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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 ________________________________________________
FORM 10-Q
 ________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2021
OR 
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)
  ________________________________________________ 
Delaware26-1561397
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1800 West Loop South, Suite 1500, Houston, Texas 77027
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (713961-4600
  ________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareNXNew 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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filer
Non-accelerated filer
  (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 
The number of shares outstanding of the registrant's Common Stock as of May 31, 2021 was 33,596,045.



QUANEX BUILDING PRODUCTS CORPORATION

INDEX
 
PART I.
Item 1:Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets – April 30, 2021 and October 31, 2020
Condensed Consolidated Statements of Income – Three and Six Months Ended April 30, 2021 and 2020
Condensed Consolidated Statements of Cash Flows – Six Months Ended April 30, 2021 and 2020
Item 2:
Item 3:
Item 4:
PART II.
Item 2:
Item 6:


Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
`QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) 
April 30,
2021
October 31,
2020
 (In thousands, except share 
amounts)
ASSETS
Current assets:
Cash and cash equivalents$49,258 $51,621 
Accounts receivable, net of allowance for credit losses of $133 and $161
96,521 88,287 
Inventories, net80,365 61,181 
Prepaid and other current assets8,361 6,217 
Total current assets234,505 207,306 
Property, plant and equipment, net of accumulated depreciation of $344,395 and $340,144
178,466 184,104 
Operating lease right-of-use assets56,424 51,824 
Goodwill150,302 146,154 
Intangible assets, net88,850 93,068 
Other assets7,025 9,129 
Total assets$715,572 $691,585 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$83,081 $77,335 
Accrued liabilities41,207 38,289 
Income taxes payable2,463 6,465 
Current maturities of long-term debt745 692 
Current operating lease liabilities8,226 7,459 
Total current liabilities135,722 130,240 
Long-term debt87,195 116,728 
Noncurrent operating lease liabilities48,989 44,873 
Deferred pension and postretirement benefits10,819 10,923 
Deferred income taxes22,078 19,116 
Other liabilities15,672 13,946 
Total liabilities320,475 335,826 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, no par value, shares authorized 1,000,000; issued and outstanding - none
  
Common stock, $0.01 par value, shares authorized 125,000,000; issued 37,273,510 and 37,296,166, respectively; outstanding 33,588,545 and 32,804,737, respectively
373 373 
Additional paid-in-capital253,147 253,458 
Retained earnings230,590 213,517 
Accumulated other comprehensive loss(23,392)(33,024)
Less: Treasury stock at cost, 3,684,965 and 4,491,429 shares, respectively
(65,621)(78,565)
Total stockholders’ equity395,097 355,759 
Total liabilities and stockholders' equity$715,572 $691,585 

The accompanying notes are an integral part of the financial statements.
1

Table of Contents
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months EndedSix Months Ended
 April 30,April 30,
 2021202020212020
 (In thousands, except per share amounts)
Net sales$270,357 $187,475 $500,504 $384,072 
Cost and expenses:
Cost of sales (excluding depreciation and amortization)208,460 149,732 384,857 307,159 
Selling, general and administrative29,672 16,713 60,533 40,845 
Restructuring charges 251 39 404 
Depreciation and amortization10,845 11,886 21,860 24,791 
Operating income21,380 8,893 33,215 10,873 
Non-operating (expense) income:
Interest expense(640)(1,563)(1,391)(3,145)
Other, net265 300 457 336 
Income before income taxes21,005 7,630 32,281 8,064 
Income tax expense(6,454)(2,129)(9,878)(2,553)
Net income$14,551 $5,501 $22,403 $5,511 
Basic earnings per common share$0.44 $0.17 $0.68 $0.17 
Diluted earnings per common share$0.43 $0.17 $0.67 $0.17 
Weighted-average common shares outstanding:
Basic33,355 32,676 33,110 32,770 
Diluted33,637 32,793 33,444 32,907 
Cash dividends per share$0.08 $0.08 $0.16 $0.16 

The accompanying notes are an integral part of the financial statements.

2

Table of Contents
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months EndedSix Months Ended
 April 30,April 30,
 2021202020212020
 (In thousands)
Net income$14,551 $5,501 $22,403 $5,511 
Other comprehensive income (loss):
Foreign currency translation gain (loss)1,032 (6,999)9,632 (4,256)
Change in pension from net unamortized gain adjustment (pretax)   2,519 
Change in pension from net unamortized gain adjustment tax expense   (609)
Other comprehensive income (loss)1,032 (6,999)9,632 (2,346)
Comprehensive income (loss)$15,583 $(1,498)$32,035 $3,165 

The accompanying notes are an integral part of the financial statements.

3

Table of Contents
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 April 30,
 20212020
 (In thousands)
Operating activities:
Net income$22,403 $5,511 
Adjustments to reconcile net income to cash (used for) provided by operating activities:
Depreciation and amortization21,860 24,791 
Stock-based compensation970 86 
Deferred income tax2,339 1,194 
Other, net5,049 463 
Changes in assets and liabilities:
(Increase) decrease in accounts receivable(6,726)14,682 
Increase in inventory(18,265)(8,363)
Increase in other current assets(2,013)(559)
Increase (decrease) in accounts payable5,584 (16,807)
Increase (decrease) in accrued liabilities994 (13,673)
Decrease in income taxes payable(4,071)(4,052)
(Decrease) increase in deferred pension and postretirement benefits(104)562 
Increase (decrease) in other long-term liabilities642 (787)
Other, net298 (576)
Cash provided by operating activities28,960 2,472 
Investing activities:
Capital expenditures(9,799)(16,313)
Proceeds from disposition of capital assets1,665 33 
Cash used for investing activities(8,134)(16,280)
Financing activities:
Borrowings under credit facilities 114,500 
Repayments of credit facility borrowings(30,000)(41,000)
Repayments of other long-term debt(605)(505)
Common stock dividends paid(5,330)(5,287)
Issuance of common stock16,123 2,954 
Payroll tax paid to settle shares forfeited upon vesting of stock(492)(454)
Purchase of treasury stock(3,968)(6,693)
Cash (used for) provided by financing activities(24,272)63,515 
Effect of exchange rate changes on cash and cash equivalents1,083 (323)
(Decrease) increase in cash and cash equivalents(2,363)49,384 
Cash and cash equivalents at beginning of period51,621 30,868 
Cash and cash equivalents at end of period$49,258 $80,252 

The accompanying notes are an integral part of the financial statements.
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QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Six Months Ended April 30, 2021Common
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, 2020$373 $253,458 $213,517 $(33,024)$(78,565)$355,759 
Net income— — 7,852 — — 7,852 
Foreign currency translation adjustment — — — 8,600 — 8,600 
Common dividends ($0.08 per share)
— — (2,637)— — (2,637)
Treasury shares purchased, at cost— — — — (1,927)(1,927)
Stock-based compensation activity:
Expense related to stock-based compensation— 523 — — — 523 
Stock options exercised— 635 — — 9,395 10,030 
Restricted stock awards granted— (1,282)— — 1,282  
Performance restricted stock units vested— (565)— — 565 — 
Other— (492)— — — (492)
Balance at January 31, 2021$373 $252,277 $218,732 $(24,424)$(69,250)$377,708 
Net income— — 14,551 — — 14,551 
Foreign currency translation adjustment— — — 1,032 — 1,032 
Common dividends ($0.08 per share)
— — (2,693)— — (2,693)
Purchase of treasury stock— — — — (2,041)(2,041)
Stock-based compensation activity:
Expense related to stock-based compensation— 447 — — — 447 
Stock options exercised— 423 — — 5,670 6,093 
Balance at April 30, 2021$373 $253,147 $230,590 $(23,392)$(65,621)$395,097 
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Six Months Ended April 30, 2020Common
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, 2019$374 $254,673 $185,703 $(33,817)$(76,746)$330,187 
Net income— — 10 — — 10 
Foreign currency translation adjustment — — — 2,743 — 2,743 
Common dividends ($0.08 per share)
— — (2,659)— — (2,659)
Purchase of treasury stock— — — — (4,639)(4,639)
Change in pension from net unamortized loss (net of tax expense of $609)
— — — 1,910 — 1,910 
Stock-based compensation activity:
Stock-based compensation benefit— (239)— — — (239)
Stock options exercised— 92 (159)— 3,142 3,075 
Restricted stock awards granted— (1,082)94 — 988  
Performance share awards vested— (495)— — 495 — 
Other(1)(454)— — — (455)
Balance at January 31, 2020$373 $252,495 $182,989 $(29,164)$(76,760)$329,933 
Net income— — 5,501 — — 5,501 
Foreign currency translation adjustment— — — (6,999)— (6,999)
Common dividends ($0.08 per share)
— — (2,628)— — (2,628)
Purchase of treasury stock— — — — (2,054)(2,054)
Stock-based compensation activity:
Expense related to stock-based compensation— 325 — — — 325 
Stock options exercised— (38)(83)—  (121)
Restricted stock awards granted— (65) — 65  
Balance at April 30, 2020$373 $252,717 $185,779 $(36,163)$(78,749)$323,957 

The accompanying notes are an integral part of the financial statements.

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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 to original equipment manufacturers (OEMs) in the building products industry. These components can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of fenestration components include: (1) energy-efficient flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, and (4) precision-formed metal and wood products. We also manufacture cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, vinyl fencing, 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 11, “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 U.K. and Germany, as well as through sales and marketing efforts in other countries.
Unless the context indicates otherwise, references to “Quanex”, the “Company”, “we”, “us” and “our” refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries.
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, 2020 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, 2020. 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.
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-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.
Revenue from Contracts with Customers
Revenue recognition
We recognize revenue that reflects the consideration we expect to receive for product sales upon transfer to customers. Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we are entitled to consideration in exchange for such transfer. We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those products, and when collectability of the consideration due is probable.
Performance obligations
A performance obligation is a promise to provide the customer with a good or service. Our performance obligations include product sales, with each product included in a customer contract being recognized as a separate performance obligation. For contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable.
Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to account for product returns related to general returns and product nonconformance.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Pricing and sales incentives
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts.
Shipping and handling costs
We account for shipping and handling services as fulfillment services; accordingly, freight revenue is combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in  cost of sales in the accompanying condensed consolidated statements of income.
Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration.
Disaggregation of revenue
We produce a wide variety of products that are used in the fenestration industry, including window spacer systems; extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we produce certain non-fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other products.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our product sales for the three and six months ended April 30, 2021 and 2020 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 EndedSix Months Ended
April 30,April 30,
 2021202020212020
(In thousands)
North American Fenestration:
United States - fenestration$128,218 $95,791 $240,518 $192,638 
International - fenestration8,397 6,153 16,175 12,587 
United States - non-fenestration6,293 4,372 11,690 8,935 
International - non-fenestration3,235 2,277 5,876 4,885 
$146,143 $108,593 $274,259 $219,045 
European Fenestration:
International - fenestration$50,835 $24,865 $92,189 55,829 
International - non-fenestration10,822 4,335 18,559 10,137 
$61,657 $29,200 $110,748 $65,966 
North American Cabinet Components:
United States - fenestration$3,497 $2,647 $6,471 $5,795 
United States - non-fenestration60,388 47,540 110,890 93,989 
International - non-fenestration(323)477 195 924 
$63,562 $50,664 $117,556 $100,708 
Unallocated Corporate & Other
Eliminations$(1,005)$(982)$(2,059)$(1,647)
$(1,005)$(982)$(2,059)$(1,647)
Net sales$270,357 $187,475 $500,504 $384,072 
Allowance for Credit Losses
We have established an allowance for credit losses to estimate the risk of losses, which represents an estimate of expected losses over the remaining contractual life of our 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.
COVID-19 Impact
On March 11, 2020, the World Health Organization (WHO) declared the outbreak of COVID-19 as a global pandemic and advised aggressive containment action. The COVID-19 pandemic and its impacts are continuing to have an adverse effect on many sectors of the economy. Measures providing for business shutdowns generally exclude certain essential services commonly including critical infrastructure such as construction and the businesses that support that critical infrastructure. To date, we have not experienced significant challenges or expenses implementing crisis management plans intended for containment and prevention. While we could expect some negative impacts on our business, results of operations, cash flows and financial position, the overall financial impact cannot be reasonably estimated at this time.
The health and safety of our employees are high priority. In response to the COVID-19 pandemic, we have taken additional measures to limit possible infections at the workplace by implementing social distancing, sanitizing the workspace, and requiring employees to wear masks and other measures necessary to ensure safety as infection surges dictate. We continue to assess and refine these measures on an ongoing basis as public health guidance and applicable laws and regulations continue to evolve.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
As a result of the economic and business impact of COVID-19, we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of goodwill, intangibles, right-of-use assets, long-lived assets, accounts receivable (including allowances for credit losses), and inventory, which could have a material adverse effect on our financial position and results of operations.
2. Inventories
Inventories consisted of the following at April 30, 2021 and October 31, 2020 (in thousands):
April 30,
2021
October 31,
2020
Raw materials$40,506 $33,298 
Finished goods and work in process41,881 32,347 
Supplies and other2,170 2,020 
Total84,557 67,665 
Less: Inventory reserves4,192 6,484 
Inventories, net$80,365 $61,181 
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.
3. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the six months ended April 30, 2021 was as follows (in thousands):
Six Months Ended
 April 30, 2021
Beginning balance as of November 1, 2020$146,154 
Foreign currency translation adjustment4,148 
Balance as of the end of the period$150,302 
At our last annual test date, August 31, 2020, we evaluated the recoverability of goodwill at each of our five reporting units with goodwill balances and determined that our goodwill was not impaired. We evaluated for indicators of impairment during the three and six months ended April 30, 2021 and determined that there were no triggering events related to the impacts of COVID-19 or any other areas of our operations. However, the long term effects of the COVID-19 pandemic on the demand and pricing of our products may result in future impairment charges. For a summary of the change in the carrying amount of goodwill by segment, see Note 11, “Segment Information.”
Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of April 30, 2021 and October 31, 2020 (in thousands):
 April 30, 2021October 31, 2020
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
Customer relationships$146,592 $76,203 $154,004 $80,441 
Trademarks and trade names56,554 38,622 55,745 37,314 
Patents and other technology22,545 22,016 22,386 21,312 
Total$225,691 $136,841 $232,135 $139,067 
We had aggregate amortization expense related to intangible assets for the three and six months ended April 30, 2021 of $3.3 million and $6.7 million, respectively, and $3.6 million and $7.4 million, respectively, for the comparable prior year periods. We retired fully amortized identifiable assets of $9.9 million related to customer relationships during the six months ended April 30, 2021.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Estimated remaining amortization expense, based on current intangible balances, for each of the fiscal years ending October 31, is as follows (in thousands):
Estimated
Amortization Expense
2021 (remaining six months)$6,105 
202212,163 
202311,404 
202410,652 
20259,426 
Thereafter39,100 
Total$88,850 

4. Debt and Finance Lease Obligations
Long-term debt consisted of the following at April 30, 2021 and October 31, 2020 (in thousands):
April 30,
2021
October 31,
2020
Revolving Credit Facility$73,000 $103,000 
Finance lease obligations and other15,689 15,321 
Unamortized deferred financing fees(749)(901)
Total debt$87,940 $117,420 
Less: Current maturities of long-term debt745 692 
Long-term debt$87,195 $116,728 
Revolving Credit Facility
As more fully described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020, on October 18, 2018, we amended and extended our prior credit facility by entering into a $325.0 million revolving credit facility (the “2018 Credit Facility”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A. serving as Syndication Agent. The 2018 Credit Facility has a five-year term, maturing on October 18, 2023, and requires interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin or the LIBOR Rate plus an applicable margin. At the time of the initial borrowing, the applicable rate was LIBOR + 1.50%. In addition, we are subject to commitment fees for the unused portion of the 2018 Credit Facility.
The applicable margin and commitment fees are outlined in the following table:
Pricing LevelConsolidated Leverage RatioCommitment FeeLIBOR Rate LoansBase Rate Loans
ILess than or equal to 1.50 to 1.000.200%1.25%0.25%
IIGreater than 1.50 to 1.00, but less than or equal to 2.25 to 1.000.225%1.50%0.50%
IIIGreater than 2.25 to 1.00, but less than or equal to 3.00 to 1.000.250%1.75%0.75%
IVGreater than 3.00 to 1.000.300%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.
The 2018 Credit Facility provides for incremental revolving credit commitments for a minimum principal amount of $10.0 million, up to an aggregate amount of $150.0 million, subject to the lender's discretion to elect or decline the incremental increase. We can also borrow up to the lesser of $15.0 million or the revolving credit commitment, as defined, under a Swingline feature of the Credit Facility.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The 2018 Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than 2.25 to 1.00, and (2) Consolidated Leverage Ratio requirement, whereby we must not permit the Consolidated Leverage Ratio, as defined, to be greater than 3.25 to 1.00.
In addition to maintaining these financial covenants, the 2018 Credit Facility also limits our ability to enter into certain business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted payments, pay dividends (limited to $20.0 million per year) and other transactions as further defined in the 2018 Credit Facility. Some of these limitations, however, do not take effect so long as total leverage is less than or equal to 2.75 to 1.00 and available liquidity exceeds $25 million. Substantially all of our domestic assets, with the exception of real property, are used as collateral for the Credit Agreement.
As of April 30, 2021, we had $73.0 million of borrowings outstanding under the 2018 Credit Facility (reduced by unamortized debt issuance costs of $0.7 million), $4.5 million of outstanding letters of credit and $15.7 million outstanding primarily under finance leases and other debt. We had $247.5 million available for use under the 2018 Credit Facility at April 30, 2021. Outstanding borrowings under the 2018 Credit Facility accrue interest at 1.36% per annum. Our weighted average borrowing rate for borrowings outstanding during the six months ended April 30, 2021 and 2020 was 1.47% and 3.03%, respectively. We were in compliance with our debt covenants as of April 30, 2021.
5. Retirement Plans
Pension Plan
Our non-contributory, single employer defined benefit pension plan covers a majority of our employees in the U.S. The net periodic pension cost for this plan for the three and six months ended April 30, 2021 and 2020 was as follows (in thousands):
Three Months EndedSix Months Ended
April 30,April 30,
 2021202020212020
Service cost$212 $242 $425 $780 
Interest cost189 280 378 573 
Expected return on plan assets(490)(502)(980)(994)
Amortization of net loss36 95 72 204 
Net periodic pension (benefit) cost$(53)$115 $(105)$563 
On January 1, 2020, we enacted changes to our pension plan whereby the benefits for all participants were frozen and thereafter those participants will receive increased benefits in the Company sponsored defined contribution plan in lieu of participation in a defined benefit plan.
As a result of this action, we remeasured the pension assets and obligations for the pension plan, which resulted in a decrease to our projected benefit obligation and a corresponding net actuarial gain that was recorded in accumulated other comprehensive income.
During September 2020, we contributed $3.7 million to fund our plan, and we expect to make a contribution to our plan in September 2021 of approximately $0.5 million.
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 April 30, 2021 and October 31, 2020, our liability under the supplemental benefit plan was approximately $2.8 million and $2.6 million, respectively. As of April 30, 2021 and October 31, 2020, the liability associated with the deferred compensation plan was approximately $4.6 million and $3.3 million, respectively. We record the current portion of liabilities associated with these plans under the caption “Accrued Liabilities,” and the long-term portion under the caption “Other Liabilities” in the accompanying condensed consolidated balance sheets.
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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. 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. Our estimated annual effective tax rates for the six months ended April 30, 2021 and 2020 were 27.3% and 25.8%, respectively, excluding discrete items. The 2021 effective tax rate is higher than the U.S. Statutory rate of 21% primarily due to state income taxes and the $0.8 million true-up of our deferred taxes from prior year filings, partially offset by a discrete benefit of $0.6 million related to the vesting or exercise of equity-based compensation awards. The 2020 effective tax rate was primarily impacted by a discrete charge of $0.4 million related to the vesting or exercise of equity-based compensation awards.
As of April 30, 2021, our liability for uncertain tax positions (UTP) of $0.5 million relates to certain state tax items regarding the interpretation of tax laws and regulations. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. The outcome of the future tax consequences of legal proceedings, if any, as well as the outcome of competent authority proceedings, changes in regulatory tax laws, or interpretation of those tax laws could impact our financial statements. We are subject to the effect of these matters occurring in various jurisdictions. The disallowance of the UTP would not materially affect the annual effective tax rate. We do not believe any of the UTP at April 30, 2021 will be recognized within the next twelve months.
We evaluate the likelihood of realization of our deferred tax assets by considering both positive and negative evidence. We maintain a valuation allowance for certain state net operating losses which totaled $1.5 million as of April 30, 2021 and October 31, 2020.
Final regulations were published by the Internal Revenue Service regarding Uniform Capitalization (UNICAP) that became effective during fiscal 2020. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. In addition, the Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020 and the American Rescue Plan Act of 2021 (American Rescue Plan) was signed into law on March 11, 2021. We evaluated the UNICAP regulations and the CARES Act and determined that there were no material impacts on our condensed consolidated financial statements. We are evaluating the CAA and the American Rescue Plan and do not believe there will be a material impact on our condensed consolidated financial statements.
7. 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, 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 six fiscal years, and do not expect to incur a material amount of such costs in fiscal 2021. While we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows.
Litigation
From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal injury, environmental matters, product performance or warranties, product liability, insurance coverage and personnel and employment disputes. We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks to the extent deemed prudent by our management and to the extent such insurance is available. However, there is no assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations.
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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. 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.
8. 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.
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 instrument approximates carrying value at April 30, 2021, and October 31, 2020 (Level 2 measurement).
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 9, “Stock-Based Compensation - Performance Share Awards.”
9. Stock-Based Compensation
We have established and maintain an Omnibus Incentive Plan (2020 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards, performance restricted stock units, and other stock-based and cash-based awards. The 2020 Plan is administered by the Compensation and Management Development Committee of the Board of Directors.
The aggregate number of shares of common stock authorized for grant under the 2020 Plan is 3,139,895 as approved by shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 2020 Plan. We grant restricted stock units to non-employee directors on the first business day of each fiscal year. As approved by the Compensation & Management Development Committee of our Board of Directors annually, we grant a mix of restricted stock awards, restricted stock units, performance shares and/or performance restricted stock units to officers, management and key employees. We also historically granted stock options to certain officers, directors and key employees. Occasionally, we may make additional grants to key employees at other times during the year.
Restricted Stock Awards
Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a three-year period with service and continued employment as the only vesting criteria. The recipient of the restricted stock award is entitled to all of the rights of a shareholder, except that the award is nontransferable during the vesting period. The fair value of the restricted stock award is established on the grant date and then expensed over the vesting period resulting in an increase in additional paid-in-capital. Shares are generally issued from treasury stock at the time of grant.
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A summary of non-vested restricted stock awards activity during the six months ended April 30, 2021 is presented below:
Restricted Stock AwardsWeighted Average
Grant Date Fair Value per Share
Non-vested at October 31, 2020187,500 $16.82 
Granted73,300 20.68 
Forfeited  
Vested(44,400)20.70 
Non-vested at April 30, 2021216,400 $17.28 
The total weighted average grant-date fair value of restricted stock awards that vested during each of the six months ended April 30, 2021 and 2020 was $0.9 million and $1.1 million, respectively. As of April 30, 2021, total unrecognized compensation cost related to unamortized restricted stock awards was $2.1 million. We expect to recognize this expense over the remaining weighted average vesting period of 2.1 years.
Stock Options
Historically, stock options have been awarded to key employees, officers and non-employee directors. In December 2017, the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted stock units as further described below. As a result, the final stock options were granted during the fiscal year ended October 31, 2017. Stock options typically vested ratably over a three-year period with service and continued employment as the vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of the stock options was determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital. For employees who were nearing retirement-eligibility, we recognized stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date.
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, 2020.
The following table summarizes our stock option activity for the six months ended April 30, 2021:
Stock OptionsWeighted Average
Exercise Price
Weighted Average
Remaining Contractual
Term (in years)
Aggregate
Intrinsic
Value (000s)
Outstanding at October 31, 20201,095,329 $18.88 
Granted 
Exercised(857,893)18.79 
Forfeited/Expired(2,500)18.22 
Outstanding at April 30, 2021234,936 $19.22 3.8$1,896 
Vested at April 30, 2021234,936 $19.22 3.8$1,896 
Exercisable at April 30, 2021234,936 $19.22 3.8$1,896 
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 six months ended April 30, 2021 and 2020 was $4.2 million and $0.5 million, respectively. The weighted-average grant date fair value of stock options that vested during the six months ended April 30, 2020 was $0.4 million.
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
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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.
During the six months ended April 30, 2021 and 2020, non-employee directors received 28,826 and 25,326 restricted stock units, respectively, at a grant date fair value of $18.79 per share and $19.02 per share, respectively, which vested immediately. As of April 30, 2021, there were 21,774 non-vested restricted stock units, which were awarded in January 2020 to key employees at a weighted average grant date fair value of $17.08. During the six months ended April 30, 2021 we paid $0.8 million to settle vested restricted stock units. There were no corresponding payments to settle vested restricted stock during the six months ended April 30, 2020.
Performance Share Awards
We have awarded annual grants of performance shares to key employees and officers. Beginning with the fiscal year ended October 31, 2019, performance share awards issued vest with return on net assets (RONA) as the vesting condition and pay out 100% in cash, and are accounted for as liability.
The expected cash settlement of the performance share award is recorded as a liability and is being marked to market over the three-year term of the award and can fluctuate depending on the number of shares ultimately expected to vest. Depending on the achievement of the performance conditions, 0% to 200% of the awarded performance shares may ultimately vest.
The following table summarizes our performance share grants and the grant date fair value for the RONA performance metrics:
Grant DateShares AwardedReturn on Net AssetsShares Forfeited
December 5, 2018132,400 $13.63 40,900 
December 5, 201955,900 $19.40 5,300 
December 2, 202065,300 $20.68  
In December 2020, the December 2017 grant vested, however, no shares were awarded as performance criteria were not met. We recorded compensation expense of $0.6 million and $3.3 million, respectively, for the three and six months ended April 30, 2021 related to the expected payout of our performance share awards that were outstanding as of April 30, 2021. We recorded compensation expense of $0.1 million for the three months ended April 30, 2020 and a decrease in compensation expense of $0.4 million for the six months ended April 30, 2020 related to the expected payout of our performance share awards that were outstanding as of April 30, 2020.
Performance share awards are not considered outstanding shares and do not have voting rights, although dividends are accrued over the performance period and will be payable in cash based upon the number of performance shares ultimately earned.
Performance Restricted Stock Units
We award performance restricted stock units to key employees and officers. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of 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.
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To value the performance restricted stock units, we used a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Depending on the achievement of the performance conditions, a minimum of 0% and a maximum of 150% of the awarded performance restricted stock units may vest. Specifically, the awards vest on a continuum with the following Absolute Total Shareholder Return (A-TSR) milestones:
Vesting LevelVesting CriteriaPercentage of Award Vested
Level 1A-TSR greater than or equal to 50%150%
Level 2A-TSR less than 50% and greater than or equal to 20%100%
Level 3A-TSR less than 20% and greater than or equal to -20%50%
Level 4A-TSR less than -20%%
The following table summarizes our performance restricted stock unit grants and the grant date fair value for the A-TSR performance metric:
Grant DateShares AwardedGrant Date Fair ValueShares Forfeited
December 5, 201889,200 $13.63 25,500 
December 5, 201935,000 $19.40  
December 2, 202038,400 $20.68  
During the six months ended April 30, 2021, 32,322 performance restricted stock units vested. We recorded compensation expense related to our performance restricted stock units of approximately $0.2 million and $0.4 million, respectively, for the three and six months ending April 30, 2021 and $0.1 million and $0.3 million, respectively, for the comparable prior year periods.
The performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares. As of April 30, 2021, we have deemed 91,460 shares related to the December 2018 grant of performance restricted stock units as probable to vest.
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, 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. There were no charges to retained earnings during the six months ended April 30, 2021.
The following table summarizes the treasury stock activity during the six months ended April 30, 2021:
Six Months Ended
 April 30, 2021
Beginning Balance as of November 1, 20204,491,429 
Restricted stock awards granted(73,300)
Performance restricted stock units vested(32,322)
Stock options exercised(857,893)
Treasury stock repurchases157,051 
Balance at April 30, 2021