Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.68M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 22K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 22K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 20K
10: R1 Cover page HTML 72K
11: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 132K
12: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 43K
(Parenthetical)
13: R4 Condensed Consolidated Statements of Income (Loss) HTML 92K
(Unaudited)
14: R5 Condensed Consolidated Statements of Comprehensive HTML 42K
Income (Loss) (Unaudited)
15: R6 Condensed Consolidated Statements of Cash Flow HTML 104K
(Unaudited)
16: R7 Condensed Consolidated Statement of Stockholders' HTML 88K
Equity (Unaudited)
17: R8 Condensed Consolidated Statement of Stockholders' HTML 21K
Equity (Unaudited) (Parenthetical)
18: R9 Nature of Operations and Basis of Presentation HTML 76K
19: R10 Inventories HTML 28K
20: R11 Goodwill and Intangible Assets HTML 44K
21: R12 Debt and Finance Lease Obligations HTML 47K
22: R13 Retirement Plans HTML 41K
23: R14 Income Taxes HTML 26K
24: R15 Contingencies HTML 25K
25: R16 Fair Value Measurement of Assets and Liabilities HTML 26K
26: R17 Stock-Based Compensation HTML 97K
27: R18 Other, net HTML 37K
28: R19 Segment Information HTML 106K
29: R20 Earnings Per Share HTML 60K
30: R21 New Accounting Guidance HTML 20K
31: R22 Nature of Operations and Basis of Presentation HTML 61K
(Tables)
32: R23 Inventories (Tables) HTML 29K
33: R24 Goodwill and Intangible Assets (Tables) HTML 60K
34: R25 Debt and Finance Lease Obligations (Tables) HTML 39K
35: R26 Retirement Plans (Tables) HTML 35K
36: R27 Stock-Based Compensation (Tables) HTML 97K
37: R28 Other, net (Tables) HTML 36K
38: R29 Segment Information (Tables) HTML 108K
39: R30 Earnings Per Share (Tables) HTML 58K
40: R31 Nature of Operations and Basis of Presentation HTML 25K
(Details)
41: R32 Nature of Operations and Basis of Presentation HTML 50K
Summary of Product Sales (Details)
42: R33 Inventories (Detail) HTML 31K
43: R34 Goodwill and Intangible Assets - Goodwill HTML 30K
(Details)
44: R35 Goodwill and Intangible Assets - Identifiable HTML 53K
Intangible Assets (Details)
45: R36 Debt and Finance Lease Obligations (Details) HTML 110K
46: R37 Retirement Plans (Detail) HTML 44K
47: R38 Income Taxes (Detail) HTML 40K
48: R39 Fair Value Measurement of Assets and Liabilities HTML 21K
(Details)
49: R40 Stock Based Compensation (Details) HTML 37K
50: R41 Stock-Based Compensation - Restricted Stock Awards HTML 55K
(Details)
51: R42 Stock-Based Compensation - Stock Options (Details) HTML 78K
52: R43 Stock-Based Compensation - Restricted Stock Units HTML 37K
(Details)
53: R44 Stock-Based Compensation - Performance Share HTML 45K
Awards (Details)
54: R45 Stock-Based Compensation - Performance Restricted HTML 59K
Stock Units (Details)
55: R46 Stock-Based Compensation - Treasury Shares HTML 36K
(Details)
56: R47 Other, net (Details) HTML 32K
57: R48 Segment Information (Details) HTML 29K
58: R49 Segment Information Segment Reporting Information HTML 59K
(Details)
59: R50 Segment Information Goodwill by Segment (Details) HTML 35K
60: R51 Segment Information Reconcilliation of Operating HTML 44K
Loss to Net Income (Details)
61: R52 Earnings Per Share (Details) HTML 55K
64: XML IDEA XML File -- Filing Summary XML 117K
62: XML XBRL Instance -- nx-20220731_htm XML 1.90M
63: EXCEL IDEA Workbook of Financial Reports XLSX 115K
6: EX-101.CAL XBRL Calculations -- nx-20220731_cal XML 149K
7: EX-101.DEF XBRL Definitions -- nx-20220731_def XML 422K
8: EX-101.LAB XBRL Labels -- nx-20220731_lab XML 1.27M
9: EX-101.PRE XBRL Presentations -- nx-20220731_pre XML 785K
5: EX-101.SCH XBRL Schema -- nx-20220731 XSD 123K
65: JSON XBRL Instance as JSON Data -- MetaLinks 324± 503K
66: ZIP XBRL Zipped Folder -- 0001423221-22-000010-xbrl Zip 333K
(Exact name of registrant as specified in its charter)
________________________________________________
iDelaware
i26-1561397
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i1800 West Loop South, iSuite 1500, iHouston,
iTexasi77027
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (i713) i961-4600
________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, par value $0.01 per share
iNX
iNew 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. iYes☒ 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). iYes☒ 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):
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☐ No ☒
Accounts
receivable, net of allowance for credit losses of $i837 and $i340
i109,467
i108,309
Inventories,
net
i138,237
i92,529
Prepaid
and other current assets
i8,651
i8,148
Total
current assets
i306,385
i249,047
Property,
plant and equipment, net of accumulated depreciation of $i345,111 and $i336,493
i175,404
i178,630
Operating
lease right-of-use assets
i45,722
i52,708
Goodwill
i141,249
i149,205
Intangible
assets, net
i69,670
i82,410
Other
assets
i5,177
i5,323
Total
assets
$
i743,607
$
i717,323
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
i84,527
$
i86,765
Accrued
liabilities
i51,453
i56,156
Income
taxes payable
i13,709
i6,038
Current
maturities of long-term debt
i1,070
i846
Current
operating lease liabilities
i7,972
i8,196
Total
current liabilities
i158,731
i158,001
Long-term
debt
i55,458
i52,094
Noncurrent
operating lease liabilities
i38,768
i45,367
Deferred
pension and postretirement benefits
i4,498
i4,737
Deferred
income taxes
i21,086
i21,965
Other
liabilities
i14,929
i15,377
Total
liabilities
i293,470
i297,541
Commitments
and contingencies
i
i
Stockholders’ equity:
Preferred
stock, iino/ par value, shares authorized ii1,000,000/;
issued and outstanding - iiiinone///
i—
i—
Common
stock, $ii0.01/ par value, shares authorized ii125,000,000/;
issued i37,211,056 and i37,273,510, respectively; outstanding i33,119,361
and i33,274,785, respectively
i373
i373
Additional
paid-in-capital
i251,359
i254,162
Retained
earnings
i315,471
i259,718
Accumulated
other comprehensive loss
(i41,365)
(i21,770)
Less:
Treasury stock at cost, i4,091,695 and i3,998,725 shares, respectively
(i75,701)
(i72,701)
Total
stockholders’ equity
i450,137
i419,782
Total
liabilities and stockholders' equity
$
i743,607
$
i717,323
The
accompanying notes are an integral part of the financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. iNature
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 ithree
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, 2021 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, 2021. 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.
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.
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.
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.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our product sales for the three and nine months ended July 31, 2022 and 2021 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”.
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.
Property, Plant and Equipment and Intangible
Assets with Defined Lives
During the three months ended July 31, 2022, our North American vinyl extrusion operations in our NA Fenestration segment experienced lower-than-expected operating results due to the continued impact of inflation and historical customer contracts which prevent us from passing on the full impact of higher costs to our customers. We determined that this condition was an indicator of a triggering event which necessitated an evaluation of certain long-term assets used in this business for potential impairment. We compared the projected undiscounted cash flows we expected to realize associated with these assets over the remaining useful lives of the primary operating assets to the net book value of the long-term assets and determined that these assets were not impaired.
Therefore, we did not record an impairment charge related to property, plant and equipment or intangible assets with defined lives during the nine months ended July 31, 2022, however, should we be unable to successfully increase prices to offset inflation, it is possible that we could incur an impairment in the future.There were no indicators of triggering events noted for any period in the year ended October 31, 2021.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Related Parties
Net sales for the nine months ended July 31, 2022 included approximately $i1.6 million of transactions with a customer which is a related party with one of our non-employee directors. We performed a review of these transactions, of which no single transaction or
series of related transactions exceeded $i120,000 in amount, and determined that these transactions were enacted independently of each other in fair transactions. We are not aware of any other related party transactions with any of our current non-employee directors or officers outside of their normal business functions or expected contractual duties.
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. iGoodwill and Intangible Assets
Goodwill
i
The
change in the carrying amount of goodwill for the nine months ended July 31, 2022 was as follows (in thousands):
At
our last annual test date, August 31, 2021, we evaluated the recoverability of goodwill at each of our ifive reporting units with goodwill balances and determined that our goodwill was inot
impaired. We evaluated for indicators of impairment during the three and nine months ended July 31, 2022 and determined that there were no triggering events. For a summary of the change in the carrying amount of goodwill by segment, see Note 11, “Segment Information.”
We
had aggregate amortization expense related to intangible assets for the three and nine months ended July 31, 2022 of $i3.0 million and $i9.0
million, respectively, and $i3.0 million and $i9.7 million for the comparable prior year periods.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
i
Estimated remaining amortization expense, based on current intangible balances, for each of the fiscal years ending October 31, is as follows (in thousands):
On 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 $i1.2 million of deferred financing fees related the Credit Facility during the three months ended July 31, 2022.
This $i325.0 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, 2021.
Interest payments for the Credit Facility are calculated, at our election and depending upon the Consolidated
Net Leverage Ratio, at a Base Rate plus an applicable margin or at the same rate as Risk-Free Rate (“RFR”) Loans for domestic borrowings or Eurocurrency Rate Loans plus an applicable margin. In addition, we are subject to commitment fees for the unused portion of the Credit Facility.
iThe applicable margin and commitment fees are outlined in the following table:
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
i0.150%
ii1.25/%
i0.25%
II
Greater
than 1.50 to 1.00, but less than or equal to 2.25 to 1.00
i0.175%
ii1.50/%
i0.50%
III
Greater
than 2.25 to 1.00, but less than or equal to 3.00 to 1.00
i0.200%
ii1.75/%
i0.75%
IV
Greater
than 3.00 to 1.00
i0.250%
ii2.00/%
i1.00%
/
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 i2% above the total per annum rate otherwise applicable.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Credit Facility provides for incremental revolving credit commitments for a minimum principal amount of $i10.0 million, up to an aggregate amount of $i150.0 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 $i15.0 million or the revolving credit commitment, as defined, under a Swingline feature of the Credit Facility.
The Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than i3.00
to 1.00, and (2) Consolidated Net Leverage Ratio requirement, whereby we must not permit the Consolidated Net Leverage Ratio, as defined, to be greater than i3.25 to 1.00.
In addition to maintaining these financial covenants, the Credit Facility also limits our ability to enter into certain business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted payments, pay dividends (limited to $i25.0
million per year) and other transactions as further defined in the Credit Facility. Some of these limitations, however, do not take effect so long as Consolidated Net Leverage Ratio is less than or equal to i2.75 to 1.00 and available liquidity exceeds $i25.0 million.
Substantially all of our domestic assets, with the exception of real property, are used as collateral for the Credit Agreement.
As of July 31, 2022, we had $i38.0 million of borrowings outstanding under the Credit Facility (reduced by unamortized debt issuance costs of $1.6 million), $i5.1
million of outstanding letters of credit and $i20.1 million outstanding primarily under finance leases and other debt. We had $i281.9 million available for
use under the Credit Facility at July 31, 2022. Outstanding borrowings under the Credit Facility accrue interest at i3.08% per annum. Our weighted average borrowing rate for borrowings outstanding during the nine months ended July 31, 2022 and 2021 was i1.81%
and i1.43%, respectively. We were in compliance with our debt covenants as of July 31, 2022.
5. iRetirement
Plans
Pension Plan
Our non-contributory, single employer defined benefit pension plan covers certain of our employees in the U.S. iThe net periodic pension cost for this plan for the three and nine months ended July 31, 2022 and 2021 was as follows (in thousands):
During
September 2021, we contributed $i0.5 million to fund our plan. During fiscal2022, we do not expect to need to make a contribution to the pension plan to maintain targeted funding levels and meet minimum contribution requirements.
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 July 31, 2022 and October 31, 2021, our liability under the supplemental benefit plan was approximately $ii2.9/
million. As of July 31, 2022 and October 31, 2021, the liability associated with the deferred compensation plan was approximately $i3.5 million and $i3.4 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.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. iIncome
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 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 effective tax rates from continuing operations for the nine months ended July 31, 2022 and 2021 were i22.2%
and i32.5%, respectively. The difference between our effective income tax rate and the U.S. federal statutory rate of i21%
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 2022 effective rate were a benefit of $i0.2 million related to the vesting or exercise of equity-based compensation awards and a benefit of $i1.0
million for the true-up of our accruals and related deferred taxes from prior year. The primary discrete items affecting the 2021 effective rate were the $i3.1 million remeasurement of our deferred income tax assets and liabilities related to the increase in the corporate tax rate in the U.K. from i19%
to i25%, a charge of $i0.6
million related to the vesting or exercise of equity-based compensation awards and a benefit of $i0.6 million for the true-up of our accruals and related deferred taxes from prior year filings.
As of July 31, 2022, our liability for uncertain tax positions (UTP) of $i1.4
million relates to certain U.S. federal and state tax items regarding the interpretation of tax laws and regulations, 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 the future, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. Our total unrecognized tax benefits, if recognized, would not materially affect our effective tax rate. We do not believe that the recorded amount of unrecognized tax benefits will decrease significantly 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 $ii1.3/
million as of July 31, 2022 and October 31, 2021.
On August 16, 2002 the Inflation Reduction Act of 2022 was signed into law. We are evaluating the regulations but do not believe they will result in a material impact to our consolidated financial statements.
7. iContingencies
Remediation
and Environmental Compliance Costs
Under applicable state and federal laws, we may be responsible for, among other things, all or part of the costs required to remove or remediate wastes or hazardous substances at locations we, or our predecessors, have owned or operated. From time to time, we also have been alleged to be liable for all or part of the costs incurred to clean up third-party sites where there might have been an alleged improper disposal of hazardous substances. At present, we are not involved in any such matters.
From time to time, we incur routine expenses and capital expenditures associated with compliance with existing environmental regulations, including control of air emissions and water discharges, and plant decommissioning costs. We have not incurred any material expenses or capital expenditures related to environmental matters during the past three fiscal years,
and do not expect to incur a material amount of such costs in fiscal 2022. While we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows.
Litigation
From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal injury, environmental matters, product performance or warranties, product liability, insurance coverage and
personnel and employment disputes. We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks to the extent deemed prudent by our management and to the extent such insurance is available. However, there is no assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations.
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. iFair 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 July 31, 2022, foreign currency derivatives were being measured on a recurring basis. Less than $i0.1 million
of foreign currency derivatives were included in total liabilities as of July 31, 2022. There were no outstanding foreign currency derivatives as of October 31, 2021. All of our derivative contracts are valued using quoted market prices from brokers or exchanges and are classified within Level 2 of the fair value hierarchy.
Carrying amounts reported on the balance 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
July 31, 2022, and October 31, 2021 (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. iStock-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 i3,139,895
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.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restricted Stock Awards
Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a ithree-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.
i
A summary of non-vested restricted stock awards activity during the nine months ended July 31, 2022 is presented below:
The
total weighted average grant-date fair value of restricted stock awards that vested during each of the nine months ended July 31, 2022 and 2021was $i1.2 million and $i0.9
million, respectively. As of July 31, 2022, total unrecognized compensation cost related to unamortized restricted stock awards was $i2.3 million. We expect to recognize this expense over the remaining weighted average vesting period of i2.0
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 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 vested ratably over a ithree-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, 2021.
i
The
following table summarizes our stock option activity for the nine months ended July 31, 2022:
Stock Options
Weighted Average Exercise Price
Weighted Average Remaining
Contractual Term (in years)
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 nine months ended July 31, 2022 and 2021 was $i0.1 million and $i4.2
million, respectively.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 ithree-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.
During the nine months ended July 31, 2022 and2021, non-employee directors received i36,669
and i28,826 restricted stock units, respectively, at a weighted average grant date fair value of $i22.52
per share and $i18.79 per share, respectively, which vested immediately. As of July 31, 2022, there were i21,774
non-vested restricted stock units, which were awarded in January 2020 to key employees at a weighted average grant date fair value of $i17.08. During the nine months ended July 31, 2022 we paid $i1.0 million
and $i0.8 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. Performance share awards vest with return on net assets (RONA) as the vesting condition and pay out i100%
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, i0% to i200%
of the awarded performance shares may ultimately vest.
i
The following table summarizes our performance share grants and the grant date fair value for the RONA performance metrics:
In
December 2021, i183,000 shares vested pursuant to the December 2018 grant, which were settled with a cash payment of $i3.8 million.
Performance share awards are payable in cash based upon the number of performance shares ultimately earned, and are therefore not considered outstanding shares.
Performance Restricted Stock Units
We 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 ithree-year
term as the vesting criteria. The number of shares earned is variable depending on the metric achieved, and the settlement method is i100% 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.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 i0%
and a maximum of i150% of the awarded performance restricted stock units may vest. iSpecifically,
the awards vest on a continuum with the following Absolute Total Shareholder Return (A-TSR) milestones:
Vesting Level
Vesting Criteria
Percentage of Award Vested
Level 1
A-TSR greater than or equal to 50%
i150%
Level
2
A-TSR less than 50% and greater than or equal to 20%
i100%
Level 3
A-TSR less than 20% and greater than or equal to -20%
i50%
Level
4
A-TSR less than -20%
i—%
The following table summarizes our performance restricted stock unit grants and the grant date fair value for the A-TSR performance metric:
During
the nine months ended July 31, 2022, i87,919 performance restricted stock units vested.
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 July 31, 2022, we have deemed i41,269 shares related to the December 2019 grant of performance restricted stock units as probable to vest.
i
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 and nine months ended July 31, 2022 and 2021 (in thousands):
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 nine months ended July 31, 2022.
Other,
net on the condensed consolidated statements of income consisted of the following for the three and nine months ended July 31, 2022 and 2021 (in thousands):
We present ithree reportable business segments (1) NA Fenestration, comprising ithree
operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens & other fenestration components; (2) EU Fenestration, comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles & conservatories, and the European insulating glass business manufacturing insulating glass spacers; and (3) NA Cabinet Components, comprising our cabinet door and components operations. We maintain an 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 general and administrative costs associated with the corporate office are allocated to the reportable segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as those used to prepare the accompanying condensed consolidated financial statements. Corporate general and administrative expense allocated during the three and nine month period ended July 31, 2022 was $i5.8 million
and $i17.1 million, respectively, and $i4.9 million and $i15.6 million
for the comparable prior year periods.
ASC Topic 280-10-50, “Segment Reporting” (ASC 280) permits aggregation of operating segments based on factors including, but not limited to: (1) similar nature of products serving the building products industry, primarily the fenestration business; (2) similar production processes, although there are some differences in the amount of automation amongst operating plants; (3) similar types or classes of customers, namely the primary OEMs; (4) similar distribution methods for product delivery, although the extent of the use of third-party distributors will vary amongst the businesses; (5) similar regulatory environment; and (6) converging long-term economic similarities.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
i
Segment information for the three and nine months ended July 31, 2022 and 2021, and total assets as of July 31, 2022 and October 31,
2021 are summarized in the following table (in thousands):
The
following table summarizes the change in the carrying amount of goodwill by reportable business segment for the nine months ended July 31, 2022 (in thousands):
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
i
We
did not allocate non-operating loss or income tax benefit to the reportable segments. The following table reconciles operating income as reported above to net income for the three and nine months ended July 31, 2022 and 2021 (in thousands):
We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common shares include the weighted average of additional shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock as determined using the treasury stock method prescribed by U.S. GAAP and contingent shares associated with performance share awards, if dilutive.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
i
Basic and diluted earnings per share for the three and nine months ended July 31, 2022 and 2021 were calculated as follows (in thousands, except per share data):
We
do not include equity instruments in our calculation of diluted earnings per share if those instruments would be anti-dilutive. Such dilution is dependent on the excess of the market price of our stock over the exercise price and other components of the treasury stock method. There were no anti-dilutive instruments for the three and nine months ended July 31, 2022 and 2021.
13. iNew
Accounting Guidance
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standards setting bodies that we adopt as of the specified effective date. We did not adopt any new accounting pronouncements during the three and nine months ended July 31, 2022. As of July 31, 2022, we believe 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 condensed consolidated financial statements upon adoption.
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.
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, particularly in the new home construction, and residential remodeling and replacement
(R&R) activity markets in the United States, United Kingdom, Germany and elsewhere;
•changes in non-pass-through raw material costs;
•changes in domestic and international economic conditions;
•changes in 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 situation in Ukraine;
•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 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 good relationships 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” in our Annual Report on Form
10-K for the fiscal year ended October 31, 2021.
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, U.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 July 31, 2022, and for the three and nine months ended July 31, 2022 and 2021, 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, 2021.
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 solar panel sealants, trim moldings, vinyl decking, vinyl fencing, 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 U.K., and also serve customers in international markets through our operating plants in the U.K. and Germany, as well as through sales and marketing efforts in other countries.
We continue to invest in organic growth initiatives and we intend to continue evaluating business acquisitions that allow us to expand our existing fenestration and cabinet component footprint, enhance our product offerings, provide new complementary technology, enhance our leadership position within the markets we serve and expand into new markets or service lines. We have disposed of non-core businesses in the past, and continue to evaluate our business portfolio to ensure that we are investing in markets where we believe there is potential future growth.
We currently have three reportable business segments: (1) North American Fenestration segment
(“NA Fenestration”), comprising three operating segments, manufacturing vinyl profiles, IG spacers, screens and other fenestration components; (2) European Fenestration segment (“EU Fenestration”), comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles and conservatories, and the European insulating glass business manufacturing IG spacers; and (3) North American Cabinet Components segment (“NA Cabinet Components”), comprising our North American cabinet door and components business and two wood-manufacturing plants. We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance, 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
U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. Although the length and impact of the ongoing
military conflict is highly unpredictable, the conflict in Ukraine 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 same time last year resulting in the increase in natural gas prices and the potential for natural gas shortages. If this trend 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.
On March 11, 2020, the WHO declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures. Our first priority with regard to
the COVID-19 pandemic is to do everything we can to ensure the safety, health and welfare of our employees, customers, suppliers and other partners. With the implementation of health and safety practices at our facilities, we are continuing to supply the industry during this uncertain time, recognizing the essential role the construction industry plays in providing housing and necessary infrastructure. As federal, state and local governments react to the public health crisis, significant uncertainties have been created in the economy. The COVID-19
pandemic and its related effects continue to have a significant adverse effect on many sectors of the economy
and we may be further impacted.
The war in Ukraine and the impact of COVID-19 on the global economy including inflation and the price of raw materials, supply chain disruptions, and the volatility in interest rates including home mortgage rates are unpredictable and there may be developments outside our control requiring us to adjust our operating plan.
Market Overview and Outlook
We believe the primary drivers of our operating results continue to be North American 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 evaluated the market using data from the National Association
of Homebuilders (NAHB) with regard to housing starts, and published reports by Ducker Worldwide, LLC (Ducker), a consulting and research firm, with regard to window shipments in the U.S. We obtain market data from Catalina Research, a consulting and research firm, for insight into the U.S. residential wood cabinet demand.
In August 2022, the NAHB forecasted calendar-year housing starts to be 1.5 million in both the 2022 and 2023 calendar-years and 1.6 million in 2024. In August 2022, the Ducker forecast indicated that total window shipments are expected to remain essentially flat for calendar-year 2022 and increase 1.9% in 2023. In August 2022, Catalina Research estimated that residential semi-custom cabinet sales in the U.S. is estimated to increase 8.4% in 2022 and decrease 3.8% in 2023.
Several commodities in our business are subject to pricing fluctuations,
including polyvinyl resin (PVC), titanium dioxide (TiO2), petroleum products, aluminum and wood. For the majority of our customers and critical suppliers, we have price adjusters in place which effectively share the base pass-through price changes for our primary commodities with our customers commensurate with the market at large. Our long-term exposure to these price fluctuations is somewhat mitigated due to the contractual component of the adjuster 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 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.
The
global economy remains uncertain due to currency devaluations, political unrest, terror threats, global pandemics such as COVID-19, and even the political landscape in the U.S. These and other macro-economic factors have impacted the global financial markets, which may have contributed to significant changes in foreign currencies. We continue to monitor our exposure to changes in exchange rates.
Cost
of sales (excluding depreciation and amortization)
143.0
116.5
26.5
(23)%
Selling, general and administrative
14.6
13.3
1.3
(10)%
Depreciation
and amortization
4.0
4.4
(0.4)
9%
Operating income
$
23.2
$
13.5
$
9.7
72%
Operating
income margin
13
%
9
%
Net Sales. Net sales increased $37.1 million, or 25%, for the three months ended July 31, 2022 compared to the same period in 2021, which was primarily driven by an increase in price and raw material surcharges of $19.6 million and a $17.5 million increase in volumes.
Cost of Sales. The cost of sales increased $26.5 million, or 23%, for the three months ended July 31,
2022 compared to the same period in 2021. Cost of sales, including labor, increased primarily due to higher volumes during the period as well as the inflation of raw materials.
Selling, General and Administrative. Selling, general and administrative expenses increased $1.3 million, or 10%, for the three months ended July 31, 2022 compared to the same period in 2021, primarily due an increase in compensation expense, professional fees and general expenses year-over-year.
Cost of sales (excluding depreciation and amortization)
47.2
49.4
(2.2)
4%
Selling,
general and administrative
8.3
7.6
0.7
(9)%
Depreciation and amortization
2.3
2.7
(0.4)
15%
Operating income
$
9.9
$
11.5
$
(1.6)
(14)%
Operating
income margin
15
%
16
%
Net Sales. Net sales decreased $3.5 million, or 5%, for the three months ended July 31, 2022 compared to the same period in 2021, which was primarily driven by a $7.9 million decrease in volumes and $8.9 million of foreign currency rate changes partially offset by $13.3 million of base price increases.
Cost of Sales. The cost of sales decreased $2.2 million, or 4%, for the three months ended July 31,
2022 compared to the same period in 2021. Cost of sales decreased primarily due to lower volumes and foreign currency rate changes during the period partially offset by inflation of raw materials.
Selling, General and Administrative. Selling, general and administrative expense increased $0.7 million, or 9%, for the three months ended July 31, 2022 compared to the same period in 2021. The increase is primarily due to higher compensation and general expenses partially offset by a decrease in professional fees and foreign currency impacts year-over-year.
Cost
of sales (excluding depreciation and amortization)
61.6
54.4
7.2
(13)%
Selling, general and administrative
5.3
5.2
0.1
(2)%
Depreciation
and amortization
3.4
3.4
—
—%
Operating income (loss)
$
2.1
$
(1.1)
$
3.2
291%
Operating
income (loss) margin
3
%
(2)
%
Net Sales. Net sales increased $10.5 million, or 17%, for the three months ended July 31, 2022 compared to the same period in 2021, which was driven by an increase in price and raw material indexes of $15.0 million partially offset by a $4.5 million decrease in volumes due to labor and material shortages throughout the supply chain.
Cost of Sales. Cost of sales increased $7.2
million, or 13%, for the three months ended July 31, 2022 compared to the same period in 2021. Cost of sales increased primarily due to rising lumber prices, which are recovered on a lag, partially offset by lower volumes during the period.
Selling, General and Administrative. Selling, general and administrative expense was similar to the three months ended July 31, 2022 compared to the same period in 2021.
Cost
of sales (excluding depreciation and amortization)
(0.3)
(0.5)
0.2
(40)%
Selling, general and administrative
0.6
1.7
(1.1)
65%
Depreciation
and amortization
0.1
0.1
—
—%
Operating loss
$
(1.2)
$
(2.2)
$
1.0
45%
Net
Sales. Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the three months ended July 31, 2022 and 2021.
Cost of Sales. Cost of sales for Unallocated Corporate & Other consists of the elimination of inter-segment sales, profit in inventory, and other costs.
Selling, General and Administrative. Selling, general and administrative expenses decreased $1.1 million, or 65%, for the three months ended July 31, 2022 compared to the same period in 2021. This decrease is primarily attributable to a decrease of $2.6 million related to medical expense claims partially offset by $1.0 million of higher
compensation expense including the valuations of our stock based compensation awards and a $0.5 million increase in professional fees during the three months ended July 31, 2022 as compared to the prior year period.
Changes related to Non-Operating Items:
Income Taxes. We recorded income tax expense of $7.8 million on pre-tax income of $33.7 million for the three months ended July 31, 2022, an effective rate of 23.1%, and income tax expense of $7.5 million on pre-tax income of $21.2 million for the three months ended July 31,
2021, an effective rate of 35.3%. The increase in income tax expense year-over-year was primarily driven by the increase in pre-tax book income during the three months ended July 31, 2022, relative to the three months ended July 31, 2021. The decrease in the effective tax rate for the three months ended July 31, 2022, was primarily driven by a non-recurring tax detriment that occurred during the three months ended July 31, 2021, associated with the remeasurement of U.K. deferred taxes from a 19% to 25% tax rate as a result of an enacted tax law change during the period.
Cost of sales (excluding depreciation and amortization)
396.5
328.3
68.2
(21)%
Selling,
general and administrative
43.1
38.9
4.2
(11)%
Depreciation and amortization
12.2
14.4
(2.2)
15%
Operating
income
$
57.5
$
40.4
$
17.1
42%
Operating income margin
11
%
10
%
Net
Sales. Net sales increased $87.3 million, or 21%, for the nine months ended July 31, 2022 compared to the same period in 2021, which was primarily driven by an increase in price and raw material surcharges of $52.6 million and a $34.7 million increase in volumes.
Cost of Sales. The cost of sales increased $68.2 million, or 21%, for the nine months ended July 31, 2022 as compared to the same period in 2021. Cost of sales, including labor, increased primarily due to higher volumes during the period as well as the inflation of raw materials.
Selling, General and Administrative. Selling, general and administrative expenses increased $4.2 million, or 11%, for the nine
months ended July 31, 2022 as compared to the same period in 2021. This increase was primarily due to higher compensation expense, professional fees and general expenses year-over-year.
Depreciation and Amortization. Depreciation and amortization expense decreased $2.2 million, or 15%, for the nine months ended July 31, 2022 as compared to the same period in 2021, reflecting the run-off of depreciation expense related to existing assets and disposals during the period.
Cost
of sales (excluding depreciation and amortization)
138.1
122.6
15.5
(13)%
Selling, general and administrative
24.2
21.6
2.6
(12)%
Depreciation
and amortization
7.4
7.8
(0.4)
5%
Operating income
$
30.3
$
29.9
$
0.4
1%
Operating
income margin
15
%
16
%
Net Sales. Net sales increased $18.1 million, or 10%, comparing the nine months ended July 31, 2022 to the same period in 2021, which was primarily driven by $35.8 million of base price increases partially offset by $11.7 million of foreign currency rate changes and $6.0 million decrease in volumes.
Cost of Sales. The cost of sales
increased $15.5 million, or 13%, for the nine months ended July 31, 2022 compared to the same period in 2021. Cost of sales increased primarily due to inflation of raw materials partially offset by a decrease in volumes and foreign currency impacts.
Selling, General and Administrative. Selling, general and administrative expense increased $2.6 million, or 12%, for the nine months ended July 31, 2022 compared to the same period in 2021. The increase is primarily due to higher compensation and general expenses partially offset by foreign currency impacts year-over-year.
Cost of sales (excluding depreciation and amortization)
179.8
155.4
24.4
(16)%
Selling,
general and administrative
15.8
15.4
0.4
(3)%
Depreciation and amortization
10.7
10.0
0.7
(7)%
Operating
income (loss)
$
1.4
$
(1.3)
$
2.7
208%
Operating income (loss) margin
1
%
(1)
%
Net
Sales. Net sales increased $28.2 million, or 16%, for the nine months ended July 31, 2022 compared to the same period in 2021, which was driven by a $47.7 million increase in price and raw material indexes partially offset by $19.5 million decrease in volumes due to labor and material shortages throughout the supply chain.
Cost of Sales. Cost of sales increased $24.4 million, or 16%, for the nine months ended July 31, 2022 compared with the same period in 2021, primarily as a result of lumber price inflation, which is recovered on a lag, partially offset by lower volumes during the period.
Selling, General and Administrative. Selling, general and administrative
expense increased $0.4 million, or 3%, for the nine months ended July 31, 2022 compared to the same period in 2021 due to an increase in general expenses year-over-year.
Cost
of sales (excluding depreciation and amortization)
(1.5)
(1.6)
0.1
(6)%
Selling, general and administrative
4.7
12.4
(7.7)
62%
Depreciation
and amortization
0.3
0.3
—
—%
Operating loss
$
(6.5)
$
(14.1)
$
7.6
54%
Net
Sales. Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the nine months ended July 31, 2022 and 2021.
Cost of Sales. Cost of sales for Unallocated Corporate & Other consists of the elimination of inter-segment sales, profit in inventory, and other costs.
Selling, General and Administrative. Selling, general and administrative expenses decreased $7.7 million, or 62%, for the nine months ended July 31, 2022 compared to the same period in 2021. This decrease is primarily attributable to $3.7 million of decreased compensation expense including the valuations of our stock based compensation
awards, a decrease of $2.9 million related to medical expense claims and a decrease of $0.5 million related to workers’ compensation claims partially offset by an increase of $0.8 million professional fees during the nine months ended July 31, 2022 as compared to the prior year period. Additionally, we recorded a $1.4 million loss on the sale of a plant during the nine months ended July 31, 2021, for which we did not have a comparable expense in the corresponding nine months ended July 31, 2022.
Changes related to Non-Operating Items:
Income Taxes. We recorded income tax expense of $18.1 million on pre-tax income of $81.8 million for the nine months ended July 31,
2022, an effective rate of 22.2%, and income tax expense of $17.4 million on a pre-tax income of $53.4 million for the nine months ended July 31, 2021, an effective rate of 32.5%.The increase in income tax expense year-over-year was primarily driven by the increase in pre-tax book income during the nine months ended July 31, 2022, relative to the nine months ended July 31, 2021. The decrease in the effective tax rate for the nine months ended July 31, 2022, was primarily driven by a non-recurring tax detriment that occurred during the nine months ended July
31, 2021, associated with the remeasurement of U.K. deferred taxes from a 19% to 25% tax rate as a result of an enacted tax law change during the period as well as a charge related to the vesting or exercise of equity-based compensation awards.
Historically, our principal sources of funds have been cash on hand, cash flow from operations, and borrowings under our credit facilities.
We
maintain a $325.0 million revolving credit facility (the Credit Facility) that matures in 2027 (5-year term) and requires interest payments calculated at a variable market rate depending upon our Consolidated Net Leverage Ratio. The applicable rate during the nine months ended July 31, 2022 was RFR Rate + 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 Consolidated Net Leverage Ratio covenant, we are required to meet a Consolidated Interest 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 $25.0 million per year). We are amortizing deferred financing fees of $1.6 million
straight-line over the remaining term of the facility. For further details of the Credit Facility, refer to Note 4, “Debt and Finance Lease Obligations”to the accompanying unaudited condensed consolidated financial statements contained elsewhere herein.
As of July 31, 2022, we had $50.0 million of cash and equivalents, $38.0 million outstanding under the Credit Facility, $5.1 million of outstanding letters of credit and $20.1 million outstanding under finance leases and other debt. We had $281.9 million available for use under the Credit Facility at July 31, 2022.
We repatriated $18.2 million and $17.7 million of foreign cash during the nine months ended July 31,
2022 and 2021, respectively. We expect to repatriate excess cash moving forward and use 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 the recent steps we have taken to strengthen our balance sheet leave us well-positioned to manage our business and remain in compliance with our debt covenants.
Analysis of Cash Flow
The following table summarizes our cash flow results for the nine months ended July 31, 2022 and 2021:
Operating Activities. Cash provided by operating activities increased $2.5 million for the nine months ended July 31, 2022 compared to the nine months ended July 31, 2021. The increase in operating cash flows is primarily due to higher net income year-over-year due to increased demand partially offset by unfavorable changes in working capital. The unfavorable changes in working capital
were largely driven by an increase in inventory value due to raw material price inflation and a higher payout of accrued incentives.
Investing Activities. Cash used for investing activities increased $6.5 million for the nine months ended July 31, 2022 compared to the same period in 2021, primarily as a result of an increase in capital expenditures and a decrease in proceeds from dispositions.
Financing Activities. Cash provided by financing activities was $17.9 million for the nine months ended July 31, 2022, which included $7.9 million of dividends paid to our shareholders, $6.6 million purchase of treasury stock, $1.4 million of payroll tax paid to settle shares forfeited upon vesting of stock, $1.3 million
of net repayment of long-term debt and $1.2 million of debt issuance costs.
Liquidity Requirements
Historically, our strategy for deploying cash has been to invest in organic growth opportunities, develop our infrastructure, and explore strategic acquisitions. Other uses of cash include paying cash dividends to our shareholders and repurchasing our common stock. During the nine months ended July 31, 2022 and 2021, we repatriated $18.2 million and $17.7 million, respectively, of foreign earnings from our foreign locations. We maintain cash balances in foreign countries which total $14.9 million as of July 31, 2022.
The preparation of our financial statements in accordance with accounting principles generally accepted in the U.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, 2021. Our critical accounting policies and estimates have not changed materially during the nine months ended July 31, 2022.
While there have been no changes in the application of principles, methods, and assumptions used to determine our significant estimates, we may be required to revise certain accounting estimates and judgments related to the economic and business impact of the COVID-19 pandemic, such as, but not limited to, those
related to the valuation of goodwill, intangibles, long-lived assets, accounts receivable, and inventory, which could have a material adverse effect on our financial position and results of operations.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standards setting bodies that we adopt as of the specified effective date. We did not adopt any new accounting pronouncements during the three and nine months ended July 31, 2022. As of July 31, 2022, we believe 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 condensed consolidated financial statements upon adoption.
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
Our outstanding debt bears interest at variable rates and accordingly is sensitive to changes in interest rates. Based upon the balances of the variable rate debt at July 31, 2022, a hypothetical 1.0% increase or decrease in interest rates could result in approximately $0.4 million of additional pretax charges or credit to our net income per year. This sensitivity is impacted by the amount of borrowings under our credit facilities, and amounts outstanding
under finance 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. Less than $0.1 million of foreign currency derivatives were included in total liabilities as of July 31, 2022. There were no corresponding foreign currency derivatives as of October 31, 2021. These foreign currency derivative contracts
hedge cross-border intercompany and commercial activity for our insulating glass spacer business. Although these derivatives hedge our exposure to fluctuations in foreign currency rates, we do not apply hedge accounting and therefore, the change in the fair value of these foreign currency derivatives is recorded directly to other income and expense in the accompanying condensed consolidated statements of income. 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.
Commodity Price Risk
We purchase PVC as the significant raw material consumed in the manufacture of vinyl extrusions. We have resin adjusters in place with a majority of our customers and our resin supplier that is adjusted based upon published indices for lagging resin prices.
These adjusters effectively share the base pass-through price changes of PVC with our customers commensurate with the market at large. Our long-term exposure to changes in PVC prices is somewhat mitigated due to the contractual component of the resin adjuster program. However, there is a level of exposure to short-term volatility due to timing lags.
We adjust the pricing of petroleum-based raw materials for the majority of our customers who purchase products using these materials. This is intended to offset the fluctuating cost of products which are highly correlated to the price of oil including butyl and other oil-based raw materials. This program is adjusted monthly based upon the 90-day average published price for Brent crude. The oil-based raw materials that we purchase are subject to similar pricing schemes. As such, our long-term exposure to increases in oil-based raw material prices is significantly reduced under this
program.
Similarly, NA Cabinet Components includes a price index provision in the majority of its customer arrangements to insulate against significant fluctuations in the price for various hardwood products used as the primary raw material for kitchen and bathroom cabinet doors. Like our vinyl extrusion business, we are exposed to short-term volatility in wood prices due to a lag in the timing of price updates which generally could extend for up to three months.
We have begun implementing additional programs for other raw materials to facilitate more accurate pricing and reduce our exposure to changing material costs when necessary, however these are also subject to timing lags. While we maintain surcharges and other adjusters to manage our exposure to changes in the prices of our critical raw materials, we use several commodities in our business that are not covered by contractual
surcharges or adjusters for which pricing can fluctuate, including PVC compound micro ingredients, silicone and other inputs. Further discussion of our industry risks is included within our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
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 July 31, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of July 31, 2022, 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
During the three months ended July 31, 2022, we repurchased common stock as follows:
Period
(a)
Total Number of Shares Purchased
(b) Average Price Paid per Share
(c) Total Number of Shares Purchased as Part of a Publicly Announced Plans or Programs (1)
(d) Maximum US Dollars Remaining that May Yet Be Used to Purchase Shares Under the Plans or Programs (1)
May 2022
216,000
$
23.29
216,000
$
68,399,526
June
2022
—
—
—
$
68,399,526
July 2022
—
—
—
$
68,399,526
Total
216,000
$
—
216,000
(1)
In December 2021, our Board of Directors approved a stock repurchase program that authorized the repurchase of up to $75.0 million worth of shares of our common stock. Repurchases under the new program are made in open market transactions or privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. The program does not have an expiration date or a limit on the number of shares that may be purchased.
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.
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.
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.
36
Dates Referenced Herein and Documents Incorporated by Reference
