NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation
Quanex Building Products Corporation and its subsidiaries (Quanex or the Company) is a technological leader in the production of aluminum sheet products, flexible insulating glass spacers, extruded vinyl profiles, window and door screens, thin film solar panel sealants and precision-formed metal and wood products. The Company's primary geographic market is North America, while also having operations in the U.K. and Germany and serving customers on a global basis. The Company operates its business in
two
segments: Engineered Products and Aluminum Sheet Products.
The accompanying condensed consolidated financial statements include the Company's accounts as of
January 31, 2013
and
October 31, 2012
and for the
three
months ended
January 31, 2013
and
2012
. All intercompany accounts and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared by the Company, 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 (GAAP) have been condensed or omitted pursuant to such rules and regulations. The
October 31, 2012
condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended
October 31, 2012
.
In management's opinion, all adjustments (which consist of normal recurring adjustments, except as disclosed herein) necessary to fairly present the Company's financial position, results of operations and cash flows for the interim periods presented have been included. The results of operations for the
three
months ended
January 31, 2013
are not necessarily indicative of the results to be expected for the full year or for any future periods.
2. New Accounting Pronouncements
The Company adopted Accounting Standards Update (ASU) No. 2011-05,
Presentation of Comprehensive Income,
as of November 1, 2012 and has elected to present separate Condensed Consolidated Statements of Comprehensive Income for the three months ended
January 31, 2013
and
2012
.
In September 2011, the FASB issued ASU No. 2011-08,
Testing Goodwill for Impairment
which amends the guidance in ASC 350-20. The amendments in ASU 2011-08 provide entities with the option of performing a qualitative assessment before performing the first step of the two-step impairment test. If entities determine, on the basis of qualitative factors, it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, then performing the two-step impairment test would be unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. ASU 2011-08 also provides entities with the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the first step of the two-step impairment test. For the Company, ASU 2011-08 applies to annual and interim goodwill impairment tests performed after November 1, 2012. The provisions of ASU 2011-08 will not have a material effect on the Company's consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-11 ,
Disclosures about Offsetting Assets and Liabilities,
which requires entities to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope of this standard, which was subsequently clarified by ASU 2013-1, includes derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. These disclosures assist users of financial statements in evaluating the effect or potential effect of netting arrangements on a company’s financial position. The Company will be required to apply the amendments as of November 1, 2013. The Company does not expect the provisions of ASU 2011-11 to have a material impact on its consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-2,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, which require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The Company will be required to apply the amendments as of November 1, 2013, with early adoption permitted. The Company does not expect the provisions of ASU 2013-02 to have a material impact on its consolidated financial statements.
3. Acquisitions
On December 31, 2012, the Company acquired substantially all of the assets of Alumco, Inc. and its subsidiaries (Alumco), including its aluminum screen business, for
$22.4 million
in cash. The purchase agreement contains (1) an earn-out clause that provides for the payment of an additional
$0.5 million
to Alumco contingent upon the achievement of certain financial targets and (2) a working capital clause that provides for an adjustment to the purchase price based on the working capital balance as of the acquisition date. We estimated the fair value of the contingent consideration to be
$0.3 million
and accrued it as part of the purchase price. In addition, we reduced the purchase price by approximately
$0.4 million
to account for the proceeds we expect to receive from Alumco under the terms of the working capital clause.
The purchase price has been allocated to the fair value of the assets acquired and liabilities assumed, as indicated in the table below. The allocation is preliminary and based on estimates and assumptions that are subject to change within the purchase price allocation period (generally one year from the acquisition date). The primary areas of the purchase price allocation that are not yet finalized relate to the valuation of property, plant and equipment and intangible assets.
|
|
|
|
|
|
As of Date of
Opening Balance
Sheet
|
|
(In thousands)
|
Current assets:
|
|
Accounts receivable
|
$
|
3,638
|
|
Inventories
|
5,062
|
|
Prepaid and other current assets
|
140
|
|
Total current assets
|
8,840
|
|
Property, plant and equipment
|
4,702
|
|
Goodwill
|
2,477
|
|
Intangible assets
|
8,939
|
|
Total assets
|
$
|
24,958
|
|
Current liabilities:
|
|
Accounts payable
|
$
|
1,816
|
|
Accrued liabilities
|
705
|
|
Current maturities of long-term debt
|
14
|
|
Total current liabilities
|
2,535
|
|
Long-term debt
|
77
|
|
Total liabilities
|
2,612
|
|
Investment
|
22,346
|
|
Total liabilities and equity
|
$
|
24,958
|
|
The Company used recognized valuation techniques to determine the fair value of the assets and liabilities, including the income approach for customer relationships, with a discount rate that reflects the risk of the expected future cash flows. The goodwill balance, which is deductible for tax purposes, resulted primarily from management's expectation that the acquisition will allow Quanex to become a leader in the screen market by expanding its product portfolio and geographic distribution capabilities. The goodwill has been recorded within the Engineered Products segment.
Pro forma results of operations have not been presented because the effect of the Alumco acquisition was not material to our results of operations.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. Goodwill and Acquired Intangible Assets
Goodwill
All of the Company’s goodwill is recorded in the Engineered Products segment. The change in the carrying amount of goodwill for the period ended
January 31, 2013
is as follows (in thousands):
|
|
|
|
|
|
Engineered
Products Goodwill
|
Balance at October 31, 2012
|
$
|
68,331
|
|
Alumco acquisition
|
2,477
|
|
Foreign currency translation adjustment
|
701
|
|
Balance at January 31, 2013
|
$
|
71,509
|
|
Acquired Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31, 2013
|
|
As of October 31, 2012
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
52,768
|
|
|
$
|
(12,600
|
)
|
|
$
|
43,737
|
|
|
$
|
(11,675
|
)
|
Trademarks and trade names
|
44,700
|
|
|
(15,302
|
)
|
|
44,519
|
|
|
(14,520
|
)
|
Patents and other technology
|
25,219
|
|
|
(9,880
|
)
|
|
24,773
|
|
|
(9,382
|
)
|
Other
|
1,392
|
|
|
(534
|
)
|
|
1,392
|
|
|
(464
|
)
|
Total
|
$
|
124,079
|
|
|
$
|
(38,316
|
)
|
|
$
|
114,421
|
|
|
$
|
(36,041
|
)
|
The intangible assets as of
January 31, 2013
include customer relationships of
$8.7 million
and technology of
$0.2 million
related to the Alumco acquisition. These assets have estimated useful lives of
10
and
3
years, respectively. (See Note 3 for further information about the acquisition.)
The aggregate amortization expense for the
three
months ended
January 31, 2013
and
2012
was
$2.2 million
and
$2.1 million
, respectively. Estimated amortization expense for the next
five
years for existing intangibles follows (in thousands):
|
|
|
|
|
Fiscal Years Ending
October 31,
|
Estimated
Amortization
|
|
(In thousands)
|
2013 (remaining nine months)
|
$
|
6,857
|
|
2014
|
$
|
9,049
|
|
2015
|
$
|
8,918
|
|
2016
|
$
|
8,647
|
|
2017
|
$
|
8,541
|
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
January 31,
2013
|
|
October 31,
2012
|
|
(In thousands)
|
Raw materials
|
$
|
36,139
|
|
|
$
|
30,400
|
|
Finished goods and work in process
|
46,050
|
|
|
32,937
|
|
Supplies and other
|
2,374
|
|
|
2,567
|
|
Total
|
$
|
84,563
|
|
|
$
|
65,904
|
|
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. The values of inventories are based on the following accounting methods:
|
|
|
|
|
|
|
|
|
|
January 31,
2013
|
|
October 31,
2012
|
|
(In thousands)
|
LIFO
|
$
|
37,680
|
|
|
$
|
28,224
|
|
FIFO
|
46,883
|
|
|
37,680
|
|
Total
|
$
|
84,563
|
|
|
$
|
65,904
|
|
During interim quarters, the Company estimates a LIFO reserve based on our expectations of year-end inventory levels and costs. If our calculations indicate that an adjustment at year-end will be required, we record a proportionate share of this amount during the quarter. At year-end, we calculate the actual LIFO reserve and record an adjustment for the difference between the annual calculation and any estimates recognized during the interim quarters. Because the interim projections are subject to many factors beyond management's control, the results could differ significantly from the year-end LIFO calculation. Our projections resulted in
no
interim LIFO allocation for the
three
months ended
January 31, 2013
. Similarly,
no
interim LIFO allocation was recognized for the
three
months ended
January 31, 2012
.
For inventories valued under the LIFO method, replacement cost exceeded the LIFO value by approximately
$10.7 million
as of
January 31, 2013
and
October 31, 2012
.
6. Earnings Per Share
Earnings Per Share
Basic and diluted earnings per share are identical for the
three
months ended
January 31, 2013
and
2012
. The computation of diluted earnings per share excludes outstanding options and other common stock equivalents when their inclusion would be anti-dilutive. This is always the case when an entity incurs a net loss as the Company did during the periods presented. For the
three
months ended
January 31, 2013
,
0.1 million
of restricted stock and
0.5 million
of common stock equivalents were excluded from the computation of diluted earnings per share. For the
three
months ended
January 31, 2012
,
0.1 million
of restricted stock and
0.3 million
of common stock equivalents were excluded from the computation of diluted earnings per share.
For the
three
months ended
January 31, 2013
and
2012
, the Company had
0.6 million
and
1.3 million
, respectively, of securities that are potentially dilutive in future earnings per share calculations. Such dilution will be dependent on the excess of the market price of the Company’s stock over the exercise price and other components of the treasury stock method.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. Long-Term Debt and Capital Lease Obligations
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
January 31,
2013
|
|
October 31,
2012
|
|
(In thousands)
|
Revolving Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
City of Richmond, Kentucky Industrial Building Revenue Bonds
|
800
|
|
|
800
|
|
Scott County, Iowa Industrial Waste Recycling Revenue Bonds
|
400
|
|
|
400
|
|
Capital lease obligations and other
|
267
|
|
|
201
|
|
Total debt
|
$
|
1,467
|
|
|
$
|
1,401
|
|
Less maturities due within one year included in current liabilities
|
379
|
|
|
368
|
|
Long-term debt
|
$
|
1,088
|
|
|
$
|
1,033
|
|
On January 28, 2013 the Company entered into a Senior Unsecured Revolving Credit Facility (the Credit Facility) that has a
five
-year term and permits aggregate borrowings at any time of up to
$150 million
, with a letter of credit sub-facility, a swing line sub-facility and a multi-currency sub-facility. Borrowings denominated in U.S. dollars bear interest at a spread above LIBOR or a base rate derived from the prime rate. Foreign denominated borrowings bear interest at a spread above the LIBOR applicable to such currencies. Subject to customary conditions, the Company may request that the aggregate commitments under the Credit Agreement be increased by up to
$100 million
, with total commitments not to exceed
$250 million
. The Credit Facility replaces the Company's previous Senior Unsecured Revolving Credit Facility that was scheduled to expire on April 23, 2013.
The Credit Facility requires the Company to comply with certain financial covenants. Specifically, the Company must not permit, on a quarterly basis, the ratio of its consolidated EBITDA to its consolidated interest expense to exceed
3.00
to
1
. Also, the Company must not permit the ratio of its consolidated funded debt to its consolidated EBITDA (Consolidated Leverage Ratio) to exceed
3.25
to
1
. Additionally, the Credit Facility contains certain limitations on additional indebtedness, asset or equity sales and acquisitions. The payment of dividends and other distributions is permitted provided there is no event of default after giving effect to such transactions.
Although there were no borrowings and only
$5.6 million
of outstanding letters of credit under the Credit Facility as of
January 31, 2013
, the aggregate availability under the Credit Facility was limited to
$81.0 million
based on the Company's consolidated EBITDA and the Consolidated Leverage Ratio covenant limit.
The Company borrowed
$10.0 million
under the Credit Facility during the second quarter of 2013.
8. Retirement Plans
Pension Plan
The Company has a non-contributory, single employer defined benefit pension plan that covers substantially all non-union employees.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The net periodic pension cost for this plan includes the following components:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
January 31,
|
|
2013
|
|
2012
|
|
(In thousands)
|
Net periodic benefit cost:
|
|
|
|
Service cost
|
$
|
907
|
|
|
$
|
980
|
|
Interest cost
|
194
|
|
|
204
|
|
Expected return on plan assets
|
(365
|
)
|
|
(277
|
)
|
Amortization of net loss
|
62
|
|
|
50
|
|
Net periodic benefit cost
|
$
|
798
|
|
|
$
|
957
|
|
The Company made
no
contributions to its defined benefit plan during the
three
months ended
January 31, 2013
. In February 2013, the Company contributed
$3.3 million
to the plan and does not currently expect to make additional contributions during the fiscal year.
9. Industry Segment Information
Quanex has
two
reportable segments: Engineered Products and Aluminum Sheet Products. The Engineered Products segment produces systems, finished products and components serving the OEM residential window and door industry, while the Aluminum Sheet Products segment produces mill finished and coated aluminum sheet serving the broader building and construction markets. The primary market drivers of both segments are residential repair and remodel activity (R&R) and new home construction.
The Company measures its inventory at the segment level on a FIFO or weighted-average basis; however, at the consolidated Company level a portion of the inventory is measured on a LIFO basis. The LIFO reserve is computed on a consolidated basis as a single pool and is thus treated as a corporate expense. See Note 5 to the financial statements for more information. LIFO inventory adjustments along with corporate office charges and intersegment eliminations are reported as Corporate, Intersegment Eliminations or Other. The Company accounts for intersegment sales and transfers as though the sales or transfers were to third parties, that is, at current market prices. Intersegment sales, related cost of sales, and intercompany profit are eliminated in consolidation at Corporate. The most significant components of Corporate assets generally include cash and equivalents and property, plant and equipment, which are partially offset by the Company’s consolidated LIFO inventory reserve.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
January 31,
|
|
2013
|
|
2012
|
|
(In thousands)
|
Net Sales:
|
|
|
|
Engineered Products
|
$
|
106,119
|
|
|
$
|
99,393
|
|
Aluminum Sheet Products
|
84,603
|
|
|
65,700
|
|
Intersegment Eliminations
|
(5,009
|
)
|
|
(3,514
|
)
|
Consolidated
|
$
|
185,713
|
|
|
$
|
161,579
|
|
Operating Income (Loss):
|
|
|
|
Engineered Products
|
$
|
2,833
|
|
|
$
|
1,803
|
|
Aluminum Sheet Products
|
(4,229
|
)
|
|
(5,518
|
)
|
Corporate & Other
|
(12,289
|
)
|
|
(7,589
|
)
|
Consolidated
|
$
|
(13,685
|
)
|
|
$
|
(11,304
|
)
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
|
|
|
|
|
|
|
|
January 31,
2013
|
|
October 31,
2012
|
|
(In thousands)
|
Identifiable Assets:
|
|
|
|
Engineered Products
|
$
|
397,776
|
|
|
$
|
380,551
|
|
Aluminum Sheet Products
|
149,168
|
|
|
139,733
|
|
Corporate, Intersegment Eliminations & Other
|
15,356
|
|
|
69,254
|
|
Consolidated
|
$
|
562,300
|
|
|
$
|
589,538
|
|
Goodwill:
|
|
|
|
Engineered Products
|
$
|
71,509
|
|
|
$
|
68,331
|
|
Consolidated
|
$
|
71,509
|
|
|
$
|
68,331
|
|
10. Stock-Based Compensation
The Company's Omnibus Incentive Plan provides for the granting of stock options, restricted stock awards (RSAs), restricted stock units (RSUs) and other stock-based and cash-based awards.
Restricted Stock Awards
RSAs are awarded to key employees and officers and typically vest on a straight-line basis over a
three
-year period with service as the vesting condition. The recipient is entitled to all of the rights of a shareholder, except that the shares are nontransferable during the vesting period. The fair value of the RSAs is established on the grant date and then expensed over the vesting period with a corresponding increase to additional paid-in-capital. A summary of non-vested restricted stock award changes during the
three
months ended
January 31, 2013
is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted - Average
Grant-Date Fair
Value Per Share
|
Non-vested at October 31, 2012
|
212,700
|
|
|
$
|
16.08
|
|
Granted
|
71,400
|
|
|
21.09
|
|
Vested
|
(67,300
|
)
|
|
16.21
|
|
Non-vested at January 31, 2013
|
216,800
|
|
|
$
|
17.69
|
|
The weighted-average grant-date fair value of restricted stock granted during the
three
months ended
January 31, 2013
and
2012
was
$21.09
and
$15.08
per share, respectively. The total fair value of restricted stock vested during the
three
months ended
January 31, 2013
and
2012
was
$1.1 million
and
$0.9 million
, respectively. Total unrecognized compensation cost related to unamortized restricted stock awards was
$2.4 million
as of
January 31, 2013
. This cost is expected to be recognized over a weighted-average period of
2.3
years.
Stock Options
The Company uses the Black-Scholes pricing model to estimate the fair value of its stock options. The following table provides a summary of assumptions used to estimate the fair value of options issued during the three months ended
January 31, 2013
and
2012
.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
January 31,
|
|
2013
|
|
2012
|
Weighted-average expected volatility
|
54.0
|
%
|
|
54.0
|
%
|
Expected term (in years)
|
4.9-5.1
|
|
|
4.9-5.1
|
|
Risk-free interest rate
|
0.6
|
%
|
|
1.0
|
%
|
Expected dividend yield over expected term
|
1.0
|
%
|
|
1.0
|
%
|
Weighted-average grant-date fair value per share
|
$
|
8.98
|
|
|
$
|
6.49
|
|
Options are awarded to key employees, officers and non-employee directors. Director awards vest immediately while employee and officer awards typically cliff vest over a
three
-year period with service as the vesting condition. Similar to RSAs, the fair value of the options is established on the grant date and expensed over the vesting period with a corresponding increase to additional paid-in-capital. The following table summarizes the Company's stock option shares activity for the
three
months ended
January 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value (000s)
|
Outstanding at October 31, 2012
|
2,473,250
|
|
|
$
|
14.57
|
|
|
|
|
|
Granted
|
423,100
|
|
|
21.06
|
|
|
|
|
|
Exercised
|
(37,903
|
)
|
|
13.38
|
|
|
|
|
|
Cancelled/Expired
|
(2,500
|
)
|
|
20.99
|
|
|
|
|
|
Outstanding at January 31, 2013
|
2,855,947
|
|
|
15.54
|
|
|
7.4
|
|
$
|
14,813
|
|
Vested or expected to vest at January 31, 2013
|
2,765,986
|
|
|
15.44
|
|
|
7.4
|
|
$
|
14,618
|
|
Exercisable at January 31, 2013
|
1,877,560
|
|
|
$
|
14.07
|
|
|
6.5
|
|
$
|
12,380
|
|
The total intrinsic value of options (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) exercised during the
three
months ended
January 31, 2013
and
2012
was
$0.3 million
and
$12.0 thousand
, respectively. The total fair value of shares vested during the
three
months ended
January 31, 2013
and
2012
was
$2.5 million
and
$2.1 million
, respectively. Total unrecognized compensation cost related to stock options granted under the 2008 Plan was
$5.3 million
as of
January 31, 2013
. This cost is expected to be recognized over a weighted-average period of
1.8
years.
Restricted Stock Units
RSUs are awarded to key employees, officers and non-employee directors. The director awards vest immediately and the employee and officer awards typically cliff vest after a
three
-year period with service as the vesting condition. RSUs are not considered to be outstanding stock and do not have voting rights, although they do receive cash for an equivalent amount of dividends paid to the Company's shareholders. Upon the completion of certain service requirements, each RSU is payable to the holder in cash based on the market value of one share of the Company's common stock. Accordingly, the Company records a liability for the RSUs on its balance sheet and recognizes any changes in the market value during each reporting period as an expense. A summary of non-vested restricted stock unit changes during the
three
months ended
January 31, 2013
is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted - Average
Grant-Date Fair
Value Per Share
|
Non-vested at October 31, 2012
|
161,000
|
|
|
$
|
15.47
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
Non-vested at January 31, 2013
|
161,000
|
|
|
$
|
15.47
|
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
No
restricted stock units were granted during the
three
months ended
January 31, 2013
. The weighted-average grant-date fair value of restricted stock units granted during the
three
months ended
January 31, 2012
was
$15.08
per share.
No
restricted stock units vested during the
three
months ended
January 31, 2013
or
2012
. Total unrecognized compensation cost based on service related to unamortized restricted stock units was
$1.5 million
as of
January 31, 2013
. This cost does not include market fluctuations and is expected to be recognized over a weighted-average period of
1.9
years. There was no cash used to settle restricted stock units during the
three
months ended
January 31, 2013
or
2012
. The number of RSU awards outstanding as of
January 31, 2013
and
October 31, 2012
was
194,358
.
11. Income Taxes
The provision for income taxes is determined by applying an estimated annual effective income tax rate to income (loss) before income taxes. The rate is based on the most recent annualized forecast of pretax income, permanent book versus tax differences and tax credits. The Company’s estimated annual effective tax rate for the
three
months ended
January 31, 2013
is
41.7%
compared to the estimated annual effective tax rate of
39.8%
for the
three
months ended
January 31, 2012
. The increase in the current year effective tax rate benefit is primarily attributable to the loss of the manufacturer's deduction benefit in the current year.
The Company continues to record a state Net Operating Loss (NOL) valuation allowance in fiscal 2013. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets.
Prepaid and other current assets on the Condensed Consolidated Balance Sheets include an income tax receivable of
$1.3 million
as of
January 31, 2013
and
October 31, 2012
.
The Company’s unrecognized tax benefit (UTB) is related to the spin-off of the Company in 2008 and state tax items regarding the interpretations of tax laws and regulations. The total UTB as of
January 31, 2013
is
$15.8 million
. Of this,
$6.8 million
is recorded in Liability for uncertain tax positions and
$9.0 million
is recorded in Deferred income taxes (non-current assets) on the Condensed Consolidated Balance Sheets. The UTB includes
$14.7 million
for which the disallowance of such items would not affect the annual effective tax rate.
Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s financial statements or income tax returns. The final outcome of the future tax consequences of legal proceedings, if any, as well as the outcome of competent authority proceedings, changes in regulatory tax laws, or interpretation of those tax laws could impact the Company’s financial statements. The Company is subject to the effects of these matters occurring in various jurisdictions. The Company believes it is reasonably possible that a decrease of approximately
$2.7 million
in the UTB may be recognized within the next
twelve
months as a result of a lapse in the statute of limitations.
12. Contingencies
Environmental
Quanex is subject to extensive laws and regulations concerning the discharge of materials into the environment and the remediation of chemical contamination. To satisfy such requirements, Quanex must make capital and other expenditures on an ongoing basis. The Company accrues its best estimates of its remediation obligations and adjusts such accruals as further information and circumstances develop. Those estimates may change substantially depending on information about the nature and extent of contamination, appropriate remediation technologies, and regulatory approvals. In accruing for environmental remediation liabilities, costs of future expenditures are not discounted to their present value, unless the amount and timing of the expenditures are fixed or reliably determinable. When environmental laws might be deemed to impose joint and several liability for the costs of responding to contamination, the Company accrues its allocable share of liability taking into account the number of parties participating, their ability to pay their shares, the volumes and nature of the wastes involved, the nature of anticipated response actions, and the nature of the Company’s alleged connections. The cost of environmental matters has not had a material adverse effect on Quanex’s operations or financial condition in the past, and management is not currently aware of any conditions that it believes are likely to have a material adverse effect on Quanex’s operations, financial condition or cash flows.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The table below indicates the total environmental reserve and corresponding recovery balances as well as where these balances are reported on the Condensed Consolidated Balance Sheets as of
January 31, 2013
and
October 31, 2012
:
|
|
|
|
|
|
|
|
|
|
January 31,
2013
|
|
October 31,
2012
|
|
(In thousands)
|
Accrued liabilities
|
$
|
1,700
|
|
|
$
|
1,700
|
|
Non-current environmental reserves
|
9,480
|
|
|
9,827
|
|
Total environmental reserves
|
$
|
11,180
|
|
|
$
|
11,527
|
|
|
|
|
|
Accounts receivable
|
$
|
436
|
|
|
$
|
821
|
|
Other assets (non-current)
|
10,062
|
|
|
10,374
|
|
Total receivable for recovery of remediation costs
|
$
|
10,498
|
|
|
$
|
11,195
|
|
Currently, the Company’s ongoing remediation activities are at one of its subsidiaries, Nichols Aluminum-Alabama, LLC (NAA). NAA operates a plant in Decatur, Alabama that is subject to an Alabama Hazardous Wastes Management and Minimization Act Post-Closure Permit. Among other things, the permit requires NAA to remediate, as directed by the state, historical environmental releases of wastes and waste constituents. Consistent with the permit, NAA has undertaken various studies of site conditions and, during the first quarter of 2006, started a phased program to treat in-place free product petroleum that had been released underneath the plant. During the second quarter 2010, NAA submitted to the state the first component of its proposed workplan for implementing a site-wide remedy. The full workplan was submitted to the state during the third quarter 2010, revised during the second quarter
2011
to reflect both additional sampling data and responses to state comments, and revised again in the fourth quarter
2011
in response to another round of state comments. Based on those plans, which remain subject to further comment, revision, and state approval, the Company’s remediation reserve at NAA’s Decatur plant is
$11.2 million
as of
January 31, 2013
. Approximately
$1.1 million
of the
January 31, 2013
reserve represents administrative costs; the balance of
$10.1 million
represents estimated costs for investigation, studies, cleanup, and treatment. The reserve has not been discounted. NAA was acquired through a stock purchase in which the sellers agreed to indemnify Quanex and NAA for identified environmental matters related to the business and based on conditions initially created or events initially occurring prior to the acquisition. Environmental conditions are presumed to relate to the period prior to the acquisition unless proved to relate to releases occurring entirely after closing. The limit on indemnification is
$21.5 million
excluding legal fees. While the Company’s current estimates indicate it will not reach this limit, changing circumstances could result in additional costs or expense that are not foreseen at this time. In accordance with the indemnification, the indemnitors paid the first
$1.5 million
of response costs and have been paying
90%
of ongoing costs. Based on its experience to date, its estimated cleanup costs going forward, and costs incurred to date as of
January 31, 2013
, the Company expects to recover from the sellers’ shareholders an additional
$10.5 million
which has not been discounted. The undiscounted recovery from indemnitors as of
October 31, 2012
was
$11.2 million
.
The Company’s final remediation costs and the timing of those expenditures will depend upon such factors as the nature and extent of contamination, the cleanup technologies employed, the effectiveness of the cleanup measures that are employed, and regulatory concurrences. While actual remediation costs, therefore, may be more or less than amounts accrued, the Company believes it has established adequate reserves for all probable and reasonably estimable remediation liabilities. It is not possible at this point to reasonably estimate the amount of any obligation for remediation in excess of current accruals because of uncertainties as to the extent of environmental impact, cleanup technologies, and concurrence of governmental authorities.
The Company currently expects to pay the accrued remediation reserve through at least fiscal 2034, although some of the same factors discussed earlier could accelerate or extend the timing.
Other
From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of their business. Although the ultimate resolution and impact of such litigation on the Company is not presently determinable, the Company’s management believes that the eventual outcome of such litigation will not have a material adverse effect on the overall financial condition, results of operations or cash flows of the Company.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. Warranty Obligations
The Company’s estimated obligations for warranty are accrued concurrently with the revenue recognized. The Company makes provisions for its warranty obligations based upon historical experience incurred for such obligations adjusted, as necessary, for current conditions and factors. Due to the significant uncertainties and judgments involved in estimating the Company’s warranty obligations, including changing product designs, variance in customer installation process and future claims experience varying from historical claims experience, the ultimate amount incurred for warranty costs could change in the near and long-term from the current estimate.
The following table provides a reconciliation of the activity related to the Company’s accrued warranty, including both the current (reported in Accrued liabilities on the Condensed Consolidated Balance Sheets) and long-term portions (reported in Other liabilities on the Condensed Consolidated Balance Sheets), for the
three
months ended
January 31, 2013
(in thousands):
|
|
|
|
|
|
January 31,
2013
|
Beginning balance
|
$
|
4,781
|
|
Provision for warranty expense
|
121
|
|
Warranty costs paid
|
(240
|
)
|
Total accrued warranty
|
$
|
4,662
|
|
Less long-term portion
|
2,614
|
|
Current accrued warranty
|
$
|
2,048
|
|
14. Derivative Instruments and Fair Value Measurement of Assets and Liabilities
Derivative Instruments
The Company's derivative activities are subject to the management, direction, and control of the Chief Financial Officer and Chief Executive Officer and other officers and employees they select. Certain transactions in excess of specified levels require further approval from the Board of Directors.
The nature of the Company's business activities requires the management of various financial and market risks, including those related to changes in foreign currency exchange rates and aluminum scrap prices. The Company uses foreign currency forwards and options and aluminum forward and swap contracts to mitigate or eliminate certain of those risks. Specifically, the foreign currency contracts are used to offset fluctuations in the value of accounts receivable and payable balances that are denominated in currencies other than the U.S. dollar, which consist principally of the Euro, British Pound and Canadian Dollar. The aluminum contracts are used to minimize the price risk related to customer sales contracts. The Company enters into firm price raw material purchase commitments (which are designed as "normal purchases" under ASC 815) as well as contracts on the London Metal Exchange (LME). The Company's risk management policy as it relates to these LME contracts is to enter into contracts as needed so that raw material purchase levels, including both fixed price purchase commitments as well as LME contracts match the needs of the Company to meet committed sales orders. This is done through the use of LME forward purchase and sale contracts as well as LME swap contracts. The Company does not currently enter into derivative transactions for speculative or trading purposes.
The Company is exposed to credit loss in the event of nonperformance by the counterparties to its derivative transactions. The Company attempts to mitigate this risk by monitoring the creditworthiness of its counterparties and limiting its exposure to individual counterparties. In addition, the Company has established master netting agreements in certain cases to facilitate the settlement of gains and losses on specific derivative contracts.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company has not designated any of its derivative contracts for hedge accounting treatment. Therefore, changes in the fair value of these contracts are recorded in the Condensed Consolidated Statements of Income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Derivatives Not Designated as
|
Location of Gain or (Loss)
|
January 31,
|
Hedging Instruments
|
Recognized in Earnings
|
2013
|
|
2012
|
|
|
|
(In thousands)
|
Aluminum derivatives
|
Cost of sales
|
$
|
70
|
|
|
$
|
961
|
|
|
Foreign currency derivatives
|
Other, net
|
$
|
(708
|
)
|
|
$
|
721
|
|
|
The fair value of outstanding derivative contracts recorded as assets and liabilities on the accompanying Condensed Consolidated Balance Sheet is indicated in the table below:
|
|
|
|
|
|
|
|
|
|
January 31, 2013
|
|
October 31, 2012
|
|
(In thousands)
|
Asset Derivatives
|
|
|
|
Prepaid and other current assets:
|
|
|
|
Aluminum derivatives
|
$
|
38
|
|
|
$
|
10
|
|
Foreign currency derivatives
|
$
|
11
|
|
|
$
|
6
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
Accrued liabilities:
|
|
|
|
Aluminum derivatives
|
$
|
79
|
|
|
$
|
170
|
|
Foreign currency derivatives
|
$
|
123
|
|
|
$
|
23
|
|
Other liabilities (non-current):
|
|
|
|
Aluminum derivatives
|
$
|
—
|
|
|
$
|
4
|
|
The following table summarizes the notional amounts and fair value of the Company's outstanding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional as indicated
|
|
Fair Value in $
|
|
|
January 31, 2013
|
|
October 31, 2012
|
|
January 31, 2013
|
|
October 31, 2012
|
|
|
(In thousands)
|
Aluminum derivatives:
|
|
|
|
|
|
|
|
|
Aluminum forward purchase contracts
|
LBS
|
1,213
|
|
|
2,370
|
|
|
$
|
46
|
|
|
$
|
(164
|
)
|
Aluminum forward sales contracts
|
LBS
|
1,488
|
|
|
—
|
|
|
$
|
(78
|
)
|
|
$
|
—
|
|
Aluminum swap contracts
|
LBS
|
163
|
|
|
—
|
|
|
$
|
(8
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives:
|
|
|
|
|
|
|
|
|
Sell EUR, buy GBP
|
EUR
|
940
|
|
|
545
|
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
Sell EUR, buy USD
|
EUR
|
8,873
|
|
|
7,663
|
|
|
$
|
(111
|
)
|
|
$
|
(23
|
)
|
Sell CAD, buy USD
|
CAD
|
443
|
|
|
608
|
|
|
$
|
(5
|
)
|
|
$
|
1
|
|
Buy GBP, sell USD
|
GBP
|
1,756
|
|
|
1,934
|
|
|
$
|
11
|
|
|
$
|
5
|
|
Fair Value Measurement
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
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (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.
|
The Company holds Money Market Fund investments, pension plan assets and derivative contracts that are measured at fair value on a recurring basis. The Money Market Fund investments and the pension plan assets are measured at fair value based on active market quotations and are therefore classified as Level 1. All of the Company's derivative contracts are valued using quoted market prices from brokers or exchanges and are classified within Level 2 of the fair value hierarchy.
The Money Market Fund investments are classified as Cash and equivalents, while the pension plan assets are included in Deferred pension and postretirement benefits on the Condensed Consolidated Balance Sheets. The derivative instruments are included in various asset and liability accounts as discussed earlier in this footnote.
The following table summarizes the assets and liabilities measured on a recurring basis based on the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2013
|
|
October 31, 2012
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
(In thousands)
|
Assets
|
|
Money market fund investments
|
$
|
891
|
|
$
|
—
|
|
$
|
—
|
|
$
|
891
|
|
|
$
|
67,819
|
|
$
|
—
|
|
$
|
—
|
|
$
|
67,819
|
|
Aluminum derivatives
|
—
|
|
38
|
|
—
|
|
38
|
|
|
—
|
|
10
|
|
—
|
|
10
|
|
Foreign currency exchange derivatives
|
—
|
|
11
|
|
—
|
|
11
|
|
|
—
|
|
6
|
|
—
|
|
6
|
|
Pension plan assets
|
19,196
|
|
—
|
|
—
|
|
19,196
|
|
|
18,562
|
|
—
|
|
—
|
|
18,562
|
|
Total assets
|
$
|
20,087
|
|
$
|
49
|
|
$
|
—
|
|
$
|
20,136
|
|
|
$
|
86,381
|
|
$
|
16
|
|
$
|
—
|
|
$
|
86,397
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Aluminum derivatives
|
$
|
—
|
|
$
|
(79
|
)
|
$
|
—
|
|
$
|
(79
|
)
|
|
$
|
—
|
|
$
|
(174
|
)
|
$
|
—
|
|
$
|
(174
|
)
|
Foreign currency exchange derivatives
|
—
|
|
(123
|
)
|
—
|
|
(123
|
)
|
|
—
|
|
(23
|
)
|
—
|
|
(23
|
)
|
Total liabilities
|
$
|
—
|
|
$
|
(202
|
)
|
$
|
—
|
|
$
|
(202
|
)
|
|
$
|
—
|
|
$
|
(197
|
)
|
$
|
—
|
|
$
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
Net assets (liabilities)
|
$
|
20,087
|
|
$
|
(153
|
)
|
$
|
—
|
|
$
|
19,934
|
|
|
$
|
86,381
|
|
$
|
(181
|
)
|
$
|
—
|
|
$
|
86,200
|
|
As of
January 31, 2013
and
October 31, 2012
, the Company did not have any assets or liabilities that were measured at fair value on a recurring basis and classified as Level 3. In connection with the Alumco asset purchase transaction (see Note 3), the Company recognized a
$0.3 million
contingent liability that is recorded at fair value on a non-recurring basis and was classified as Level 3 as of
January 31, 2013
. The fair value is based on management's assessment of the probability that the acquired business will achieve the financial targets necessary to receive the earn out payment specified in the purchase agreement. In addition, the Company holds approximately
$4.2 million
of property that is recorded at fair value on a non-recurring basis and based on broker opinions that was classified as Level 3 as of
January 31, 2013
and
October 31, 2012
.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. Other Income (Expense)
The Company's non-operating income (expense), (Other,net) for the three months ended
January 31, 2013
and
2012
are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
January 31,
|
|
2013
|
|
2012
|
|
(In thousands)
|
Other income (expense)
|
|
|
|
Foreign currency transaction gains (losses)
|
$
|
662
|
|
|
$
|
(605
|
)
|
Foreign currency exchange derivative gains (losses)
|
(708
|
)
|
|
721
|
|
Interest income
|
20
|
|
|
79
|
|
Other
|
(65
|
)
|
|
22
|
|
Other income (expense)
|
$
|
(91
|
)
|
|
$
|
217
|
|