1.8 million, respectively. As of January 31, 2018, total unrecognized compensation cost related to stock options was $0.6 million. We expect to recognize this expense over the remaining weighted average vesting period of 1.5 years.
Restricted Stock Units
Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee directors. The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date. Restricted stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued employment as the vesting conditions. Restricted stock units are not considered outstanding shares and do not have voting rights, although the holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares. Once the 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.
As of January 31, 2018, there were no non-vested restricted stock units. During the three-month periodsthree months ended January 31, 20182024 and 2017, 2023, non-employee directors received 18,05026,215 and 24,56038,704 restricted stock units, respectively, at a weighted-average grant date fair value of $21.85$26.70 per share and $15.65,$20.67 per share, respectively, which vested immediately. During the three-month periodsthree months ended January 31, 20182023, 21,774 restricted stock units, which were awarded to key employees, vested. During the three months ended January 31, 2024, we paid $0.1 million and 2017, there were no payments$0.4 million for the comparable prior year to settle vested restricted stock units.
Performance Share Awards
We have awarded annual grants of performance shares to key employees and officers. ThesePerformance share awards cliff vest after a three-year period with servicereturn on net assets (RONA) as the vesting condition and performance measures (relative total shareholder return (R-TSR) and earnings per share (EPS) growth), as vesting conditions. However, the number of shares earned is variable depending on the metrics achieved, and the settlement method is 50%pay out 100% in cash, and 50% in our common stock.are accounted for as liability.
To account for these awards, we have bifurcated the portion subject to a market condition (relative total shareholder return) and the portion subject to an internal performance measure (earnings per share growth). We have further bifurcated these awards based on theThe expected cash settlement method, as the portion expected to settle in stock (equity component) and the portion expected to settle in cash (liability component).
To value the shares subject to the market condition, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be expensed over the three-year term of the award with a credit to additional paid-in-capital. To value the shares subject to the internal performance measure, we used the value of our common stock on the date of grant as the grant-date fair value per share. This amount is being expensed over the three-year term of theshare award with a credit to additional paid-in-capital, and could fluctuate depending on the number of shares ultimately expected to vest based on our assessment of the probability that the performance conditions will be achieved. For both performance conditions, the portion of the award expected to settle in cash is recorded as a liability and is being marked to market over the three-year term of the award and can fluctuate
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 and R-TSRRONA performance metrics:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Grant Date | | Shares Awarded | | Grant Date Fair Value | | Shares Forfeited |
| | | | | | |
| | | | | | |
December 9, 2021 | | 80,900 | | | $ | 22.54 | | | 4,600 | |
December 7, 2022 | | 89,300 | | | $ | 23.49 | | | 4,600 | |
December 7, 2023 | | 72,200 | | | $ | 32.15 | | | — | |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | |
| Grant Date Fair Value |
Grant Date | Shares Awarded | | EPS | | R-TSR | | Shares Forfeited |
December 2, 2015 | 158,100 |
| | $ | 19.31 |
| | $ | 23.72 |
| | 11,100 |
|
January 25, 2016 | 4,300 |
| | 17.46 |
| | 26.65 |
| | — |
|
November 30, 2016 | 186,500 |
| | 19.45 |
| | 26.61 |
| | 2,400 |
|
December 7, 2017 | 146,500 |
| | $ | 20.70 |
| | $ | 21.81 |
| | — |
|
OnIn December 3, 2017, 123,6002023, 122,400 shares vested pursuant to the December 20142020 grant, resulting in the issuance of 25,340 shares of common stock andwhich were settled with a cash payment of $0.6$3.4 million. The November 2016 and December 2017 grants include a return on invested capital (ROIC) metric which, if achieved, could enhance the number of shares that are ultimately issued but cannot exceed the maximum (200%). Due to the uncertainty with regard to achieving this metric, no value has been assigned. In the event and at such time the metric is deemed achievable, compensation expense will begin to be recognized through the remaining vesting period. For the three-month period ended January 31, 2018, we recorded a decrease in compensation expense of $0.6 million which reflects a decrease in the number of shares expected to vest in December 2018 associated with the December 2, 2015 performance share grant, as well as current expense for other outstanding performance share grants. For the three-month period ended January 31, 2017, we recorded compensation expense of $1.0 million related to our performance share awards.
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.
The performance sharesearned, and 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 contingenttherefore not considered outstanding shares. As of January 31, 2018, we have deemed 55,125 shares related to the December 2015 grant of performance shares as probable to vest. We expect to settle these shares in December 2018 by issuing 27,563 shares and paying the value of the equivalent number of shares in cash, along with accrued dividends thereon.
Performance Restricted Stock Units
We awardedaward performance restricted sharestock units to key employees and officers in December 2017.officers. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of shares 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 shares,performance restricted stock units, we utilizedused 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: if absolute total shareholder return is -20%, 50% of the award will vest; at 20% total shareholder return, 100% of the award will vest; and at 50% absolute total shareholder return, 150% of the award will vest. If absolute total shareholder return is below -20%, none of the shares will vest. In accordance with U.S. GAAP, regardless of whether the market performance measure is ultimately met, compensation expense will be recognized.
On December 7, 2017, we awarded 78,200 | | | | | | | | | | | | | | |
Vesting Level | | Vesting Criteria | | Percentage of Award Vested |
Level 1 | | A-TSR greater than or equal to 50% | | 150% |
Level 2 | | A-TSR less than 50% and greater than or equal to 20% | | 100% |
Level 3 | | A-TSR less than 20% and greater than or equal to -20% | | 50% |
Level 4 | | A-TSR less than -20% | | —% |
The following table summarizes our performance restricted share units with astock unit grants and the grant date fair value of $17.76 per share. As offor the A-TSR performance metric:
| | | | | | | | | | | | | | | | | | | | |
Grant Date | | Shares Awarded | | Grant Date Fair Value | | Shares Forfeited |
| | | | | | |
| | | | | | |
December 9, 2021 | | 50,900 | | | $ | 21.06 | | | 3,400 | |
December 7, 2022 | | 51,500 | | | $ | 23.22 | | | 3,100 | |
December 7, 2023 | | 40,700 | | | $ | 30.35 | | | — | |
During the three months ended January 31, 2018, we recorded compensation expense of approximately $0.1 million related to our2024, 49,228 performance share restricted units.stock units vested.
Similar to performance shares, theThe performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excludedexcluded 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 January 31, 2024, we have deemed 58,957 shares related to the December 2021 grant of performance restricted stock units as probable to vest.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED 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 three months ended January 31, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | January 31, |
| | | | | 2024 | | 2023 |
Restricted stock awards | | | | | $ | 317 | | | $ | 438 | |
| | | | | | | |
Restricted stock units | | | | | 1,424 | | | 1,491 | |
Performance share awards | | | | | 569 | | | 2,639 | |
Performance restricted stock units | | | | | 266 | | | 241 | |
Total compensation expense | | | | | $ | 2,576 | | | $ | 4,809 | |
| | | | | | | |
| | | | | | | |
Treasury Shares
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, and 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 chargeThere were no charges to retained earnings of $0.9 million during the three months ended January 31, 2018.2024.
The following table summarizes the treasury stock activity during the three months ended January 31, 2018:
| | | | | |
| | |
| Three Months Ended |
| January 31, 20182024 |
Beginning balanceBalance as of November 1, 20172023 | 2,670,7434,165,839 | |
Restricted stock awards granted | (73,400(72,900) | | )
Performance share awardsrestricted stock units vested | (25,340(49,228) | | )
Stock options exercised | (176,947(20,280) | | )
| |
Balance at January 31, 20182024 | 2,395,0564,023,431 | |
13. Other Income (Loss)
Other income (loss) included under the caption "Other, net" on the accompanying condensed consolidated statements of income (loss), consisted of the following for the three-month periods ended January 31, 2018 and 2017:
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2018 | | 2017 |
| (In thousands) |
Foreign currency transaction gains | $ | 354 |
| | $ | 486 |
|
Foreign currency derivative (losses) gains | (55 | ) | | 144 |
|
Interest income | 15 |
| | 27 |
|
Other | 3 |
| | 4 |
|
Other, net | $ | 317 |
| | $ | 661 |
|
14.11. Segment Information
We present three reportable business segments in accordance with Topic 280-10-50, "Segment Reporting" (ASC 280): (1) North American Engineered Components segment (“NA Engineered Components”),Fenestration, comprising four operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass (IG) spacers, screens, &custom compound mixing, and other fenestration components; (2) European Engineered Components segment (“EU Engineered Components”),Fenestration, comprising our United Kingdom-basedU.K.-based vinyl extrusion business, manufacturing vinyl profiles & conservatories, and the European insulating glass business manufacturing IGinsulating glass spacers; and (3) North AmericanNA Cabinet Components, segment (“NA Cabinet Components”), comprising solely the North Americanour cabinet door and components business acquired in November 2015. Weoperations. Additionally, we maintain an Unallocated Corporate & Other grouping which includes LIFO inventory adjustments, corporate office charges, and inter-segment eliminations, less an allocation of a portion of the general and administrative costs associated with the corporate office which 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 cost. Certain costs are not allocated to the reportable operating segments, but remain in Unallocated Corporate & Other, including transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance, legal, and legalother costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations.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 policiespolicies of our operating segments are the same as those used to prepare the accompanying condensed consolidated financial statements. Corporate general and administrative expense allocated during the three-three month periodsperiod ended January 31, 2018 and 2017 were $5.12024 was $7.3 million and $4.4$4.3 million respectively.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
for the comparable prior year period.
ASC 280Topic 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
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Segment information for the three months ended January 31, 20182024 and 2017,2023, and total assets as of January 31, 20182024 and October 31, 20172023 are summarized in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| NA Eng. Comp. | | EU Eng. Comp. | | NA Cabinet Comp. | | Unallocated Corp. & Other | | Total |
Three Months Ended January 31, 2018 | | | | | | | | | |
Net sales | $ | 102,727 |
| | $ | 33,996 |
| | $ | 55,922 |
| | $ | (979 | ) | | $ | 191,666 |
|
Depreciation and amortization | 7,012 |
| | 2,449 |
| | 3,686 |
| | 126 |
| | 13,273 |
|
Operating income (loss) | 1,611 |
| | 1,264 |
| | (2,877 | ) | | (487 | ) | | (489 | ) |
Capital expenditures | 3,897 |
| | 2,408 |
| | 1,458 |
| | 48 |
| | 7,811 |
|
Three Months Ended January 31, 2017 | | | | | | | | | |
Net sales | $ | 106,083 |
| | $ | 31,569 |
| | $ | 58,630 |
| | $ | (1,186 | ) | | $ | 195,096 |
|
Depreciation and amortization | 9,938 |
| | 2,056 |
| | 3,275 |
| | 137 |
| | 15,406 |
|
Operating income (loss) | 70 |
| | 2,203 |
| | (827 | ) | | (5,287 | ) | | (3,841 | ) |
Capital expenditures | 3,711 |
| | 3,144 |
| | 1,084 |
| | 202 |
| | 8,141 |
|
As of January 31, 2018 | | | | | | | | | |
Total assets | $ | 246,021 |
| | $ | 229,510 |
| | $ | 284,132 |
| | $ | 7,371 |
| | $ | 767,034 |
|
As of October 31, 2017 | | | | | | | | | |
Total assets | $ | 258,315 |
| | $ | 219,622 |
| | $ | 285,457 |
| | $ | 10,485 |
| | $ | 773,879 |
|
During 2017, we transferred two operating plants that manufacture wood products (fenestration and non-fenestration products) from the NA Engineered Components segment to the NA Cabinet Components segment, to better align wood-related products under a common segment management team, which is expected to generate operational efficiencies and synergies. The operating results and total assets presented reflect this transfer as if it occurred on November 1, 2016.
The following table reconciles our segment presentation, as previously reported in our Quarterly Report on Form 10-Q for the three months ended January 31, 2017, to the current presentation (in thousands):
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | NA Fenestration | | | NA Fenestration | | EU Fenestration | | NA Cabinet Components | | Unallocated Corp. & Other | | Total |
| | Three Months Ended January 31, 2017 | As Previously Reported | | Reclassification | | Current Presentation |
| (in thousands) |
NA Engineered Components | | | | | |
| Three Months Ended January 31, 2024 | |
| Three Months Ended January 31, 2024 | |
| Three Months Ended January 31, 2024 | |
Net sales | |
Net sales | |
Net sales | $ | 111,073 |
| | $ | (4,990 | ) | | $ | 106,083 |
|
Depreciation and amortization | 10,078 |
| | (140 | ) | | 9,938 |
|
Operating income (loss) | 301 |
| | (231 | ) | | 70 |
|
Capital expenditures | $ | 3,756 |
| | $ | (45 | ) | | $ | 3,711 |
|
EU Engineered Components | | | | | |
Three Months Ended January 31, 2023 | |
Net sales | |
Net sales | |
Net sales | $ | 31,569 |
| | $ | — |
| | $ | 31,569 |
|
Depreciation and amortization | 2,056 |
| | — |
| | 2,056 |
|
Operating income (loss) | 2,203 |
| | — |
| | 2,203 |
|
Capital expenditures | $ | 3,144 |
| | $ | — |
| | $ | 3,144 |
|
NA Cabinet Components | | | | | |
Net sales | $ | 52,997 |
| | $ | 5,633 |
| | $ | 58,630 |
|
Depreciation and amortization | 3,135 |
| | 140 |
| | 3,275 |
|
Operating income (loss) | (1,058 | ) | | 231 |
| | (827 | ) |
Capital expenditures | $ | 1,039 |
| | $ | 45 |
| | $ | 1,084 |
|
Unallocated Corporate & Other | | | | | |
Net sales | $ | (543 | ) | | $ | (643 | ) | | $ | (1,186 | ) |
Depreciation and amortization | 137 |
| | — |
| | 137 |
|
Operating income (loss) | (5,287 | ) | | — |
| | (5,287 | ) |
Capital expenditures | $ | 202 |
| | $ | — |
| | $ | 202 |
|
As of January 31, 2024 | |
Total assets | |
Total assets | |
Total assets | |
As of October 31, 2023 | |
Total assets | |
Total assets | |
Total assets | |
The following table summarizes the change in the carrying amount of goodwill by reportable business segment for the three months ended January 31, 20182024 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| NA Eng. Comp. | | EU Eng. Comp. | | NA Cabinet Comp. | | Unallocated Corp. & Other | | Total |
Balance as of October 31, 2017 | $ | 38,712 |
| | $ | 69,735 |
| | $ | 113,747 |
| | $ | — |
| | $ | 222,194 |
|
Foreign currency translation adjustment | — |
| | 4,733 |
| | — |
| | — |
| | 4,733 |
|
Balance as of January 31, 2018 | $ | 38,712 |
| | $ | 74,468 |
| | $ | 113,747 |
| | $ | — |
| | $ | 226,927 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NA Fenestration | | EU Fenestration | | NA Cabinet Comp. | | Unallocated Corp. & Other | | Total |
Balance as of October 31, 2023 | $ | 80,105 | | | $ | 63,704 | | | $ | 39,147 | | | $ | — | | | $ | 182,956 | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency translation adjustment | — | | | 2,483 | | | — | | | — | | | 2,483 | |
Balance as of January 31, 2024 | $ | 80,105 | | | $ | 66,187 | | | $ | 39,147 | | | $ | — | | | $ | 185,439 | |
For further details of Goodwill, see Note 4, "Goodwill“Goodwill & Intangible Assets",Assets,” located herewith.
We did not allocate non-operating loss or income tax benefit to the reportable segments. The following table reconciles operating lossincome as reported above to net income (loss) for the three months ended January 31, 20182024 and 2017:2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | January 31, |
| | | | | 2024 | | 2023 |
Operating income | | | | | $ | 7,917 | | | $ | 4,403 | |
Interest expense | | | | | (1,068) | | | (2,259) | |
Other, net | | | | | 1,042 | | | 218 | |
Income tax expense | | | | | (1,642) | | | (453) | |
Net income | | | | | $ | 6,249 | | | $ | 1,909 | |
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2018 | | 2017 |
| (In thousands) |
Operating loss | $ | (489 | ) | | $ | (3,841 | ) |
Interest expense | (2,441 | ) | | (2,160 | ) |
Other, net | 317 |
| | 661 |
|
Income tax benefit | 7,560 |
| | 1,614 |
|
Net income (loss) | $ | 4,947 |
| | $ | (3,726 | ) |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Product Sales
We produce a wide variety of products that are used in the fenestration industry, including window and door systems; accessory trim profiles with real wood veneers and wood grain laminate finishes; window spacer systems; extruded vinyl products; metal fabrication; 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-month periods ended January 31, 2018 and 2017 into general groupings by segment to provide additional information to our shareholders. For all periods presented, this table reflects the reclassification of two operating plants transferred from the NA Engineered Components segment to the NA Cabinet Components segment, as applicable.
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2018 | | 2017 |
| (In thousands) |
NA Engineered Components: | | | |
United States - fenestration | $ | 88,216 |
| | $ | 89,711 |
|
International - fenestration | 7,008 |
| | 6,341 |
|
United States - non-fenestration | 4,147 |
| | 5,831 |
|
International - non-fenestration | 3,356 |
| | 4,200 |
|
| $ | 102,727 |
| | $ | 106,083 |
|
EU Engineered Components: | | | |
United States - fenestration | $ | — |
| | $ | 35 |
|
International - fenestration | 29,869 |
| | 28,905 |
|
International - non-fenestration | 4,127 |
| | 2,629 |
|
| $ | 33,996 |
| | $ | 31,569 |
|
NA Cabinet Components: | | | |
United States - fenestration | $ | 3,445 |
| | $ | 3,332 |
|
United States - non-fenestration | 52,006 |
| | 54,691 |
|
International - non-fenestration | 471 |
| | 607 |
|
| $ | 55,922 |
| | $ | 58,630 |
|
Unallocated Corporate & Other | | | |
Eliminations | $ | (979 | ) | | $ | (1,186 | ) |
| $ | (979 | ) | | $ | (1,186 | ) |
Net sales | $ | 191,666 |
| | $ | 195,096 |
|
15.12. Earnings Per Share
We compute basic earnings (loss) per share by dividing net income (loss) by the weighted averageweighted-average number of common shares outstanding during the period. Diluted earnings per common and potential common shares include the weighted averageweighted-average of additional shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock as
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
determined using the treasury stock method prescribed by U.S. GAAP and contingent shares associated with performance share awards, if dilutive.
Basic and diluted earnings per share for the three-month periodthree months ended January 31, 2018 was2024 and 2023 were calculated as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| Net Income | | Weighted-Average Shares | | Per Share |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Three Months Ended January 31, 2024 | | | | | |
Basic earnings per common share | $ | 6,249 | | | 32,825 | | | $ | 0.19 | |
Effect of dilutive securities: | | | | | |
Stock options | — | | | 35 | | | — | |
Restricted stock awards | — | | | 124 | | | — | |
| | | | | |
Performance restricted stock units | — | | | 59 | | | — | |
Diluted earnings per common share | $ | 6,249 | | | 33,043 | | | $ | 0.19 | |
Three Months Ended January 31, 2023 | | | | | |
Basic earnings per common share | $ | 1,909 | | | 32,951 | | | $ | 0.06 | |
Effect of dilutive securities: | | | | | |
Stock options | — | | | 32 | | | — | |
Restricted stock awards | — | | | 111 | | | — | |
| | | | | |
Performance restricted stock units | — | | | 43 | | | — | |
Diluted earnings per common share | $ | 1,909 | | | 33,137 | | | $ | 0.06 | |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | |
| Three Months Ended January 31, 2018 |
| Net Income | | Weighted Average Shares | | Per Share |
Basic earnings per common share | $ | 4,947 |
| | 34,662 |
| | $ | 0.14 |
|
Effect of dilutive securities: | | | | | |
Stock options | — |
| | 442 |
| | |
Restricted stock awards | — |
| | 154 |
| | |
Performance shares | — |
| | 28 |
| | |
Diluted earnings per common share | $ | 4,947 |
| | 35,286 |
| | $ | 0.14 |
|
Basic and diluted loss per share was $0.11 for the three months ended January 31, 2017. The computationWe do not include equity instruments in our calculation of diluted earnings per share excludes outstanding stock options and other common stock equivalents when their inclusionif those instruments would be anti-dilutive. This is always the case when an entity incurs a net loss. During the three-month period ended January 31, 2017, 420,603 shares of common stock equivalents and 121,857 shares of restricted stock, were excluded from the computation of diluted earnings per share. In addition, 62,650 potentially dilutive contingent shares related to performance share awards for the three-month period ended January 31, 2017 were excluded.
We had common stock equivalents that were potentially dilutive in future earnings per share calculations of 108,267 and 1,033,246 for the three-month periods ended January 31, 2018 and 2017, respectively. Such dilution will beis dependent on the excess of the market price of our stock over the exercise price and other components of the treasury stock method.
16. New Accounting Guidance
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This guidance prescribes a methodology to determine when revenue is recognizable and constitutes a principles-based approach to revenue recognition based on the consideration to which the entity expects to be entitled in exchange for goods or services. In addition, this guidance requires additional disclosure in the notes to the financial statements with regard to the methodology applied. This pronouncement will essentially supersede and replace existing revenue recognition rules in U.S. GAAP, including industry-specific guidance. We expect to adopt this guidance in fiscal 2019. We are currently evaluating the impact on our consolidated financial statements and have begun collecting the population of revenues by contract type for further evaluation.
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This amendment simplifies the subsequent measurement of inventories by replacing the lower of cost or market revaluation method with the lower of cost and net realizable value test. This guidance is applicable to all inventories measured using methods other than last-in first-out method and the retail inventory method. We adopted the provisions of ASU 2016-09 effective November 1, 2017, with There were no material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance prescribes the presentation of excess tax benefits or deficiencies derived from book and tax timing differences associated with stock-based compensation arrangements and certain related statement of cash flow implications. We adopted the provisions of ASU 2016-09 effective November 1, 2017, as noted below with no significant impact on our consolidated financial statements.
Excess tax benefits or deficiencies for share-based payments are to be recorded in the income tax provision, rather than as an adjustment to additional paid-in-capital. We made this change on a prospective basis;
Cash flows related to excess tax benefits or deficiencies are included in net cash provided by operating activities rather than as a financing activity. We adopted this change retrospectively, which resulted in an increase to net cash provided by operating activities and a corresponding decrease to net cash provided by financing activities of less than $0.1 millionanti-dilutive instruments for the three months ended January 31, 2017;2024 and 2023.
Cash paid
13. New Accounting Guidance
From time to taxing authorities when withholding shares from an employee’s vestingtime, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or exerciseother standards setting bodies that we adopt as of equity-based compensation awards for tax-withholding purposes is to be classified as net cash used in financing activities rather than as an operating activity.the specified effective date. We adopted this change retrospectively, which resulted in an increase to net cash provided by operating activities and a corresponding decrease to net cash provided by financing activities of $1.0 million fordid not adopt any new accounting pronouncements during the three months ended January 31, 2017;2024.
Accounting Standards Not Yet Adopted
In November 2023, the FASB issued “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 with early adoption is permitted. The guidance is to be applied retrospectively to all prior periods presented in the financial statements. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.
In December 2023, the FASB issued “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which includes updates to the income tax disclosures related to the rate reconciliation and disaggregation of income taxes paid by jurisdiction. The amendments are effective for fiscal years beginning after December 15, 2024 with early adoption permitted. The amendments should be applied prospectively, however retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
We elected to continue to withhold shares associated with stock-based compensation vesting or exercises to satisfy the minimum statutory tax withholding requirements, rather than electing to withhold at a higher rate; and
We elected to continue to estimate forfeitures rather than account for forfeitures as they occur.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This amendment requires disclosure of the accounting policy for releasing income tax effects from accumulated other comprehensive income. It also provides an option for entities to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. We elected to early adopt this ASU effective November 1, 2017. We record income tax effects related to our unrecognized pension obligations in accumulated other comprehensive income as discussed in our Annual Report on Form 10-K for the year ended October 31, 2017. We have not elected to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.
Unless the context indicates otherwise, references to "Quanex"“Quanex”, the "Company"“Company”, "we"“we”, "us"“us” and "our"“our” refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries.
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 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,conditions, particularly in the new home construction, and residential remodeling and replacement (R&R) activity markets in the United States, United Kingdom, Germany and Germany;elsewhere;
•changes in non-pass-through raw material costs;
•changes in domestic and international economic conditions;
•changes in availability and prices of raw material including inflationary pressures and supply chain challenges, which could be exacerbated by political or global unrest such as the current military conflicts in Ukraine and Gaza;
•our ability to attract and retain skilled labor;
•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;costs and the availability of energy;
•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 a good relationshiprelationships with our suppliers, subcontractors, and key customers; and
•the resolution of litigation and other legal proceedings.
For information on additional factors that could cause actual results to differ materially, please refer to the section entitled “Item 1A. Risk Factors”Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.2023.
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 StatesU.S. 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of January 31, 2018,2024, and for the three-month periodsthree months ended January 31, 20182024 and 2017,2023, included elsewhere herein. For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.2023.
Our Business
We manufacture components for 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 custom mixing, solar panel sealants, trim moldings, vinyl decking, vinyl fencing, customized compounds, water retention barriers, and conservatory roof components. We use low-cost, short lead-time 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 United KingdomU.K. and Germany, as well as through sales and marketing efforts in other countries.
We currently have three reportable business segments: (1) North American Engineered Components segment (“NA Engineered Components”), comprising four operating segments primarily focused on the fenestration market in North America manufacturing vinyl profiles, IG spacers, screens & other fenestration components; (2) European Engineered Components segment (“EU Engineered Components”), comprising our United Kingdom-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 cabinet door and components operations. We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on performance of our common stock and other factors, certain severance and legal costs not allocable to our operating segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations. 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. The accounting policies of our operating segments are the same as those used to prepare our accompanying condensed consolidated financial statements.
In an effort to focus on protecting margins and improving cash flows, we implemented a strategy to reduce our sales volume with certain low-margin customers. During 2017, we rationalized capacity and closed two United States vinyl plants and two cabinet door plants, relocating assets to improve overall operational efficiency. For the three-month periods ended January 31, 2018 and 2017, we incurred $0.4 million and $1.1 million of expense, respectively, associated with these restructuring efforts, and recognized $2.5 million of accelerated depreciation and amortization associated with related assets during the three month period ended January 31, 2017.
We continue to invest in organic growth initiatives and we intend to continue to pursueevaluating business acquisitions that allow us to expand our existing fenestration and cabinet component footprint, enhance our product offerings, provide new complementary technology, enhance our leadership position within the markets we serve and expand into new markets or service lines. We have disposed of non-core businesses in the past, and continue to evaluate our business portfolio to ensure that we are investing in markets where we believe there is potential future growth.
We currently have three reportable business segments: (1) North American Fenestration segment (“NA Fenestration”), comprising four operating segments, manufacturing vinyl profiles, IG spacers, screens, custom compound mixing, 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, legal, and other 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 condensed consolidated financial statements.
Recent Transactions and Events
On December 22, 2017, President Trump signedNovember 1, 2022, we entered into law a sweeping tax reform bill which includesan Asset Purchase Agreement with LMI and the following provisions which impact United States corporations: (1) reductionequity owners of LMI, Lauren International, Ltd. and Meteor-US-Beteiligungs GMBH. Under the Purchase Agreement, we acquired substantially all of the statutory federal corporate tax rate from 35%operating assets comprising LMI’s polymer mixing and rubber compound production business and also agreed to 21%; (2) shiftingassume certain liabilities relating to a territorial tax systemthe Acquisition. As consideration for the Purchased Assets, we paid $91.3 million in which foreign earnings could be repatriated through a 100% dividends received deduction; (3) imposing a one-time tax on un-repatriated earningscash utilizing funds borrowed under our Credit Facility. In connection with the Acquisition, we amended our existing finance lease with Lauren Real Estate Holding LLC for the purpose of 15.5% on cashadding an additional lease renewal option and 8% on other assets; (4) doubling bonus depreciation to 100% for five years and allowing used property to qualify; (5) limiting net interest expense deductions to 30%increasing rental space by approximately 60,000 square feet of adjusted taxable income; (6) limiting NOL deductions to 80% of taxable income; and (7) repealing the corporate alternative minimum tax. We have made an initial assessment of this new tax law and recorded a discrete benefit of $6.5 million during the three months ended January 31, 2018. We expect the effective tax rate for fiscal 2018 to be approximately 9%, or 24% excluding these discrete items.
In October 2017, we sold a wood-flooring business in Shawano, Wisconsin,rental space which was deemed to be non-core. We recorded a loss of $1.6 million in conjunction with this sale, and have recorded a receivable of $1.6 million which we expect to collect over a five year term based on a percentage of sales with a guaranteed minimum under the agreement. Pursuantadded to the agreement, we will313,595 square feet of rentable area located in Cambridge, Ohio.
U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the military conflicts currently ongoing in Ukraine and Gaza. Although the length and impact of these ongoing military conflicts are highly unpredictable, the conflicts could lead to market or operational disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. Russia, Europe’s largest provider of natural gas, has significantly reduced the export of natural gas compared to the beginning of the conflict resulting in the increase in natural gas prices and the potential for natural gas shortages. In addition, one of the suppliers of a vapor barrier used in the
production of our insulating glass spacers is located in Israel and may experience a disruption as a result of the ongoing conflict in Gaza. If these trends continues, this would not only negatively impact our European manufacturing facilities, this may also impact our customers and their demand for our products. We continue to monitor these situations and their impact on our business.
The conflicts in Ukraine and Gaza and their impacts on the global economy, including inflation and the price of raw materials, supply woodchain disruptions, and the volatility in interest rates including home mortgage rates, are unpredictable and there may be developments outside our control requiring us to this plant throughout fiscal 2018 at cost.adjust our operating plan.
Market Overview and Outlook
We believe the primary drivers of our operating results continue to be North American new home construction and residential remodeling and replacement (R&R) 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 United States. To assess the housing market in the United Kingdom, we use published reports by D&G Consulting, a consulting and research firm.U.S. We obtain market data from Freedonia Group and Catalina Research, and KCMA, each a consulting and research firm, for insight into the United StatesU.S. residential wood cabinet demand.
Reports and forecasts from these sources indicate continued growth inIn February 2024, the markets we serve. The NAHB has forecasted calendar-year housing starts (excluding manufactured units) to remain stablebe 1.4 million in 2018the 2024 and increase slightly in 2019.2025 calendar-years. In February 2024, the Ducker forecast indicated that total window shipments in the R&R market are expected to increase approximately 2% annually through 2019. Derived from reports published by Ducker, the overall growthdecrease 7.6% in window shipments for the trailing twelve-month period ended December 31, 2017 was 3.6%. During this period, growthcalendar-year 2023 and 1.2% in new construction increased 5.8%, while growth in R&R activity increased 2.0%. Growth in new construction continues to outpace the growth in R&R. D&G Consulting forecasts an increase in housing in the United Kingdom through 2020. Catalina Research estimates residential semi-custom cabinet demand in the U.S. to grow between 4% to 6% annually through 2020.2024.
We utilize severalSeveral commodities in our business for whichare subject to pricing can fluctuate,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 baseimpact of pass-through price changes for our primary commodities with our customers commensurate with the market at large. Our long-termlong-term exposure to these price fluctuations is somewhat mitigated due to the contractual component of the adjuster program.programs. 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 through surcharges.recover.
Our business continuesThe global economy remains uncertain due to becurrency 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 by fluctuationsthe global financial markets, which may have contributed to significant changes in foreign currencies. We continue to monitor our exposure to changes in exchange rates as the United States dollar has weakened recently compared to other currencies where we have operations, including the United Kingdom.rates.
Results of Operations
Three Months Ended January 31, 20182024 Compared to Three Months Ended January 31, 20172023
| | | Three Months Ended January 31, |
| Three Months Ended January 31, | | | Three Months Ended January 31, |
| 2018 | | 2017 | | Change $ | | % Variance | | 2024 | | 2023 | | Change $ | | % Variance |
| (Dollars in millions) | | (Dollars in thousands) |
Net sales | $ | 191.7 |
| | $ | 195.1 |
| | $ | (3.4 | ) | | (2 | )% | Net sales | $ | 239,155 | | | $ | | $ | 261,916 | | | $ | | $ | (22,761) | | | (9) | | (9) | % |
Cost of sales (excluding depreciation and amortization) | 154.4 |
| | 154.9 |
| | (0.5 | ) | | — | % | Cost of sales (excluding depreciation and amortization) | 187,723 | | | 210,149 | | 210,149 | | | (22,426) | | (22,426) | | | (11) | | (11) | % |
Selling, general and administrative | 24.1 |
| | 27.5 |
| | (3.4 | ) | | 12 | % | Selling, general and administrative | 32,363 | | | 36,744 | | 36,744 | | | (4,381) | | (4,381) | | | (12) | | (12) | % |
Restructuring charges | 0.4 |
| | 1.1 |
| | (0.7 | ) | | 64 | % |
| Depreciation and amortization | 13.3 |
| | 15.4 |
| | (2.1 | ) | | 14 | % |
Operating loss | $ | (0.5 | ) | | $ | (3.8 | ) | | $ | 3.3 |
| | 87 | % |
Depreciation and amortization | |
Depreciation and amortization | | 11,152 | | | 10,620 | | | 532 | | | 5 | % |
| Operating income | |
Operating income | |
Operating income | | 7,917 | | | 4,403 | | | 3,514 | | | 80 | % |
Interest expense | (2.4 | ) | | (2.2 | ) | | (0.2 | ) | | (9 | )% | Interest expense | (1,068) | | | (2,259) | | (2,259) | | | 1,191 | | 1,191 | | | (53) | | (53) | % |
Other, net | 0.3 |
| | 0.7 |
| | (0.4 | ) | | (57 | )% | Other, net | 1,042 | | | 218 | | 218 | | | 824 | | 824 | | | 378 | | 378 | % |
Income tax benefit | 7.6 |
| | 1.6 |
| | 6.0 |
| | 375 | % |
Net income (loss) | $ | 5.0 |
| | $ | (3.7 | ) | | $ | 8.7 |
| | 235 | % |
Income tax expense | | Income tax expense | (1,642) | | | (453) | | | (1,189) | | | 262 | % |
| Net income | |
| Net income | |
| Net income | | $ | 6,249 | | | $ | 1,909 | | | $ | 4,340 | | | 227 | % |
Our period-over-period results by reportable segment follow.
Changes Related to Operating LossIncome by Reportable Segment:
NA Engineered ComponentsFenestration
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended January 31, |
| 2024 | | 2023 | | $ Change | | % Variance |
| (Dollars in thousands) |
Net sales | $ | 147,995 | | | $ | 152,980 | | | $ | (4,985) | | | (3)% |
Cost of sales (excluding depreciation and amortization) | 118,368 | | | 124,717 | | | (6,349) | | | (5)% |
Selling, general and administrative | 15,910 | | | 13,295 | | | 2,615 | | | 20% |
| | | | | | | |
Depreciation and amortization | 5,475 | | | 5,245 | | | 230 | | | 4% |
Operating income | $ | 8,242 | | | $ | 9,723 | | | $ | (1,481) | | | (15)% |
Operating income margin | 6 | % | | 6 | % | | | | |
|
| | | | | | | | | | | | | |
| Three Months Ended January 31, |
| 2018 | | 2017 | | $ Change | | % Variance |
| (Dollars in millions) |
Net sales | $ | 102.7 |
| | $ | 106.0 |
| | $ | (3.3 | ) | | (3)% |
Cost of sales (excluding depreciation and amortization) | 80.0 |
| | 82.0 |
| | (2.0 | ) | | 2% |
Selling, general and administrative | 13.8 |
| | 13.5 |
| | 0.3 |
| | (2)% |
Restructuring charges | 0.3 |
| | 0.5 |
| | (0.2 | ) | | 40% |
Depreciation and amortization | 7.0 |
| | 9.9 |
| | (2.9 | ) | | 29% |
Operating income | $ | 1.6 |
| | $ | 0.1 |
| | $ | 1.5 |
| | 1,500% |
Operating income margin | 2 | % | | — | % | | | | |
Net Sales. Net Net sales decreased $3.3$5.0 million, or 3%, for the three months ended January 31, 20182024 compared to the same period in 2017. On2023, which was primarily driven by a year-over-year basis, we experienced a $3.0$4.3 million decrease in sales attributablevolumes mainly due to volume,softer market demand and a decrease of $1.0return to normal seasonality and a $0.7 million related to price, partially offset by an increase of $0.9 million related to surcharges for commodities, particularly surcharge revenue for resin used in our vinyl business. The decrease in volume is primarily driven by our strategy to shed lower margin business at our United States vinyl business contributing to the loss of a major customer during 2017, as well as the sale of our wood flooring business on October 31, 2017. These volume declines were partially offset by new volume for our insulating spacerprice and window components businesses.raw material surcharges.
Cost of Sales. The cost of sales decreased $2.0 million, or 2%, when comparing the three months ended January 31, 2018 to the same period in 2017. Corresponding with the net sales discussion above, cost of sales was impacted by changes in sales volume and product mix resulting in lower material and labor costs year-over-year, partially offset by normal wage inflation and higher health insurance costs.
Selling, General and Administrative. Selling, general and administrative expenses increased $0.3 million, or 2% when comparing the three months ended January 31, 2018 to the same period in 2017. This increase was primarily due to an increase in the allocation of corporate expenses year-over-year of $0.4 million.
Restructuring Charges. Restructuring charges of $0.3 million primarily relate to facility lease expenses related to two vinyl extrusion plants which were closed in November 2016 and January 2017 in the United States which have not been sublet or otherwise exited as of January 31, 2018.
Depreciation and Amortization. Depreciation and amortization expense decreased $2.9 million, or 29% when comparing the three-month periods ended January 31, 2018 and 2017. The decrease reflects the impact of restructuring efforts in 2017 which included incremental depreciation of $1.6 million associated with an October 2016 change in estimate of the remaining service lives of assets displaced or abandoned, and accelerated amortization of $0.9 million related to a change in estimate for certain related intangible assets. The incremental depreciation expense associated with property, plant and equipment placed into service during the trailing twelve months ended January 31, 2018, was largely offset by the run-off of depreciation expense associated with existing assets and disposals during this period.
|
| | | | | | | | | | | | | |
| Three Months Ended January 31, |
| 2018 | | 2017 | | $ Change | | Variance % |
| (Dollars in millions) |
Net sales | $ | 34.0 |
| | $ | 31.6 |
| | $ | 2.4 |
| | 8% |
Cost of sales (excluding depreciation and amortization) | 24.8 |
| | 22.5 |
| | 2.3 |
| | (10)% |
Selling, general and administrative | 5.5 |
| | 4.8 |
| | 0.7 |
| | (15)% |
Depreciation and amortization | 2.4 |
| | 2.1 |
| | 0.3 |
| | (14)% |
Operating income | $ | 1.3 |
| | $ | 2.2 |
| | $ | (0.9 | ) | | (41)% |
Operating income margin | 4 | % | | 7 | % | | | | |
Net Sales. Net sales increased $2.4 million when comparing the three months ended January 31, 2018 to the same period in 2017. This increase reflects a $3.1 million favorable impact associated with changes in foreign exchange rates. Excluding the foreign exchange impact, revenue decreased $0.7 million, primarily due to lower volumes of $1.8 million due to the intentional shed of some lower margin customers at HLP, partially offset by an increase in price of $1.1 million.
Cost of Sales. The cost of sales increased $2.3 million, or 10%, for the three months ended January 31, 2018 compared to the same period in 2017. Excluding the impact of foreign exchange rate changes noted above, decreases in cost of goods sold due to lost volumes were partially offset by higher material costs, particularly resin at HLP.
Selling, General and Administrative. Selling, general and administrative expense increased $0.7 million, for the three months ended January 31, 2018 compared to the same period in 2017. The increase was primarily attributable to normal wage inflation, higher selling costs and the effects of foreign currency exchange rate changes, and an increase in the allocation of corporate expenses year-over-year of $0.2 million.
Depreciation and Amortization. Depreciation and amortization expense increased $0.3 million for the three months ended January 31, 2018 compared to the same period in 2017. The increase reflects depreciation and amortization expense associated with property, plant and equipment placed into service during the trailing twelve months ended January 31, 2018 and, to a lesser extent, the effect of changes in exchange rates.
|
| | | | | | | | | | | | | |
| Three Months Ended January 31, |
| 2018 | | 2017 | | $ Change | | Variance % |
| (Dollars in millions) |
Net sales | $ | 55.9 |
| | $ | 58.6 |
| | $ | (2.7 | ) | | (5)% |
Cost of sales (excluding depreciation and amortization) | 50.2 |
| | 51.3 |
| | (1.1 | ) | | 2% |
Selling, general and administrative | 4.8 |
| | 4.3 |
| | 0.5 |
| | (12)% |
Restructuring charges | 0.1 |
| | 0.6 |
| | (0.5 | ) | | 83% |
Depreciation and amortization | 3.7 |
| | 3.2 |
| | 0.5 |
| | (16)% |
Operating loss | $ | (2.9 | ) | | $ | (0.8 | ) | | $ | (2.1 | ) | | (263)% |
Operating loss margin | (5 | )% | | (1 | )% | | | | |
Net Sales. Net sales decreased $2.7$6.3 million, or 5%, for the three months ended January 31, 20182024 as compared to the same period in 2017. On a year-over-year basis, we experienced a $3.8 million decrease in sales attributable to volume, which was partially offset by an increase in price of $0.5 million and a $0.6 million increase in revenue associated with raw material surcharges. Contributing to the decrease in volume was the intentional shed of lower margin business in 2017, the closure of plants in Mexico and Lansing, Kansas in 2017, and slower than expected activity levels for some OEMs.
2023. Cost of Sales. The costsales, including labor, decreased primarily due to lower volumes and deflation of sales decreased $1.1raw materials during the period.
Selling, General and Administrative. Selling, general and administrative expenses increased $2.6 million, or 2%20%, for the three months ended January 31, 20182024 as compared to the same period in 2023. The increase is primarily due to increases in labor costs year-over-year.
EU Fenestration
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended January 31, |
| 2024 | | 2023 | | $ Change | | Variance % |
| (Dollars in thousands) |
Net sales | $ | 49,437 | | | $ | 54,952 | | | $ | (5,515) | | | (10)% |
Cost of sales (excluding depreciation and amortization) | 31,703 | | | 37,703 | | | (6,000) | | | (16)% |
Selling, general and administrative | 7,745 | | | 7,505 | | | 240 | | | 3% |
Depreciation and amortization | 2,558 | | | 2,348 | | | 210 | | | 9% |
Operating income | $ | 7,431 | | | $ | 7,396 | | | $ | 35 | | | —% |
Operating income margin | 15 | % | | 13 | % | | | | |
Net Sales.Net sales decreased $5.5 million, or 10%, comparing the three months ended January 31, 2024 to the same period in 2023, which was primarily driven by a $6.8 million decrease in volumes largely due to softer market demand and a return to normal seasonality, partially offset by $1.0 million of foreign currency rate change and $0.3 million of base price increases.
Cost of Sales. The cost of sales decreased $6.0 million, or 16%, for the three months ended January 31, 2024 compared to the same period in 2023. Cost of sales decreased primarily due to a decrease in volumes, deflation in the price of raw materials and foreign currency impacts.
Selling, General and Administrative. Selling, general and administrative expense increased $0.2 million, or 3%, for the three months ended January 31, 2024 compared to the same period in 2023. The increase is primarily due to increases in labor costs year-over-year.
NA Cabinet Components
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended January 31, |
| 2024 | | 2023 | | $ Change | | Variance % |
| (Dollars in thousands) |
Net sales | $ | 43,137 | | | $ | 54,674 | | | $ | (11,537) | | | (21)% |
Cost of sales (excluding depreciation and amortization) | 38,743 | | | 48,056 | | | (9,313) | | | (19)% |
Selling, general and administrative | 5,126 | | | 4,873 | | | 253 | | | 5% |
| | | | | | | |
Depreciation and amortization | 3,065 | | | 2,934 | | | 131 | | | 4% |
| | | | | | | |
Operating loss | $ | (3,797) | | | $ | (1,189) | | | $ | (2,608) | | | 219% |
Operating loss margin | (9) | % | | (2) | % | | | | |
Net Sales. Net sales decreased $11.5 million, or 21%, for the three months ended January 31, 2024 compared to the same period in 2023, which was driven by a $6.4 million decrease in volumes due to softer market demand driven by weaker consumer confidence and a $5.1 million decrease in raw material indexes.
Cost of Sales. Cost of sales decreased $9.3 million, or 19%, for the three months ended January 31, 2024 compared with the same period in 2017. This decrease correlates with2023, primarily as a 5% decrease in sales as discussed above. Margins were unfavorably impacted by higher wood and material costs which could not be recovered through surcharges due to timing lags, higher labor and benefit costs, and the overall product mix.result of lower volumes year-over-year.
Selling, General and Administrative. Selling, general and administrative expense increased $0.5$0.3 million, or 5%, for the three months endedended January 31, 20182024 compared to the same period in 2017, and related to some additional administrative headcount, normal wage inflation, and higher medical insurance and employee benefit costs, as well as higher corporate allocations year-over-year of $0.2 million.
Restructuring Charges. Restructuring charges of $0.1 million for the three months ended January 31, 2018 primarily represent costs associated with a Kansas plant closure effected in September 2017. Restructuring charges of $0.6 million in the three months ended January 31, 2017 represent equipment moving and other related costs associated with the Mexican plant closure effected in October 2016.
Depreciation and Amortization. Depreciation and amortization expense increased $0.5 million for the three months ended January 31, 2018 compared with the same period in 2017.2023. This increase reflects incremental depreciation expense associated with assets placedis primarily due to due to increases in service during the trailing twelve months ended January 31, 2018, as well as accelerated depreciation expense associated with a change in estimate for useful liveslabor costs year-over-year.
Unallocated Corporate & Other
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended January 31, |
| 2024 | | 2023 | | $ Change | | Variance % |
| (Dollars in thousands) |
Net sales | $ | (1,414) | | | $ | (690) | | | $ | (724) | | | 105% |
Cost of sales (excluding depreciation and amortization) | (1,091) | | | (327) | | | (764) | | | 234% |
Selling, general and administrative | 3,582 | | | 11,071 | | | (7,489) | | | (68)% |
Depreciation and amortization | 54 | | | 93 | | | (39) | | | (42)% |
Operating loss | $ | (3,959) | | | $ | (11,527) | | | $ | 7,568 | | | (66)% |
|
| | | | | | | | | | | | | |
| Three Months Ended January 31, |
| 2018 | | 2017 | | $ Change | | Variance % |
| (Dollars in millions) |
Net sales | $ | (0.9 | ) | | $ | (1.1 | ) | | $ | 0.2 |
| | 18% |
Cost of sales (excluding depreciation and amortization) | (0.6 | ) | | (0.9 | ) | | 0.3 |
| | (33)% |
Selling, general and administrative | — |
| | 4.9 |
| | (4.9 | ) | | 100% |
Depreciation and amortization | 0.2 |
| | 0.2 |
| | — |
| | —% |
Operating loss | $ | (0.5 | ) | | $ | (5.3 | ) | | $ | 4.8 |
| | 91% |
Net Sales. Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the three-month periodsthree months ended January 31, 20182024 and 2017. The change between periods reflects the amount of inter-segment sales.2023.
Cost of Sales. Cost of sales for Unallocated Corporate & Other consists of the elimination of inter-segment sales, profit in inventory, LIFO reserve adjustments and other costs. For
Selling, General and Administrative. Selling, general and administrative expenses decreased $7.5 million, or 68%, for the three months ended January 31, 20182024 compared to the same period in 2023. This decrease is primarily attributable to a decrease in transaction fees and 2017,compensation expense including the changevaluations of $0.3 million was primarilyour stock-based compensation awards during the three months ended January 31, 2024 as compared to the prior year period.
Changes related to Non-Operating Items:
Interest Expense. Interest expense decreased $1.2 million for the eliminationthree months ended January 31, 2024 compared to the same period in 2023 primarily as a result of inter-segment sales.lower borrowings outstanding during the three months ended January 31, 2024 as compared to the prior year period.
Selling, General and AdministrativeIncome Taxes. Selling, general and administrative expenses decreased $4.9We recorded income tax expense of $1.6 million on pre-tax income of $7.9 million for the three months ended January 31, 2018 compared to the same period in 2017. This decrease is partially attributable to2024, an increase in corporate costs allocated to the operating segments year-over-yeareffective rate of $0.8 million. Excluding this allocation, selling, general20.8%, and administrative income tax expense declined $4.1 million. Of this decrease, $3.4 of $0.5 million relates to stock based compensation, reflecting revised estimateson a pre-tax income of performance shares expected to vest in December 2018 pursuant to the December 2015 grant, and the composition of the current long-term incentive awards. The December 2018 grant did not include stock options. The results for the three-months ended January 31, 2017 include a charge of $1.2 million primarily associated with options granted to retirement-eligible participants which vested immediately. In addition, we recorded a $0.9 million decrease in professional fees year-over-year related to reimbursement of legal costs incurred to defend claims of an alleged defect in a commercial sealant product, as described in Note 9, "Contingencies," to the accompanying unaudited condensed consolidated financial statements contained elsewhere herein. Partially offsetting those declines was an increase in salaries associated with increased headcount and wage inflation and related incentive accruals.
Depreciation and Amortization. Depreciation and amortization expense remained flat for the three months ended January 31, 2018 compared to the same period in 2017. Relatively few new assets were placed in service at corporate during the trailing twelve months ended January 31, 2018.
Changes related to Non-Operating Items:
Interest Expense. Interest expense increased $0.2$2.4 million for the three months ended January 31, 2018 compared to the same period2023, an effective rate of 19.2%.The increase in 2017. This increase is primarily attributable to higher interest rates on our revolving credit facilities and the addition of the manufacturing facility lease at HLP, offset somewhat by a lower average outstanding debt balance.
Other, net. The decrease in other, net of $0.4 million at January 31, 2018 compared to the same period in 2017 relates primarily to changes in net foreign exchange transaction gains.
Income Taxes. Our estimated annual effective tax rates for the three-month periods ended January 31, 2018 and 2017 were 24% and 30%, respectively. The change in the annual rate was due to the Tax Cuts and Jobs Act (the Act) which was signed into law on December 22, 2017. The Act reduced our federal income tax rate from 35% to 23.3% forexpense year-over-year was primarily driven by the fiscal year ending October 31, 2018. Discrete items impacting the income tax benefit for the three months ended January 31, 2018 were a benefit of $7.7 million for the re-measurement of our deferred income tax assets and liabilities due to the decreasedifferences in the federal corporate income tax rate, a benefit of $0.3 million for the true up of our accruals and related deferred taxes from prior year filings and settled tax audits, and a benefit of $0.1 million for excess tax benefits 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.discrete items.
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.
We maintain a $450.0 million credit agreement comprising a $150.0 million Term Loan A and a $300.0$325.0 million revolving credit facility (collectively, the(the Credit Agreement). The Credit AgreementFacility) that matures in 20212027 (5-year term) and requires interest payments calculated at our election anda variable market rate depending upon our Consolidated Net Leverage Ratio, at either a Base Rate plus an applicable margin (0.50% to 1.25%) or the LIBOR Rate plus an applicable margin (1.50% to 2.25%).Ratio. The applicable rate during the three months ended January 31, 20182024 was LIBORRFR Rate + 2.00%1.25%. Our cost of capital could increase depending upon the Consolidated Net Leverage Ratio at the end of any given quarter. In addition to the ConsolidatedConsolidated Net Leverage Ratio covenant, we are required to meet a Consolidated Fixed ChargeInterest Coverage Ratio covenant, and there are limitations on certain transactions including our ability to incur indebtedness, incur liens, dispose of material assets, acquire businesses, make restricted payments and pay dividends (limited to $10.0$25.0 million per year). We are amortizing deferred financing fees of $2.0$1.1 million straight-line over the remaining term of the facility. For further details of the Credit Facility, refer to Note 5, “Debt and Finance Lease Obligations” to the accompanying unaudited condensed consolidated financial statements contained elsewhere herein.
As of January 31, 2018,2024, we had $13.8$44.4 million of cash and equivalents, $218.5$10.0 million outstanding under the Credit Agreement, $5.3Facility, $5.1 million of outstanding letters of credit and $19.6$55.2 million outstanding under capitalfinance leases and other debt. Of the $55.2 million outstanding under finance leases and other debt, $51.7 million relates to real estate leases. We had $211.2$309.9 million available for use under the Credit AgreementFacility at January 31, 2018.2024.
During December 2021, our Board of Directors approved a stock repurchase program that authorized the repurchase of up to $75.0 million worth of shares of our common stock. Repurchases under the program will be made in open market transactions or privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. During the three months ended January 31, 2024, we did not purchase any shares under this program and as of
January 31, 2024 we had a maximum of $62.8 million available to purchase shares under this program. The program does not have an expiration date or a limit on the number of shares that may be purchased.
We are currently evaluating our foreignrepatriated $3.6 million and $4.3 million of foreign cash position in light ofduring the tax reform effected with the Act in December 2017.three months ended January 31, 2024 and 2023, respectively. We expect to repatriate earningsexcess cash moving forward and utilizeuse the funds to retire debt or meet current working capital needs. In the U.K., we insure against a portion of our credit losses. We believe our business model, our current cash reserves and our strong balance sheet leave us well-positioned to manage our business and remain in compliance with our debt covenants.
Analysis of Cash Flow
The following table summarizes our cash flow results for the three months ended January 31, 20182024 and 2017:2023:
| | | | | | | | | | | |
| Three Months Ended |
| January 31, |
| 2024 | | 2023 |
| (Dollars in thousands) |
Cash provided by operating activities | $ | 3,854 | | | $ | 3,135 | |
Cash used for investing activities | $ | (9,549) | | | $ | (99,484) | |
Cash (used for) provided by financing activities | $ | (9,117) | | | $ | 83,314 | |
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2018 | | 2017 |
| (In millions) |
Cash provided by operating activities | $ | 8.2 |
| | $ | 3.1 |
|
Cash used for investing activities | $ | (7.7 | ) | | $ | (16.2 | ) |
Cash (used for) provided by financing activities | $ | (4.4 | ) | | $ | 1.8 |
|
Operating Activities. Activities. Cash provided by operating activities increased $0.7 million for the three-month period ended January 31, 2018 increased by approximately $5.1 million compared to the three-month period ended January 31, 2017. Cash receipts were impacted favorably by higher net income and lower incentive accrual payments in December 2018 compared to the prior year, due to financial performance and the timing of volume discount payments to customers. In addition, our inventory levels are down year-over-year, as we invested more in an inventory build in 2017 than in 2018. Cash payments were impacted by the timing of capital expenditures, material purchases and payroll cut-offs. Working capital was $86.3 million, $85.3 million and $88.0 million at January 31, 2018, October 31, 2017 and January 31, 2017, respectively.
Investing Activities. Cash used for investing activities decreased $8.5 million when comparing the three months ended January 31, 20182024 compared to the same periodthree months ended January 31, 2023. The increase in 2017. In 2017, we paid $8.5 million relatedoperating cash flows is primarily due to the HLP acquisition earn-out, with no corresponding cash paymentan increase net income year-over-year due to an improvement in 2018. Our investmentgross margin efficiency and a decrease in transaction fees partially offset by unfavorable changes to working capital. The unfavorable changes in working capital expenditures declinedwere largely driven by $0.3an increase in inventory due to inventory build partially offset by a lower payout of accrued incentives.
Investing Activities. Cash used for investing activities decreased $89.9 million for the three months ended January 31, 20182024 compared to the same period in 2017, which was offset by2023, primarily as a declineresult of no business acquisitions in proceeds from2024 compared to the saleacquisition of capital assets during these periods.LMI in 2023.
Financing Activities. Cash used for financing activities was $4.4$9.1 million for the three months ended January 31, 2018,2024 compared to cash provided by financing activities of $83.3 million for the same period in 2023. The change in investing cash flows is primarily attributable to $4.5 millionas a result of a decrease in net repaymentsborrowings of debt, dividends paid to our shareholders of $1.4 million, and $0.7 million of cash paid for payroll taxes related to stock based compensation, partially offset by $2.2 million of proceeds received from stock option exercises. Forlong-term debt. During the three months ended January 31, 2017, cash provided by financing activities2023, $92.0 million of the borrowings of long-term debt was $1.8 million, primarily attributed to net borrowings under debt facilities of and proceeds of $1.4 million from stock option exercises, which were partially offset by cash paid for dividends of $1.4 million and for payroll taxes related to stock based compensationthe acquisition of $1.0 million.
LMI.
Liquidity Requirements
OurHistorically, our strategy for deploying cash ishas been to invest in organic growth opportunities, develop our infrastructure, makeand explore strategic acquisitions and payacquisitions. Other uses of cash include paying cash dividends to our shareholders. We have historically invested cashshareholders and cash equivalents in commercial paper with terms ofrepurchasing our common stock. During the three months or less. To the extent we have excess cash which has not been applied to reduce our outstanding borrowings under our credit facilities, we intend to remain in commercial paper, highly-rated money market funds, financial institutions and treasuries following a prudent investment philosophy. From time to time, to prepare for potential disruption in the money markets, we may temporarily move funds into operating bank accounts of highly-rated financial institutions to meet on-going operational liquidity requirements. We did not have any investments during the three-month periods ended January 31, 20182024 and 2017.2023, we repatriated $3.6 million and $4.3 million, respectively, of foreign earnings from our foreign locations. We maintain cash balances in foreign countries which total $9.1$17.5 million as of January 31, 2018. We utilize cash flow from HLP to fund the operation in the United Kingdom, and to repay a note arrangement implemented as part of the capitalization of the acquisition.2024.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of AmericaU.S. (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.
For a description of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.2023. Our critical accounting policies and estimates have not changed materially during the three months ended January 31, 2018.2024.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB)(“FASB”) or other standards setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believeWe did not adopt any new accounting pronouncements during the impact of any recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.three months ended January 31, 2024.
Accounting Standards Not Yet Adopted
In May 2014,November 2023, the FASB issued ASU No. 2014-09, Revenue from Contracts“Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 with Customers. Thisearly adoption is permitted. The guidance prescribes a methodology to determine when revenue is recognizable and constitutes a principles-based approach to revenue recognition based on the consideration to which the entity expects to be entitled in exchange for goods or services. In addition, this guidance requires additional disclosureapplied retrospectively to all prior periods presented in the notes to the financial statements with regard to the methodology applied. This pronouncement will essentially supersede and replace existing revenue recognition rules in U.S. GAAP, including industry-specific guidance. We expect to adopt this guidance in fiscal 2019.statements. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and have begun collectingrelated disclosures.
In December 2023, the populationFASB issued “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which includes updates to the income tax disclosures related to the rate reconciliation and disaggregation of revenuesincome taxes paid by contract typejurisdiction. The guidance is effective for further evaluation.
Refer to our Annual Report on Form 10-K for the year ended October 31, 2017 for additional standards wefiscal years beginning after December 15, 2024 with early adoption permitted. The amendments should be applied prospectively, however retrospective application is permitted. We are currently evaluating.evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.
Item 3. 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
OurOur 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 January 31, 2018,2024, a hypothetical 1.0% increase or decrease in interest rates could result in approximately $2.2$0.1 million of additional pretax charges or credit to our operating resultsnet income per year. This sensitivity is impacted by the amount of borrowingsborrowings under our credit facilities, and amounts outstanding under finance leases at HLP.leases.
Foreign Currency Rate Risk
Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in the Euro, the British Pound Sterling and the Canadian Dollar. From time to time, we enter into foreign exchange contracts associated with our operations to manage a portion of the foreign currency rate risk.
The notional and fair market values of these positions at January 31, 2018 and October 31, 2017, There were as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Notional as indicated | | Fair Value in $ |
| | January 31, 2018 | | October 31, 2017 | | January 31, 2018 | | October 31, 2017 |
Foreign currency derivatives: | | | | | | | | |
Sell EUR, buy USD | EUR | $ | 104 |
| | $ | 1,271 |
| | $ | (1 | ) | | $ | 24 |
|
Sell CAD, buy USD | CAD | 231 |
| | 320 |
| | — |
| | 1 |
|
Sell GBP, buy USD | GBP | 47 |
| | 75 |
| | — |
| | — |
|
Buy EUR, sell GBP | EUR | 36 |
| | 30 |
| | — |
| | (1 | ) |
Buy USD, sell EUR | USD | 1 |
| | — |
| | — |
| | — |
|
Buy GBP, sell EUR | GBP | 1 |
| | — |
| | — |
| | — |
|
At January 31, 2018 and October 31, 2017, we held foreign currency derivative contracts hedging cross-border intercompany and commercial activity for our insulating glass spacer business. Although these derivatives hedge our exposure to fluctuations in foreign currency rates, we do not apply hedge accounting and therefore, the change in the fair value of theseno corresponding foreign currency derivatives is recorded directly to other income and expense in the accompanying condensed consolidated statementsas of income (loss). To the extent the gain or loss on the derivative instrument offsets the gain or loss from the re-measurement of the underlying foreign currency balance, changes in exchange rates should have no effect. See Note 10, "Derivative Instruments," to the accompanying unaudited condensed consolidated financial statements contained elsewhere herein.
We currently have an unhedged foreign currency position associated with the debt borrowed to facilitate the HLP acquisition. We are evaluating our options with regard to hedging our exposure. For the three months ended January 31, 2018 and 2017, we recorded unrealized gains of $0.3 million and $0.4 million, respectively, associated with this foreign currency exposure.2024 or October 31, 2023.
Commodity Price Risk
We purchase polyvinyl resin (PVC)PVC as the significant raw material consumed in the manufacture of vinyl extrusions. We have a monthly resin adjusteradjusters in place with a majority of our customers and our resin supplier that is adjusted based upon published industry indices for lagging resin prices for the prior month. This adjusterprices. These adjusters effectively sharesshare the base pass-through price changes of PVC with our customers commensurate with the market at large. Our long-term exposure to changes in PVC prices is somewhat mitigated due to the contractual component of the resin adjuster program. In addition,However, there is a level of exposure to short-term volatility due to the one month lag.
timing lags.
We also charge certain customers a surcharge related toadjust the pricing of petroleum-based raw materials for the majority of our customers who purchase products using these materials. The surchargeThis is intended to offset the risingfluctuating cost of products which are highly correlated to the price of oil including butyl and other oil-based raw materials. The surcharge is in place with the majority of our customers who purchase these products andThis program is adjusted monthly based upon the 90-day average published price for Brent crude. The oil-based raw materials that we purchase are subject to similar pricing schemes. As such, our long-term exposure to changesincreases in oil-based raw material prices is significantly reduced under this surcharge program.
Similarly, WoodcraftNA Cabinet Components includes a surchargeprice index provision in the majority of its customer contractsarrangements to insulate against significant fluctuations in the price for various hardwood products used as the primary raw material for kitchen and bathroom cabinets.cabinet doors. Like our vinyl extrusion business, we are exposed to short-term volatility in wood prices due to a lag in the timing of price updates which generally could extend for up to three months.
We have begun implementing additional programs for other raw materials to facilitate more accurate pricing and reduce our exposure to changing material costs when necessary, however these are also subject to timing lags. While we maintain surcharges and other adjusters to manage our exposure to changes in the prices of our critical raw materials, we utilizeuse several commodities in our business that are not covered by contractual surcharges or adjusters for which pricing can fluctuate, including titanium dioxide (TiO2), aluminum,PVC compound micro ingredients, silicone and other inputs. Further discussion of our industry risks is included within our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.2023.
Item 4. 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 Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (1934 Act) as of January 31, 2018.2024. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of January 31, 2018,2024, the disclosure controls and procedures are effective.
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.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities5. Other Information
During the three months ended January 31, 2018, we repurchased common stock as follows:
|
| | | | | | | | |
Period | | (a) Total Number of Shares Purchased (1) | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum US Dollars Remaining that May Yet Be Used to Purchase Shares Under the Plans or Programs |
November 1, 2017 through November 30, 2017 | | — | | — | | — | | — |
December 1, 2017 through December 31, 2017 | | 31,418 | | $22.47 | | — | | — |
January 1, 2018 through January 31, 2018 | | — | | — | | — | | — |
Total | | 31,418 | | $22.47 | | — | | |
(1) Shares cancelled in connection with tax withholding related to the vesting of restricted share and performance share awards. Shares so cancelled are cancelled pursuant to the terms2024, none of our 2008 Omnibus Incentive Plan, as amended, and are not partdirectors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any publicly announced share repurchase authorizations.“non-Rule 10b5-1 trading arrangement.”
Item 6. Exhibits
The exhibits required to be furnished pursuant to Item 6 are listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | | | |
| | | QUANEX BUILDING PRODUCTS CORPORATION |
| | | |
Date: | March 8, 2024 | | /s/ Scott M. Zuehlke |
| Date: | | March 6, 2018 | | /s/ Brent L. KorbScott M. Zuehlke |
| | | | | Brent L. Korb |
| | | Senior Vice President – Finance and- Chief Financial Officer & Treasurer (Principal Financial Officer) |
EXHIBIT INDEX
Exhibit Number Description of Exhibits
| | | | | | | | | | | |
| | EXHIBIT INDEX | |
Exhibit Number | | Description of Exhibits | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | Second Amended and Restated Credit Agreement dated as of July 29, 2016,6, 2022, by and among the Company; certain of its subsidiaries as guarantors;the lenders party thereto; and Wells Fargo Bank, National Association, as administrative agent; Bank of America, N.A., as syndication agent; Wells Fargo Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated as joint lead arrangers; and the lenders party thereto,Agent; filed as Exhibit 10.1 of the Registrant’sRegistrant's Current Report on Form 8-K (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on August 1, 2016,July 6, 2022, and incorporated herein by reference. | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | | |
| | |
*101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| | |
*101.SCH | | XBRL Taxonomy Extension Schema Document | |
| | |
*101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | |
| | |
*101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | |
| | |
*101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | |
| | |
*101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | |
* Filed herewith
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has not filed with this Quarterly Report on Form 10-Q 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.