QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended October 31, 2016, 2015 and 2014
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Year Ended October 31,
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2016
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2015
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2014
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(In thousands)
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Operating activities:
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Net (loss) income
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$
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(1,859
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)
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$
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16,093
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$
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29,234
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Adjustments to reconcile net (loss) income to cash provided by operating activities:
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Depreciation and amortization
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53,146
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35,220
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36,910
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(Gain) loss on disposition of capital assets
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(20
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)
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495
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586
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Stock-based compensation
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6,089
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4,266
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3,925
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Deferred income tax
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(8,469
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)
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5,204
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14,246
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Excess tax benefit from share-based compensation
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(136
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)
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(60
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)
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(654
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)
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Charge for deferred loan costs and debt discount
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16,022
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—
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—
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Asset impairment charges
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12,602
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—
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1,007
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Gain on sale of discontinued operations
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—
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—
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(39,122
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)
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Gain on involuntary conversion
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—
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(1,263
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)
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(2,408
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)
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Other, net
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339
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(19
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)
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2,105
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Changes in assets and liabilities, net of effects from acquisitions:
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Decrease in accounts receivable
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796
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2,668
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484
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Decrease (increase) in inventory
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5,346
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9,805
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(25,650
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)
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Decrease (increase) in other current assets
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2,503
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(1,304
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)
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(1,098
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)
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(Decrease) increase in accounts payable
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(2,273
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)
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(2,862
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)
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12,842
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Increase (decrease) in accrued liabilities
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1,246
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(576
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)
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(6,871
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)
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(Decrease) increase in income taxes
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(365
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)
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369
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866
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Increase (decrease) in deferred pension and postretirement benefits
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588
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(372
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)
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(347
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)
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Increase (decrease) in other long-term liabilities
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956
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(283
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)
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(2,172
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)
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Other, net
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(93
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)
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(294
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)
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(3,105
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)
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Cash provided by operating activities
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86,418
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67,087
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20,778
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Investing activities:
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Net proceeds from sale of discontinued operations
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—
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—
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107,431
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Acquisitions, net of cash acquired
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(245,904
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)
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(131,689
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)
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(5,161
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)
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Capital expenditures
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(37,243
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)
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(29,982
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)
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(33,779
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)
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Proceeds from disposition of capital assets
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1,044
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264
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832
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Proceeds from property insurance claim
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—
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1,263
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4,801
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Cash (used for) provided by investing activities
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(282,103
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)
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(160,144
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)
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74,124
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Financing activities:
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Borrowings under credit facility
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634,800
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117,000
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—
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Repayments of credit facility borrowings
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(422,875
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)
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(67,000
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)
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—
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Debt issuance costs
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(11,435
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)
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(496
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)
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—
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Repayments of other long-term debt
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(2,185
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)
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(1,020
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)
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(175
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)
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Common stock dividends paid
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(5,470
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)
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(5,515
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)
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(5,992
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)
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Issuance of common stock
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3,400
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5,109
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3,249
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Excess tax benefit from share-based compensation
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136
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60
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654
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Purchase of treasury stock
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—
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(52,719
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)
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(22,281
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)
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Other, net
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—
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—
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86
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Cash provided by (used for) financing activities
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196,371
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(4,581
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)
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(24,459
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)
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Effect of exchange rate changes on cash and cash equivalents
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1,715
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379
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207
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Increase (decrease) in cash and cash equivalents
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2,401
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(97,259
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)
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70,650
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Cash and cash equivalents at beginning of period
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23,125
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120,384
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49,734
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Cash and cash equivalents at end of period
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$
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25,526
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$
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23,125
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$
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120,384
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See notes to consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations, Basis of Presentation and Significant Accounting Policies
Nature of Operations
Quanex Building Products Corporation is a component supplier to original equipment manufacturers (OEMs) in the building products industry. These components can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of fenestration components include: (1) energy-efficient flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, and (4) precision-formed metal and wood products. We also manufacture cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, wood flooring, trim moldings, vinyl decking, fencing, water retention barriers, and conservatory roof components. We have organized our business into three reportable operating segments. For additional discussion of our reportable operating segments, see Note 18, "Segment Information." We use low-cost production processes and engineering expertise to provide our customers with specialized products for their specific window, door, and cabinet applications. We believe these capabilities provide us with unique competitive advantages. We serve a primary customer base in North America and the United Kingdom, and also serve customers in international markets through our operating plants in the United Kingdom and Germany, as well as through sales and marketing efforts in other countries.
Unless the context indicates otherwise, references to "Quanex", the "Company", "we", "us" and "our" refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries.
Basis of Presentation and Principles of Consolidation
Our consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). We consolidate our wholly-owned subsidiaries and eliminate intercompany sales and transactions. We have no cost or equity investments in companies that are not wholly-owned. In our opinion, these audited financial statements contain all adjustments necessary to fairly present our financial position, results of operations and cash flows for the periods presented.
Use of Estimates
In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. We review our estimates on an ongoing basis, including those related to impairment of long lived assets and goodwill, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates. During the year ended October 31, 2016, we recorded a change in estimate related to certain assets involved in restructuring activities, as more fully described under the caption "Restructuring."
A summary of our significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Revenue Recognition
We recognize revenue when products are shipped and when title has passed to the customer. Revenue is deemed to be realized or earned when the following criteria are met: (a) persuasive evidence that a contractual sales arrangement exists; (b) delivery has occurred; (c) the price to the buyer is fixed or determinable; and (d) collection is reasonably assured. Sales allowances and customer incentives are treated as reductions to revenue and are provided for based on historical experience and current estimates.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with an original maturity of three months or less. Such securities with an original maturity which exceeds three months are deemed to be short-term investments. We maintain cash and cash equivalents at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Concentration of Credit Risk and Allowance for Doubtful Accounts
Certain of our businesses or product lines are largely dependent on a relatively few large customers. Although we believe we have an extensive customer base, the loss of
one
of these large customers or if such customers were to incur a prolonged period of decline in business, our financial condition and results of operations could be adversely affected. For the year ended October 31, 2016,
one
customer provided
10%
of our consolidated net sales. Amounts included in accounts receivable at October 31, 2016 related to this customer totaled
$5.9 million
. Each of
two
customers provided more than
10%
of our consolidated net sales for the year ended October 31, 2015 (
11%
and
14%
) and each of
two
customers provided more than
10%
of our consolidated net sales for the year ended October 31, 2014 (
11%
and
15%
). Amounts included in accounts receivable at October 31, 2015 related to these customers totaled
$8.3 million
and
$5.0 million
, respectively.
We have established an allowance for doubtful accounts to estimate the risk of loss associated with our accounts receivable balances. Our policy for determining the allowance is based on factors that affect collectability, including: (a) historical trends of write-offs, recoveries and credit losses; (b) the credit quality of our customers; and (c) projected economic and market conditions. We believe our allowance is adequate to absorb any known or probable losses as of October 31, 2016.
Business Combinations
We apply the acquisition method of accounting for business combinations in accordance with U.S. GAAP, which requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net assets and liabilities acquired. We use established valuation techniques and engage reputable valuation specialists to assist us with these valuations.
Inventory
We record inventory at the lower of cost or market value. Inventories are valued using the first-in first-out (FIFO) and last-in first-out (LIFO) methods, although LIFO is only used at
two
of our plant locations currently. We use the dollar-value link chain LIFO method, and the LIFO reserve is calculated on a consolidated basis in a single consolidated pool. The businesses that we acquire and integrate into our operations may value inventories using either the LIFO or FIFO method. Fixed costs related to excess manufacturing capacity have been expensed in the period, and therefore, are not capitalized into inventory. Inventory quantities are regularly reviewed and provisions for excess or obsolete inventory are recorded primarily based on our forecast of future demand and our estimates regarding current and future market conditions. Significant unanticipated variances to our forecasts could require a change in the provision for excess or obsolete inventory, resulting in a charge to net income during the period of the change.
Long-Lived Assets
Property, Plant and Equipment and Intangible Assets with Defined Lives
We make judgments and estimates related to the carrying value of property, plant and equipment, intangible assets with defined lives, and long-lived assets, which include determining when to capitalize costs, the depreciation and amortization methods to use and the useful lives of these assets. We evaluate these assets for impairment when there are indicators that the carrying values of these assets might not be recoverable. Such indicators of impairment may include changes in technology, significant market fluctuations, historical losses or loss of a significant customer, or other changes in circumstances that could affect the assets’ ability to generate future cash flows. When we evaluate these assets for impairment, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset to its carrying value. If the carrying value exceeds the sum of the undiscounted cash flows, and there is no alternative use for the asset, we determine that the asset is impaired. To measure the impairment charge, we compare the carrying amount of the long-lived asset to its fair value, as determined by quoted market prices in active markets, if available, or by discounting the projected future cash flows using our incremental borrowing rate.This calculation of fair value requires us to develop and employ long-term forecasts of future operating results related to these assets. These forecasts are based on assumptions about demand for our products and future market conditions. Future events and unanticipated changes to these assumptions could require a provision for impairment, resulting in a charge to net income during the period of the change.
We monitor relevant circumstances, including industry trends, general economic conditions, and the potential impact that such circumstances might have on the valuation of our identifiable intangible assets with finite lives. Events and changes in circumstances that may cause a triggering event and necessitate such a review include, but are not limited to: a decrease in sales for certain customers, improvements or changes in technology, and/or a decision to discontinue the use of a trademark or trade name, or allow a patent to lapse. Such events could negatively impact the fair value of our identifiable intangible assets. In such
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
circumstances, we may evaluate the underlying assumptions and estimates made by us in order to assess the appropriate valuation of these identifiable intangible assets and compare to the carrying value of the assets. We may be required to write down these identifiable intangible assets and record a non-cash impairment charge. When we originally value our intangible assets, we use a variety of techniques to establish the carrying value of the assets, including the relief from royalty method, excess current year earnings method and income method.
Changes in market conditions during the fourth quarter of 2016 impacted our long-term forecasts of future operating results with regard to the potential reduction of significant sales volume to a large customer of our United States vinyl operations, and lower-than-expected operating performance of our North American Cabinet Components business. We determined that these conditions were indicators of triggering events which necessitated an evaluation of certain long-term assets utilized in these businesses for potential impairment. We compared the projected undiscounted cash flows we expected to realize associated with these assets over the remaining useful lives of the primary operating assets to the net book value of the long-term assets, including goodwill, and determined that these assets were not impaired. Therefore, we did not record an impairment charge related to property, plant and equipment or intangible assets with defined lives during 2016. There were no indicators of triggering events noted for the years ended October 31, 2015 and 2014.
Software development costs, including costs incurred to purchase third-party software, are capitalized when we have determined that the technology is capable of meeting our performance requirements, and we have authorized funding for the project. We cease capitalization of software costs when the software is substantially complete and is ready for its intended use. The software is then amortized over its estimated useful life. When events or circumstances indicate the carrying value of internal use software might not be recoverable, we assess the recoverability of these assets by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated from the asset’s use, consistent with the methodology to test other property, plant and equipment for impairment.
Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. We capitalize betterments which extend the useful lives or significantly improve the operational efficiency of assets. We expense repair and maintenance costs as incurred.
The estimated useful lives of our primary asset categories at October 31, 2016 were as follows:
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|
|
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Useful Life (in Years)
|
Land improvements
|
7 to 25
|
Buildings
|
25 to 40
|
Building improvements
|
5 to 20
|
Machinery and equipment
|
2 to 15
|
Leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the lease.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Goodwill
We use the acquisition method to account for business combinations and to the extent that the purchase price exceeds the fair value of the net assets acquired, we record goodwill. In accordance with U.S. GAAP, we are required to evaluate our goodwill on a qualitative basis to determine if there are indicators of impairment. If there are no indicators, no further analysis is deemed necessary. However, if there are indicators of impairment or if events or circumstances indicate there may be a potential impairment, we perform an annual goodwill impairment test as of August 31, or more frequently if indicators of impairment exist. This impairment test requires a two-step approach as prescribed in ASC Topic 350 “
Intangibles - Goodwill and Other
” (ASC 350). The first step of the impairment test requires us to compare the fair value of each reporting unit to its carrying value including goodwill. To determine fair value of our reporting units, we use multiple valuation techniques including a discounted cash flow analysis, using the applicable weighted average cost of capital, in combination with a market approach. This test requires us to make assumptions about the future growth of our business and the market in general, as well as other variables such as the level of investment in capital expenditure, growth in working capital requirements and the terminal or residual value of our reporting units beyond the periods of estimated annual cash flows. We use a third-party valuation firm to assist us with this analysis. If the fair value of each reporting unit exceeds its carrying value, no further testing is required. Otherwise, we perform the second step of the impairment test whereby we compare the implied fair value of goodwill to its carrying value. The implied fair value of goodwill is determined by applying the acquisition method of accounting for a business combination to the reporting unit as if it were acquired. Under this method, the fair value of the reporting unit is deemed to be the purchase price. The assets and liabilities are recorded at their fair value and the remaining excess of fair value is the implied value of goodwill. An impairment loss is recorded to the extent that the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill. Our estimates of future cash flows and the residual values could differ from actual cash flows which may require a provision for impairment in a future period.
At our annual testing date, August 31, 2016, we had six reporting units with goodwill balances: three reporting units included in our NA Engineered Components operating segment, two reporting units included in our EU Engineered Components operating segment, and one reporting unit included in our NA Cabinet Components operating segment. Of the reporting units in our NA Engineered Components operating segment, we determined that the fair value of two of the reporting units well exceeded their respective book values (
152%
and
336%
). However, one reporting unit, our United States vinyl extrusion business, recorded an impairment charge of
$12.6 million
, or 100% of the remaining goodwill for this unit. The impairment was the result of the anticipated loss of volume from a large customer over the forecast period. Of the two reporting units included in our EU Engineered Components operating segment, we determined that the fair value of these units well exceeded their respective book values (
35%
and
42%
). For the reporting unit included in our NA Cabinet Components operating segment, we determined the fair value of the unit exceeded the carrying value by
7%
.
Restructuring
We accrue one-time severance costs pursuant to an approved plan of restructuring at the communication date, when affected employees have been notified of the potential severance and sufficient information has been provided for the employee to calculate severance benefits, in the event the employee is involuntarily terminated. In addition, we accrue costs associated with the termination of contractual commitments including operating leases at the time the lease is terminated pursuant to the lease provisions or in accordance with another agreement with the landlord. Otherwise, we continue to recognize operating lease expense through the cease-use date. After the cease-use date, we determine if our operating lease payments are at market. We assume sublet of the facility at the market rate. To the extent our lease obligations exceed the fair value rentals, we discount to arrive at the present value and record a liability. If the facility is not sublet, we expense the amount of the sublet in the current period. For other costs directly related to the restructuring effort, such as equipment moving costs, we expense in the period incurred.
In October 2016, we announced the closure of three operating plants, two related to our United Stated vinyl operations, and one related to our kitchen and bathroom cabinet door business in Mexico. We expensed
$0.5 million
pursuant to these restructuring efforts at October 31, 2016, including an accrual for one-time severance cost of
$0.4 million
included in accrued liabilities in the accompanying consolidated balance sheet. Our facility lease obligations were deemed to be at fair market value and we have not yet negotiated exit from these lease obligations. We expect to incur costs related to equipment moves, potential fixed asset retirements and inventory adjustments related to these restructuring efforts during fiscal 2017.
In addition, we evaluated the remaining depreciable lives of property, plant and equipment that will be abandoned or otherwise disposed as of the cease-use date of these plants. We recorded a change in estimate associated with the remaining useful lives of these assets which resulted in an increase in depreciation expense of
$1.0 million
for the year ended October 31, 2016, and we expect to incur incremental depreciation expense totaling
$1.6 million
associated with these assets during fiscal 2017. Furthermore, we evaluated the remaining service lives of intangible assets with defined lives associated with our United Stated
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
vinyl extrusion business and recorded a change in estimate associated with the remaining useful lives of a customer relationship intangible and a utility process intangible asset resulting in an increase in amortization expense of
$0.3 million
for the year ended October 31, 2016, and we expect to incur incremental amortization expense totaling
$1.0 million
associated with these intangible assets during fiscal 2017.
Insurance
We manage our exposure to losses for workers’ compensation, group medical, property, casualty and other insurance claims through a combination of self-insurance retentions and insurance coverage with third-party carriers. We record undiscounted liabilities associated with our portion of these exposures, which we estimate by considering various factors such as our historical claims experience, severity factors and estimated claims incurred but not reported, for which we have developed loss development factors, which are estimates as to how claims will develop over time until closed. While we consider a number of factors in preparing the estimates, sensitive assumptions using significant judgment are made in determining the amounts that are accrued in the financial statements. Actual claims could differ significantly from these estimated liabilities, depending on future claims experience. We do not record insurance recoveries until any contingencies relating to the claim have been resolved.
Retirement Plans
We sponsor a defined benefit pension plan and an unfunded postretirement plan that provides health care and life insurance benefits for a limited pool of eligible retirees and dependents. To measure our liabilities associated with these plans, we make assumptions related to future events, including expected return on plan assets, rate of compensation increases, and healthcare cost trend rates. The discount rate reflects the rate at which benefits could be effectively settled on the measurement date. We determine our discount rate using a RATE: Link Model whereby target yields are developed from bonds across a range of maturity points, and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the curve and used to discount benefit payments associated with each future year. Actual pension plan asset investment performance, as well as other economic experience such as discount rate and demographic experience, will either reduce or increase unamortized pension losses at the end of any fiscal year, which ultimately affects future pension costs.
Warranty Obligations
We accrue warranty obligations when we recognize revenue for certain products. Our provision for warranty obligations is based on historical costs incurred for such obligations and is adjusted, where appropriate, based on current conditions and factors. Our ability to estimate our warranty obligations is subject to significant uncertainties, including changes in product design and our overall product sales mix.
Income Taxes
We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and the amounts reported in our consolidated balance sheets, as well as net operating losses and tax credit carry forwards. We evaluate the carrying value of the net deferred tax assets and determine whether we will be able to generate sufficient future taxable income to realize our deferred tax assets. We perform this review for recoverability on a jurisdictional basis, whereby we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence can be objectively verified. Cumulative losses in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. Thus, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. We recorded a net loss for the year ended October 31, 2016. However, we have recorded pre-tax cumulative income from continuing operations of
$31.3 million
for the three-year period ended October 31, 2016. We believe we will fully realize our deferred tax assets, net of recorded valuation allowance. We project future taxable income using the same forecasts used to test long-lived assets and intangibles for impairment, scheduling out the future reversal of existing taxable temporary differences and reviewing our most recent financial operations. In the event the estimates and assumptions indicate we will not generate sufficient future taxable income to realize our deferred tax assets, we record a valuation allowance against a portion of our deferred tax assets.
We evaluate our on-going tax positions to determine if it is more-likely-than-not we will be successful in defending such positions if challenged by taxing authorities. To the extent that our tax positions do not meet the more-likely-than-not criteria, we record a liability for uncertain tax positions. Historically, we have recorded a liability for uncertain tax positions which stem from an unrecognized tax benefit from our 2008 spin-off from our predecessor parent company, as well as certain state tax items regarding the interpretation of tax laws and regulations. In January 2015, we reversed the liability for uncertain tax positions related to the 2008 spin-off based on the issuance of a no change letter from the Internal Revenue Service (Note 11, "
Income Taxes
"). We continue
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
to evaluate our positions regarding various state tax interpretations at each reporting date, until the applicable statute of limitations lapse.
Derivative Instruments
We have historically used financial and commodity-based derivative contracts to manage our exposure to fluctuations in foreign currency exchange rates and aluminum prices. All derivatives are measured at fair value on a recurring basis and the methodology and classifications are discussed further in Note 13, "Derivative Instruments." We have not designated the derivative instruments we use as cash flow hedges under ASC Topic 815 "
Derivatives and Hedging
” (ASC 815). Therefore, all gains and losses, both realized and unrealized, are recognized in the consolidated statements of income (loss) in the period of the change as the underlying assets and liabilities are marked-to-market. We do not enter into derivative instruments for speculative or trading purposes. As such, these instruments are considered economic hedges, and are reflected in the operating activities section of the consolidated statements of cash flow.
Foreign Currency Translation
Our consolidated financial statements are presented in our reporting currency, the United States Dollar. Our German and United Kingdom operations are measured using the local currency as the functional currency. The assets and liabilities of our foreign operations which are denominated in other currencies are translated to United States Dollars using the prevailing exchange rates as of the balance sheet date. Revenues and expenses are translated at the average exchange rates for the applicable period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss on the consolidated balance sheets.
Occasionally, we enter into transactions that are denominated in currencies other than our functional currency. At each balance sheet date, we translate these asset or liability accounts to our functional currency and record unrealized transaction gains or losses. When these assets or liabilities settle, we record realized transaction gains or losses. These realized and unrealized gains or losses are included in the accompanying consolidated statements of income (loss) under the caption, “Other, net.”
Stock–Based Compensation
We have issued stock-based compensation in the form of stock options to directors, employees and officers, and non-vested restricted stock awards to certain key employees and officers. We apply the provisions of ASC Topic 718 “
Compensation - Stock Compensation
” (ASC 718), to determine the fair value of stock option awards on the date of grant using the Black-Scholes valuation model. We recognize the fair value as compensation expense on a straight-line basis over the requisite service period of the award based on awards ultimately expected to vest. Stock options granted to directors vest immediately while the stock options granted to our employees and officers typically vest ratably over a
three
-year period with service and continued employment as the vesting conditions. For new option grants to retirement-eligible employees, we recognize expense and vest immediately upon grant, consistent with the retirement vesting acceleration provisions of these grants. For employees near retirement age, we amortize such grants over the period from the grant date to the retirement-eligibility date if such period is shorter than the standard vesting schedule. For grants of non-vested restricted stock, we calculate the compensation expense at the grant date as the number of shares granted multiplied by the closing stock price of our common stock on the date of grant. This expense is recognized ratably over the vesting period. Our non-vested restricted stock grants to officers and employees cliff vest over a
three
-year period with service and continued employment as the only vesting criteria. Our fair value determination of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behavior over the expected term, our dividend rate, risk-free rate and expectation with regards to forfeitures. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, the valuation models may not provide an accurate measure of the fair value of our employee stock options. Accordingly, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
We have granted other awards which are linked to the performance of our common stock, but will settle in cash rather than the issuance of shares of our common stock. The value of these awards fluctuates with changes in our stock price, with the resulting gains or losses reflected in the period of the change.We have recorded current and non-current liabilities related to these awards reflected in the accompanying consolidated balance sheets at October 31, 2016 and 2015. See Note 15, “Stock-based Compensation.”
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In addition, we have granted performance share units which settle in cash and shares. These awards have vesting criteria based on a market condition (relative total shareholder return) and an internal performance condition (earnings per share growth). We utilize a Monte Carlo simulation model to value the market condition and our stock price on the date of grant to value the internal performance condition. We bifurcate the liability and equity portion of the awards (amounts expected to settle in cash and shares, respectively) and recognize expense ratably over the vesting period of
three
years.
Treasury Stock
We use the cost method to record treasury stock purchases whereby the entire cost of the acquired shares of our common stock is recorded as treasury stock (at cost). When we subsequently reissue these shares, proceeds in excess of cost upon the issuance of treasury shares are credited to additional paid in capital, while any deficiency is charged to retained earnings.
Earnings per Share Data
We calculate basic earnings per share based on the weighted average number of our common shares outstanding for the applicable period. We calculate diluted earnings per share based on the weighted average number of our common shares outstanding for the period plus all potentially dilutive securities using the treasury stock method, whereby we assume that all such shares are converted into common shares at the beginning of the period, if deemed to be dilutive. If we incur a loss from continuing operations, the effect of potentially dilutive common stock equivalents (stock options and unvested restricted stock awards) are excluded from the calculation of diluted earnings per share because the effect would be anti-dilutive. Performance shares are excluded from contingent shares for purposes of calculating diluted weighted average shares until the performance measure criteria is probable and shares are likely to be issued.
Supplemental Cash Flow Information
The following table summarizes our supplemental cash flow information for the years ended October 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Cash paid for interest
|
$
|
14,594
|
|
|
$
|
830
|
|
|
$
|
361
|
|
Cash paid for income taxes
|
3,004
|
|
|
2,561
|
|
|
3,046
|
|
Cash received for income tax refunds
|
1,949
|
|
|
403
|
|
|
66
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
Share value cancelled to satisfy tax withholdings
|
666
|
|
|
153
|
|
|
155
|
|
Recognition of unrecognized tax benefit
|
—
|
|
|
10,883
|
|
|
1,977
|
|
Debt assumed in acquisition
|
—
|
|
|
7,673
|
|
|
—
|
|
Debt discount on Term Loan B
|
6,200
|
|
|
—
|
|
|
—
|
|
(Decrease) increase in capitalized expenditures in accounts payable and accrued liabilities
|
$
|
(32
|
)
|
|
$
|
(204
|
)
|
|
$
|
1,398
|
|
Discontinued Operations
In accordance with ASC Topic 205-20 “
Presentation of Financial Statements-Discontinued Operations
” (ASC 205), we present the results of operations of businesses which have been sold or meet the criteria to be classified as held for sale on a consolidated basis as a separate caption below net income (loss) from continuing operations, net of tax. We also aggregate the assets and liabilities associated with discontinued operations and present separately as a component of current assets, long-term assets, current liabilities and long-term liabilities, as applicable, in the accompanying balance sheets. If an impairment loss is indicated and the fair value of the net assets exceeds the carrying value at the balance sheet date, we record an impairment loss in the period the net assets are classified as held for sale. We cease depreciation of assets which are classified as held for sale. We use our judgment to ascertain when a business meets the criteria to be accounted for as a discontinued operation, applying the U.S. GAAP standard to determine if there will be a strategic shift in the business as a result of the disposal. Changes in circumstances or our level of future involvement with a business that has been sold may impact how we account for discontinued operations.
Prior to April 1, 2014, we had
two
reportable business segments: (1) Engineered Products and (2) Aluminum Sheet Products. On April 1, 2014, we sold our interest in a limited liability company which held the assets of the Nichols Aluminum business (Nichols), the sole operating segment included in the Aluminum Sheet Products reportable segment, to Aleris International, Inc. (Aleris), a privately held Delaware corporation which provides aluminum rolled products and extrusions, aluminum recycling and
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
specification aluminum alloy production. We received net proceeds of
$107.4 million
, which includes a working capital adjustment of
$2.6 million
which we paid in June 2014, resulting in a gain on the transaction of
$24.1 million
, net of related taxes of
$15.0 million
. We paid
$0.4 million
to reimburse Aleris for certain severance costs related to Nichols employee terminations in accordance with the purchase agreement, which reduced the pre-tax gain on the sale. We entered into a transition services agreement whereby we provided certain administrative services to Nichols through May 31, 2014, including information technology support, benefit administration and payroll services.
Nichols represented a significant portion of our assets and operations. We accounted for this sale as a discontinued operation. We revised our financial statements, and removed the results of operations of Nichols from net income (loss) from continuing operations, and presented separately as income (loss) from discontinued operations, net of taxes, for each of the accompanying consolidated statements of income (loss), as applicable. Unless noted otherwise, the notes to the consolidated financial statements pertain to our continuing operations.
For cash flow statement presentation, the sources and uses of cash for Nichols during fiscal 2014 are presented as operating, investing and financing cash flows, as applicable, combined with such cash flows for continuing operations, as permitted by U.S. GAAP.
We have historically purchased rolled aluminum product from Nichols. We expect to continue to purchase aluminum from Nichols in the normal course of business. We considered whether these aluminum purchases and the services anticipated under the transition services agreement constituted significant continuing involvement with Nichols. Since these purchases are in the normal course of business and the services provided were for a relatively short period and are customary for similar transactions, we determined that this involvement was not deemed significant and did not preclude accounting for the transaction as a discontinued operation. Our purchases of aluminum product from Nichols for the years ended October 31, 2016, 2015 and 2014 were
$4.2 million
,
$9.5 million
and
$14.9 million
, respectively.
As of October 31, 2016, we recorded a receivable from Aleris of less than
$0.1 million
, which represented reimbursable costs, primarily associated with workers compensation and health insurance claims. We expect to continue to incur costs associated with these claims which will be reimbursable from Aleris.
In November 2013, Nichols experienced a fire at its Decatur, Alabama facility, which damaged a cold mill used to roll aluminum sheet to a desired thickness. The loss was insured, subject to a
$0.5 million
deductible. We capitalized
$6.5 million
to rebuild the asset, which was returned to service as of March 31, 2014. We incurred cost of
$2.3 million
associated with this loss, including an impairment of
$0.5 million
related to retirement of the asset, moving costs, outside service costs, clean-up and the deductible. This insurance claim was settled in July 2015. We received insurance proceeds of
$6.1 million
, of which
$1.3 million
was received in 2015, resulting in a recognized gain on involuntary conversion of
$3.7 million
.
The following table summarizes the operating results for Nichols for the year ended October 31, 2014:
|
|
|
|
|
|
October 31, 2014
|
|
(in thousands)
|
Net sales
|
$
|
142,797
|
|
Operating loss
|
(5,094
|
)
|
Loss before income taxes, before gain on sale
|
(5,111
|
)
|
Income tax benefit, before gain on sale
|
1,947
|
|
Gain on sale, net of tax of $15,062
|
24,060
|
|
Net income
|
$
|
20,896
|
|
Basic earnings per common share
|
$
|
0.57
|
|
Diluted earnings per common share
|
$
|
0.56
|
|
Subsequent Events
We have evaluated events occurring after the balance sheet date for possible disclosure as a subsequent event through the date the financial statements were issued.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Acquisitions
Woodcraft
On November 2, 2015, we completed a merger of QWMS, Inc., a Delaware corporation which was a newly-formed and wholly-owned Quanex subsidiary, and WII Holding, Inc. (WII), a Delaware corporation. Upon satisfaction or waiver of conditions set forth in the merger agreement, QWMS, Inc. merged with and into WII, and WII became our wholly-owned subsidiary, and, as a result, we acquired all the subsidiaries of WII (referred to collectively as Woodcraft). Woodcraft is a manufacturer of cabinet doors and other components to OEMs in the kitchen and bathroom cabinet industry. Woodcraft operated
12
plants within the United States and
one
in Mexico. On October 31, 2016, we announced the closure of the Woodcraft plant in Mexico. We paid
$245.9 million
in cash, net of cash acquired and including certain holdbacks with regard to potential indemnity claims, and received less than
$0.1 million
from the seller as a working capital true-up, resulting in goodwill totaling
$113.7 million
. For the period from the date of acquisition, November 2, 2015 through October 31, 2016, our consolidated operating results include revenues of
$223.4 million
and net income of
$4.1 million
associated with Woodcraft. Included in these results is a restructuring charge of
$0.1 million
, as more fully described in Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring." We believe this acquisition expanded our business into a new segment of the building products industry, which is experiencing growth and which is less susceptible to the impact of seasonality due to inclement weather.
The purchase price has been allocated to the fair value of the assets acquired and liabilities assumed, as indicated in the table below. During the year ended October 31, 2016, we adjusted goodwill as of November 2, 2015, reflecting changes in valuation estimates during the measurement period related to inventory, fixed assets, accounts receivable, accrued liabilities and the related current and deferred tax effects.
|
|
|
|
|
|
As of Date of
Opening Balance Sheet
|
|
(In thousands)
|
Net assets acquired:
|
|
Accounts receivable
|
$
|
23,944
|
|
Inventory
|
29,552
|
|
Prepaid and other current assets
|
4,081
|
|
Property, plant and equipment
|
63,154
|
|
Goodwill
|
113,747
|
|
Intangible assets
|
62,900
|
|
Other non-current assets
|
24
|
|
Accounts payable
|
(4,620
|
)
|
Accrued expenses
|
(9,492
|
)
|
Deferred income tax liabilities, net
|
(37,386
|
)
|
Net assets acquired
|
$
|
245,904
|
|
Consideration:
|
|
Cash, net of cash and cash equivalents acquired
|
$
|
245,904
|
|
We 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. Intangible assets related to the Woodcraft acquisition as of November 2, 2015 included
$62.8 million
of customer relationships and other intangibles of less than
$0.1 million
, with original estimated useful lives of
12
years and
1
year, respectively. These intangible assets will be amortized on a straight-line basis. The goodwill balance is not deductible for tax purposes. Woodcraft is allocated entirely to our North American Cabinet Components reportable operating segment.
HLP
On June 15, 2015, we acquired the outstanding ownership shares of Flamstead Holdings Limited, an extruder of vinyl lineal products and manufacturer of other plastic products incorporated and registered in England and Wales, for
$131.7 million
in cash, net of cash acquired, debt assumed of
$7.7 million
and contingent consideration of
$10.3 million
, resulting in goodwill on the
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
transaction of approximately
$61.3 million
. Following a pre-sale reorganization and purchase, Flamstead Holdings Limited owned
100%
of the ownership shares of the following subsidiaries: HL Plastics Limited, Vintage Windows Limited, Wegoma Machinery Sales Limited (renamed in 2016 as Avantek Machinery), and Liniar Limited (collectively referred to as “HLP”) each of which is registered in England and Wales. The agreement contains an earn-out provision which is calculated as a percentage of earnings before interest, tax and depreciation and amortization for a specified period, as defined in the purchase agreement. Pursuant to this earn-out provision, the former owner could select a base year upon which to calculate the earn-out (one of the next three succeeding twelve-month periods ended July 31). In August 2016, the former owner selected the twelve-month period ended July 31, 2016 as the measurement period for the earn-out calculation. The final earn-out liability totaled
$8.4 million
at October 31, 2016 and is recorded under the caption "Accrued Liabilities" in the accompanying consolidated balance sheet. On November 7, 2016, we paid
$8.5 million
to settle the earn-out, which included a foreign currency adjustment of
$0.1 million
.
We assumed operating leases associated with the HLP acquisition for which our lessors are entities that were either wholly-owned subsidiaries or affiliates of Flamstead Holdings Limited prior to the pre-acquisition reorganization, and in which a former owner, who is now our employee, has an ownership interest. These leases include our primary operating facilities, a finished goods warehouse and a mixing plant. The lease for the manufacturing plant has a
20
-year term which began in 2007, the lease for the warehouse has a
15
-year term which began in 2012, and the lease for the mixing plant has a
13.5
-year term which began in 2013. We have recorded rent expense of approximately
$0.4 million
pursuant to these agreements for the period June 15, 2015 to October 31, 2015 and
$1.3 million
for the year ended October 31, 2016. Future commitments of
$15.4 million
under these lease arrangements are included in our operating lease commitments disclosed in Note 12, "Commitments and Contingencies."
We believe the acquisition of HLP: (1) expanded our international presence in the global fenestration business, particularly in the United Kingdom housing market; (2) expanded our vinyl extrusion product offerings, including house systems, supplemented with the brand recognition related to Liniar; (3) provides synergies and an opportunity to sell complementary products, while adding new product offerings such as water retention barriers and conservatory roofing products; and (4) aligns well with our strategy to be the preferred supplier of quality products to our customers, while maintaining safe, efficient manufacturing facilities.
Our consolidated operating results associated with HLP for the period from the date of acquisition, June 15, 2015 through October 31, 2015 include revenues of
$42.2 million
and net income of
$1.5 million
, respectively.
The purchase price has been allocated to the fair value of the assets acquired and liabilities assumed, as indicated in the table below. Changes in the contingent consideration due to the passage of time and potential differences between projected and actual operating results for HLP for the earn-out period were recorded as period costs as incurred. We recorded expense of
$0.1 million
related to the change in contingent consideration for the period from June 15, 2015 to October 31, 2015 and
$0.1 million
for the year ended October 31, 2016. In addition, we recorded certain adjustments related to the fair value of fixed assets, inventory and other assets resulting in a decrease in goodwill of
$0.4 million
during the period from June 15, 2015 to October 31, 2015 and
$0.6 million
during the measurement period which ended on January 31, 2016.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
|
|
|
|
As of Date of
Opening Balance Sheet
|
|
(In thousands)
|
Net assets acquired:
|
|
Accounts receivable
|
$
|
12,104
|
|
Inventory
|
16,015
|
|
Prepaid and other assets
|
722
|
|
Property, plant and equipment
|
27,218
|
|
Goodwill
|
61,323
|
|
Intangible assets
|
61,101
|
|
Other non-current assets
|
2,252
|
|
Accounts payable
|
(9,375
|
)
|
Income taxes payable
|
(948
|
)
|
Accrued expenses
|
(6,239
|
)
|
Deferred tax liabilities
|
(14,492
|
)
|
Net assets acquired
|
$
|
149,681
|
|
Consideration:
|
|
Cash, net of cash and cash equivalents acquired
|
$
|
131,689
|
|
Debt assumed in acquisition (capital leases)
|
7,673
|
|
Contingent consideration (earn-out)
|
10,319
|
|
|
$
|
149,681
|
|
We use recognized valuation techniques to determine the fair value of the assets and liabilities, including the income approach for customer relationships and trade names, and the cost approach to value patents, with a discount rate that reflects the risk of the expected future cash flows. The goodwill balance is not deductible for tax purposes.
Greenville
On December 31, 2013, we acquired certain vinyl extrusion assets of Atrium Windows and Doors, Inc. (Atrium) at a facility in Greenville, Texas, for
$5.2 million
in cash (Greenville). We accounted for this transaction as a business combination resulting in an insignificant gain on the purchase. We entered into a supply agreement with Atrium related to the products manufactured at Greenville. We believe this acquisition expanded our vinyl extrusion capacity and positioned us with a platform from which to better serve our customers in the southern United States.
The purchase price has been allocated to the fair value of the assets acquired and liabilities assumed, as indicated in the table below.
|
|
|
|
|
|
As of Date of
Opening Balance Sheet
|
|
(In thousands)
|
Net assets acquired:
|
|
Inventories
|
$
|
161
|
|
Prepaid and other current assets
|
145
|
|
Property, plant and equipment
|
4,695
|
|
Intangible assets
|
290
|
|
Deferred income tax liability
|
(50
|
)
|
Net assets acquired
|
$
|
5,241
|
|
Consideration:
|
|
Cash, net of cash and cash equivalents acquired
|
$
|
5,161
|
|
|
|
Gain recognized on bargain purchase
|
$
|
80
|
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
We 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 gain on bargain purchase of approximately
$0.1 million
is included in "Other, net" on our consolidated statement of income (loss) for the year ended October 31, 2014.
In October 2016, we announced plans to close the Greenville plant as part of a restructuring plan of our United States vinyl extrusion business, as more fully described in Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring."
Pro Forma Results
We calculated the pro forma impact of the HLP and Woodcraft acquisitions and the associated debt financing on our operating results for the twelve months ended October 31, 2015 and 2014. The following pro forma results give effect to these acquisitions, assuming these transactions occurred on November 1 of the respective periods.
|
|
|
|
|
|
|
|
|
Pro Forma Results
|
|
For the Years Ended
|
|
October 31, 2015
|
October 31, 2014
|
|
(In thousands, unaudited)
|
Net sales
|
$
|
935,196
|
|
$
|
929,751
|
|
Income from continuing operations
|
$
|
26,587
|
|
$
|
24,915
|
|
Net income
|
$
|
27,066
|
|
$
|
16,931
|
|
Basic earnings per share
|
$
|
0.77
|
|
$
|
0.46
|
|
Diluted earnings per share
|
$
|
0.77
|
|
$
|
0.45
|
|
We derived the pro forma results for the HLP and Woodcraft acquisitions based on historical financial information obtained from the sellers and certain management assumptions. Our pro forma adjustments relate to incremental depreciation and amortization expense associated with property, plant and equipment and intangible assets and interest expense associated with borrowings to effect the transactions, assuming a November 1, 2013 effective date. In addition, we calculated the tax impact of these adjustments at a
20%
statutory rate in the United Kingdom, as applicable, and a
35%
statutory rate in the United States with regard to interest on pro forma borrowings.
These pro forma results do not purport to be indicative of the results that would have been obtained had the acquisitions of HLP and Woodcraft been completed on November 1 of the respective periods, or that may be obtained in the future.
Pro forma results of operations were omitted for the Greenville acquisition because this acquisition was not deemed to be material to our results of operations for the year ended October 31, 2014.
3. Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consisted of the following as of October 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Trade receivables
|
$
|
83,384
|
|
|
$
|
64,156
|
|
Other
|
492
|
|
|
597
|
|
Total
|
$
|
83,876
|
|
|
$
|
64,753
|
|
Less: Allowance for doubtful accounts
|
251
|
|
|
673
|
|
Accounts receivable, net
|
$
|
83,625
|
|
|
$
|
64,080
|
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The changes in our allowance for doubtful accounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Beginning balance as of November 1, 2015, 2014 and 2013, respectively
|
$
|
673
|
|
|
$
|
698
|
|
|
$
|
481
|
|
Bad debt (benefit) expense
|
(67
|
)
|
|
25
|
|
|
359
|
|
Amounts written off
|
(371
|
)
|
|
(66
|
)
|
|
(192
|
)
|
Recoveries
|
16
|
|
|
16
|
|
|
50
|
|
Balance as of October 31,
|
$
|
251
|
|
|
$
|
673
|
|
|
$
|
698
|
|
4. Inventories
Inventories consisted of the following at October 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Raw materials
|
$
|
50,584
|
|
|
$
|
36,865
|
|
Finished goods and work in process
|
36,886
|
|
|
32,206
|
|
Supplies and other
|
1,859
|
|
|
2,064
|
|
Total
|
$
|
89,329
|
|
|
$
|
71,135
|
|
Less: Inventory reserves
|
4,994
|
|
|
8,106
|
|
Inventories, net
|
$
|
84,335
|
|
|
$
|
63,029
|
|
The changes in our inventory reserve accounts were are follows for the years ended October 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Beginning balance as of November 1, 2015, 2014 and 2013, respectively
|
$
|
8,106
|
|
|
$
|
5,757
|
|
|
$
|
5,040
|
|
Charged (credited) to cost of sales
|
8
|
|
|
2,853
|
|
|
960
|
|
Write-offs
|
(3,048
|
)
|
|
(504
|
)
|
|
(243
|
)
|
Other
|
(72
|
)
|
|
—
|
|
|
—
|
|
Balance as of October 31,
|
$
|
4,994
|
|
|
$
|
8,106
|
|
|
$
|
5,757
|
|
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. Our inventories at October 31, 2016 and 2015 were valued using the following costing methods:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
LIFO
|
$
|
4,017
|
|
|
$
|
3,642
|
|
FIFO
|
80,318
|
|
|
59,387
|
|
Total
|
$
|
84,335
|
|
|
$
|
63,029
|
|
For inventories valued using the LIFO method, replacement cost exceeded the LIFO value by approximately
$1.1 million
and
$1.3 million
as of October 31, 2016 and 2015, respectively. There were no liquidations of LIFO costing layers during the fiscal years ended October 31, 2016 and 2015, however we did reduce the LIFO reserve and record a corresponding decrease to cost of sales of approximately
$0.3 million
for the year ended October 31, 2016 and less than
$0.1 million
for the years ended October 31, 2015 and 2014, respectively.
We record LIFO reserve adjustments as corporate expenses so that our chief operating decision maker can review the
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
operations of our operating segments on a consistent FIFO or weighted-average basis. We calculate our LIFO reserve adjustments on a consolidated basis in a single pool using the dollar-value link chain method.
For our business acquisitions which have inventory balances, we integrate these operations and allow the use of either the LIFO or FIFO costing method. The inventory costing methods selected by these acquired businesses depends upon the facts and circumstances that exist at the time, and may include expected inventory quantities and expected future pricing levels. We perform this evaluation for each business acquired individually.
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following at October 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Land and land improvements
|
$
|
10,264
|
|
|
$
|
2,149
|
|
Buildings and building improvements
|
76,710
|
|
|
50,050
|
|
Machinery and equipment
|
340,665
|
|
|
292,188
|
|
Construction in progress
|
15,986
|
|
|
13,797
|
|
Property, plant and equipment, gross
|
443,625
|
|
|
358,184
|
|
Less: Accumulated depreciation
|
245,128
|
|
|
217,512
|
|
Property, plant and equipment, net
|
$
|
198,497
|
|
|
$
|
140,672
|
|
Depreciation expense for continuing operations for the years ended October 31, 2016, 2015, and 2014 was
$36.2 million
,
$26.2 million
and
$24.8 million
, respectively.
Assets recorded under capital leases had a historical cost of
$7.1 million
and
$9.4 million
, respectively, and accumulated depreciation of
$0.9 million
and
$0.6 million
, respectively as of October 31, 2016 and 2015. Depreciation expense related to these assets totaled
$0.8 million
,
$0.5 million
and
$0.1 million
for the periods ended October 31, 2016, 2015 and 2014, respectively. Refer to Note 8,
Debt and Capital Lease Obligations
for additional information on capital leases.
If there are indicators of potential impairment, we evaluate our property, plant and equipment for recoverability over the remaining useful lives of the assets. We recorded an asset impairment charge related to specific assets that were held for sale for the year ended October 31, 2014 of
$0.5 million
. We did not have impairments for the years ended October 31, 2016 or 2015. See further discussion at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Plant and Equipment and Intangible Assets with Defined Lives."
6. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the years ended October 31, 2016 and 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Beginning balance as of November 1, 2015 and 2014
|
$
|
129,770
|
|
|
$
|
70,546
|
|
Acquisitions
|
113,747
|
|
|
61,524
|
|
Goodwill impairment charge
|
(12,602
|
)
|
|
—
|
|
Other
|
(575
|
)
|
|
—
|
|
Foreign currency translation adjustment
|
(13,305
|
)
|
|
(2,300
|
)
|
Balance as of October 31,
|
$
|
217,035
|
|
|
$
|
129,770
|
|
At our annual testing date, August 31, 2016, we had
six
reportable units with goodwill balances.
Three
of these units were included in our NA Engineered Components segment and had goodwill balances of
$12.6 million
,
$35.9 million
and
$2.8 million
,
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
two
units were included in our EU Engineered Components segment with goodwill balances of
$48.1 million
and
$16.4 million
, and our NA Cabinet Components segment had one unit with a goodwill balance of
$113.7 million
. During 2016, we recorded an impairment charge of
$12.6 million
as more fully described at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Goodwill." We did not incur an impairment charge related to goodwill for the years ended October 31, 2015 or 2014.
Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of October 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
October 31, 2016
|
|
October 31, 2015
|
|
Remaining Weighted Average Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
|
(In thousands)
|
Customer relationships
|
7 years
|
|
$
|
152,146
|
|
|
$
|
35,693
|
|
|
$
|
98,750
|
|
|
$
|
24,628
|
|
Trademarks and trade names
|
12 years
|
|
55,481
|
|
|
26,288
|
|
|
58,916
|
|
|
23,416
|
|
Patents and other technology
|
4 years
|
|
24,571
|
|
|
16,037
|
|
|
25,881
|
|
|
15,158
|
|
Other
|
1 year
|
|
100
|
|
|
100
|
|
|
1,767
|
|
|
1,302
|
|
Total
|
|
|
$
|
232,298
|
|
|
$
|
78,118
|
|
|
$
|
185,314
|
|
|
$
|
64,504
|
|
We do not estimate a residual value associated with these intangible assets. During October 2016, we determined that a triggering event occurred which necessitated a review of our long-term assets. Based on an undiscounted cash flow analysis, we determined that our defined-lived intangible assets were not impaired. In addition, we shortened the life of several defined-lived intangible assets, which resulted in the recognition of incremental amortization expense of
$0.3 million
for the year ended October 31, 2016. See additional disclosure at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring."
Included in net intangible assets as of October 31, 2016 were customer relationships of
$57.6 million
related to the Woodcraft acquisition. These intangible assets will be amortized on a straight-line basis. See Note 2, "Acquisitions", included herewith. During 2016, we retired fully amortized identifiable intangible assets of
$3.1 million
, including prepaid licenses totaling
$1.4 million
.
The aggregate amortization expense associated with identifiable intangible assets for the years ended October 31, 2016, 2015 and 2014 was
$16.9 million
,
$10.2 million
and
$9.1 million
, respectively.
Estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for future fiscal years ending October 31, is as follows (in thousands):
|
|
|
|
|
|
Estimated
Amortization Expense
|
2017
|
$
|
18,263
|
|
2018
|
15,892
|
|
2019
|
15,104
|
|
2020
|
14,045
|
|
2021
|
12,327
|
|
Thereafter
|
78,549
|
|
Total
|
$
|
154,180
|
|
We did not incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2016, 2015, or 2014.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. Accrued Liabilities
Accrued liabilities consisted of the following at October 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Payroll, payroll taxes and employee benefits
|
$
|
27,406
|
|
|
$
|
16,928
|
|
Accrued insurance and workers compensation
|
3,946
|
|
|
2,945
|
|
Sales allowances
|
6,197
|
|
|
6,216
|
|
Deferred compensation
|
362
|
|
|
331
|
|
Deferred revenue
|
238
|
|
|
987
|
|
Warranties
|
295
|
|
|
309
|
|
Audit, legal, and other professional fees
|
2,456
|
|
|
1,862
|
|
Accrued taxes
|
2,151
|
|
|
2,572
|
|
Accrued rent
|
120
|
|
|
196
|
|
Earn-out liability
(1)
|
8,376
|
|
|
—
|
|
Other
|
3,554
|
|
|
5,018
|
|
Accrued liabilities
|
$
|
55,101
|
|
|
$
|
37,364
|
|
|
|
(1)
|
Amount relates to acquisition earn-out payment for HLP, paid on November 7, 2016. For additional details, see Note 2, "Acquisitions" located elsewhere herein.
|
8. Debt and Capital Lease Obligations
Long-term debt consisted of the following at October 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Revolving Credit Facility
|
$
|
120,000
|
|
|
$
|
50,000
|
|
Term Loan A
|
148,125
|
|
|
—
|
|
City of Richmond, Kentucky Industrial Building Revenue Bonds
|
400
|
|
|
500
|
|
Capital lease obligations
|
3,683
|
|
|
6,900
|
|
Unamortized deferred financing fees
|
$
|
(2,677
|
)
|
|
$
|
(1,274
|
)
|
Total debt
|
$
|
269,531
|
|
|
$
|
56,126
|
|
Less: Current maturities of long-term debt
|
10,520
|
|
|
2,359
|
|
Long-term debt
|
$
|
259,011
|
|
|
$
|
53,767
|
|
Revolving Credit Facility
On January 28, 2013, we entered into a Senior Unsecured Revolving Credit Facility (the 2013 Credit Facility) that had a
five
-year term and permitted 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 United States dollars bore interest at a spread above LIBOR or a base rate derived from the prime rate. Foreign denominated borrowings bore interest at a spread above the LIBOR applicable to such currencies. Subject to customary conditions, we could have requested that the aggregate commitments under the 2013 Credit Facility be increased by up to
$100 million
, with total commitments not to exceed
$250 million
.
The 2013 Credit Facility required us to comply with certain financial covenants and limited the amount available for us to borrow based upon consolidated EBITDA, as defined, less the amount of outstanding debt and letters of credit, further subject to our Minimum Interest Coverage Ratio and Maximum Consolidated Leverage Ratio requirements, as defined in the credit agreement. Specifically, we could not permit, on a quarterly basis, our ratio of consolidated EBITDA to consolidated interest expense as defined (Minimum Interest Coverage Ratio), to fall below
3.00
:1 or our ratio of consolidated funded debt to consolidated EBITDA,
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
as defined (Maximum Consolidated Leverage Ratio), to exceed
3.25
:1. The Maximum Consolidated Leverage Ratio was the ratio of consolidated EBITDA to consolidated interest expense, in each case for the previous four consecutive fiscal quarters. EBITDA was defined by the indenture to include pro forma EBITDA of acquisitions and to exclude certain items such as goodwill and intangible asset impairments and certain other non-cash charges and non-recurring items. Subject to our compliance with the covenant requirements, the amount available under the 2013 Credit Facility was a function of: (1) our trailing twelve month EBITDA; (2) the Minimum Interest Coverage Ratio and Maximum Consolidated Leverage Ratio allowed under the 2013 Credit Facility; and (3) the aggregate amount of our outstanding debt and letters of credit. As of October 31, 2015, we were in compliance with the financial covenants set forth in the 2013 Credit Facility, as indicated in the table below:
|
|
|
|
|
|
|
Required
|
|
Actual
|
Minimum Interest Coverage Ratio
|
No less than
|
3.00:1
|
|
69.71:1
|
Maximum Consolidated Leverage Ratio
|
No greater than
|
3.25:1
|
|
0.92:1
|
Effective June 15, 2015, in conjunction with the acquisition of HLP, we borrowed
$92.0 million
, at a weighted average borrowing rate of
1.28%
, under the 2013 Credit Facility and subsequently repaid
$42.0 million
prior to October 31, 2015. As of October 31, 2015, we had outstanding revolver borrowings of
$48.7 million
, net of unamortized deferred financing fees of
$1.3 million
, outstanding letters of credit of
$5.9 million
, and the remaining amount available to us for use under the 2013 Credit Facility was
$86.6 million
. Our borrowing rates under the 2013 Credit Facility were
3.50%
and
1.45%
for the swing-line sub facility and the revolver, respectively, at October 31, 2015.
On November 2, 2015, we refinanced and retired the 2013 Credit Facility by entering into a
$310.0
million Term Loan Credit Agreement and a
$100.0 million
ABL Credit Agreement (collectively the “2015 Credit Facilities”) with Wells Fargo, National Association, as Agent, and Bank of America, N.A. serving as Syndication Agent. The term loan portion of the 2015 Credit Facilities was to mature on November 2, 2022, and required quarterly principal payments equal to
0.25%
of the aggregate borrowings. Interest was computed, at our election, based on a Base Rate plus applicable margin of
4.25%
, or LIBOR plus applicable margin of
5.25%
(with the stipulation that LIBOR could not be less than
1%
). In the event of default, outstanding borrowings would accrue interest at the Default Rate, as defined, whereby the obligations would bear interest at a per annum rate equal to
2%
above the total per annum rate otherwise applicable. The term loan provided for incremental term loan commitments for a minimum principal amount of
$25.0 million
, up to an aggregate amount of
$50.0 million
, to the extent that such borrowings did not cause the Consolidated Senior Secured Leverage Ratio to exceed
3.00
to 1.00. The term loan agreement permitted prepayment of the term loan of at least an aggregate amount of
$5.0 million
, or any whole multiple of
$1.0 million
, in excess thereof without penalty, except if such prepayment was made on or before November 2, 2016, we would pay a fee equal to
1%
of such prepayment. The ABL portion of the 2015 Credit Facilities was to mature on November 2, 2020 with no stated principal repayment terms prior to maturity. Borrowing capacity and availability was determined based upon the dollar equivalent of certain working capital items including receivables and inventory, subject to eligibility as determined by Wells Fargo, National Association, as Administrative Agent, up to the facility maximum of
$100.0 million
. Interest was computed, at our election, on a grid as the Base Rate plus an Applicable Margin, as defined in the agreement, or LIBOR plus an Applicable Margin. The Applicable Margin is outlined in the following table:
|
|
|
|
|
|
|
|
Level
|
|
Average Aggregate
Excess Availability
|
|
Applicable Margin Relative to
Base Rate Loans
|
|
Applicable Margin Relative to
LIBOR Rate Loans
|
I
|
|
> 66.7% of the Maximum Revolver Amount
|
|
0.50 percentage points
|
|
1.50 percentage points
|
II
|
|
< 66.7% of the Maximum Revolver Amount and 33.3% of the Maximum Revolver Amount
|
|
0.75 percentage points
|
|
1.75 percentage points
|
III
|
|
< 33.3% of the Maximum Revolver Amount
|
|
1.00 percentage points
|
|
2.00 percentage points
|
With regard to the applicable margin calculation, Level I was applied for the duration of the 2015 Credit Facilities.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In addition, the ABL portion of the 2015 Credit Facilities required payment of a commitment fee (unused line fee) in accordance with the following table:
|
|
|
|
|
|
Level
|
|
Average Revolver Usage
|
|
Applicable Unused Line Fee Percentage
|
I
|
|
> 50% of the Maximum Revolver Amount
|
|
0.25 percentage points
|
II
|
|
< 50% of the Maximum Revolver Amount
|
|
0.375 percentage points
|
With regard to the unused line fee, Level II was applied for the duration of the 2015 Credit Facilities.
The 2015 Credit Facility contained restrictive debt covenants which included: (1) as of the last day of each fiscal quarter through October 30, 2017, our Consolidated Total Leverage Ratio, as defined in the agreement, must not exceed
4.50
to 1.00. For the last day of each fiscal quarter after October 30, 2017, this ratio cannot exceed
4.00
to 1.00; (2) as of the last day of each fiscal month, we must maintain a trailing twelve-month Consolidated Fixed Charge Coverage Ratio, as defined in the agreement, of at least
1.10
to 1.00; (3) if our ABL Revolver Usage, as defined, exceeds the Borrowing Base, we must repay the excess amount on an accelerated basis to bring down the borrowing level; (4) if we receive consideration for the sale of assets other than “permitted assets” or for any insurance or condemnation event related to the ABL collateral, we are required to repay this amount as an ABL prepayment; if such payment is received with regards to assets that are not related to the ABL collateral, then we are required to repay this amount as a term loan prepayment; and (5) for each year we have “Excess Cash Flow,” as defined, we are required to make a mandatory prepayment of the term loan calculated in accordance with the terms outlined in the credit agreement.
Furthermore, the 2015 Credit Facilities required periodic reporting, as well as monthly borrowing base calculation pursuant to the ABL portion of the facility, and could restrict or limit our ability to engage in certain business activities such as: (1) future business acquisitions or liquidations; (2) incurring new indebtedness, liens or encumbrances; (3) merging or consolidating operations; (4) disposing of significant assets; (5) prepaying subordinated debt; (6) engaging in certain transactions with affiliates; or (7) modifying incentive plans or governance documents, amongst other restrictions (including a limitation on annual dividend payments of
$8.0 million
).
On July 29, 2016, we refinanced and retired the 2015 Credit Facilities and entered into a
$450.0 million
credit agreement comprised of a
$150.0 million
Term Loan A and a
$300.0 million
revolving credit facility (collectively, the “Credit Agreement”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A. serving as Syndication Agent. The Credit Agreement has a five-year term, maturing on July 29, 2021, and requires interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin or the LIBOR Rate plus an applicable margin. At the time of the initial borrowing, the applicable rate was LIBOR +
2.00%
. In addition, we are subject to commitment fees for the unused portion of the Credit Agreement.
The applicable margin and commitment fees are outlined in the following table:
|
|
|
|
|
|
|
|
|
|
Pricing Level
|
|
Consolidated Leverage Ratio
|
|
Commitment Fee
|
|
LIBOR Rate Loans
|
|
Base Rate Loans
|
I
|
|
Less than or equal to 1.50 to 1.00
|
|
0.200%
|
|
1.50%
|
|
0.50%
|
II
|
|
Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00
|
|
0.225%
|
|
1.75%
|
|
0.75%
|
III
|
|
Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00
|
|
0.250%
|
|
2.00%
|
|
1.00%
|
IV
|
|
Greater than 3.00 to 1.00
|
|
0.300%
|
|
2.25%
|
|
1.25%
|
In the event of default, outstanding borrowings would accrue interest at the Default Rate, as defined, whereby the obligations will bear interest at a per annum rate equal to
2%
above the total per annum rate otherwise applicable.
The term loan portion of the Credit Agreement requires quarterly principal payments on the last business day of each fiscal quarter in accordance with a stated repayment schedule. Required aggregate principal repayments totaled
$9.4 million
for the succeeding twelve-month period, and have been included in the accompanying consolidated balance sheet under the caption “Current Maturities of Long-term Debt.”
No
stated principal payments are required under the revolving credit portion of the Credit Agreement, except upon maturity. If our Consolidated Leverage Ratio is less than
2.25
to 1.00, then we are required to make mandatory prepayments of “excess cash flow” as defined in the agreement.
The Credit Agreement provides for incremental term loan or revolving credit commitments for a minimum principal amount of
$10.0 million
, up to an aggregate amount of
$150.0 million
, subject to the lender's discretion to elect or decline the incremental
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
increase. We can also borrow up to the lesser of
$15.0 million
or the revolving credit commitment, as defined, under a Swingline feature of the Credit Agreement. We are permitted to prepay the term loan under the Credit Agreement, without premium or penalty, in aggregate principal amounts of
$1.0 million
or whole multiples of
$0.5 million
in excess thereof.
The Credit Agreement contains a: (1) Consolidated Fixed Charge Coverage Ratio requirement whereby we must not permit the Consolidated Fixed Charge Coverage Ratio, as defined, to be less than
1.10
to 1.00, and (2) Consolidated Leverage Ratio requirement, as summarized by period in the following table:
|
|
|
|
Period
|
|
Maximum Ratio
|
Closing Date through January 30, 2017
|
|
3.50 to 1.00
|
January 31, 2017 through January 30, 2018
|
|
3.25 to 1.00
|
January 31, 2018 and thereafter
|
|
3.00 to 1.00
|
In addition to maintaining these financial covenants, the Credit Agreement also limits our ability to enter into certain business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted payments, pay dividends (limited to
$10.0 million
per year) and other transactions as further defined in the Credit Agreement. Substantially all of our domestic assets, with the exception of real property, are utilized as collateral for the Credit Agreement.
We utilized the funding from the Credit Agreement, along with additional funding of
$16.4 million
of cash on hand, to repay outstanding borrowings under the 2015 Credit Facilities of
$309.2 million
, to pay a
1%
prepayment call premium under the Term Loan B portion thereof, to settle outstanding interest accrued under the prior facility, and to pay loan fees associated with the Credit Agreement which totaled
$2.8 million
. In addition to the
1%
prepayment call premium fee, we expensed
$8.1 million
to write-off unamortized deferred financing fees and
$5.5 million
of unamortized original issuer’s discount associated with the 2015 Credit Facilities.
As of
October 31, 2016
, we had
$265.4 million
of borrowings outstanding under the Credit Agreement (reduced by unamortized debt issuance costs of
$2.7 million
),
$5.8 million
of outstanding letters of credit and
$4.1 million
outstanding under capital leases and other debt vehicles. We had
$174.2 million
available for use under the Credit Agreement at
October 31, 2016
. The borrowings outstanding as of
October 31, 2016
under the Credit Agreement accrue interest at
2.5%
per annum, and our weighted average borrowing rate for borrowings outstanding during the years ended
October 31, 2016
and 2015 was
5.26%
and
1.28%
, respectively. We were in compliance with our debt covenants as of
October 31, 2016
.
Other Debt Instruments
The City of Richmond, Kentucky Industrial Building Revenue Bonds are due in annual installments through October 2020. Interest is payable monthly at a variable rate. Interest rates on these bonds have ranged from
0.2%
to
1.1%
during the fiscal year ended October 31, 2016. The average interest rate during the fiscal years ended October 31, 2016 and 2015, was
0.5%
. We have pledged the land, building and certain equipment used at the facility located in Richmond, Kentucky as collateral. In addition, we have issued a
$0.4 million
letter of credit under the Credit Agreement which serves as a conduit for making the scheduled payments.
We maintain certain capital lease obligations related to equipment purchases. In conjunction with the acquisition of HLP, we assumed additional capital lease obligations of approximately
$7.7 million
. These capital lease obligations relate to equipment purchases and accrue interest at a weighted average rate of
5.1%
, and extend through the year 2020. As of October 31, 2016, our obligations under the HLP capital leases total
$3.7 million
, of which
$1.6 million
is classified in current maturities of long-term debt and
$2.1 million
is classified as long-term debt on the accompanying consolidated balance sheet. Our non-HLP capital lease obligations at October 31, 2016 related to equipment purchases and bear interest at a weighted average interest rate of
4.6%
with terms that extend through 2020.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The table below presents the scheduled maturity dates of our long-term debt outstanding (net of deferred loan costs) at October 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long Term Debt
|
|
Capital Lease Obligations
|
|
Aggregate Maturities
|
2017
|
$
|
8,910
|
|
|
$
|
1,610
|
|
|
$
|
10,520
|
|
2018
|
14,535
|
|
|
1,083
|
|
|
15,618
|
|
2019
|
14,535
|
|
|
765
|
|
|
15,300
|
|
2020
|
16,410
|
|
|
225
|
|
|
16,635
|
|
2021
|
211,458
|
|
|
—
|
|
|
211,458
|
|
Total
|
$
|
265,848
|
|
|
$
|
3,683
|
|
|
$
|
269,531
|
|
9. Retirement Plans
We have a number of retirement plans covering substantially all employees. We provide both defined benefit and defined contribution plans. In general, an employee’s coverage for retirement benefits depends on the location of employment.
Defined Benefit Plan
We have a non-contributory, single employer defined benefit pension plan that covers substantially all our domestic employees, excluding the Woodcraft employees who are not currently participating. Effective January 1, 2007, we amended this defined benefit pension plan to include a cash balance formula for all new salaried employees hired on or after January 1, 2007 and for any non-union employees who were not participating in a defined benefit plan prior to January 1, 2007. All participating salaried employees hired after January 1, 2007, are eligible to receive credits equivalent to
4%
of their annual eligible wages. Some of the employees at the time of the amendment were “grandfathered” and are eligible to receive credits ranging up to
6.5%
based upon a percentage of benefits received under our defined benefit plan prior to this amendment of the pension plan. Additionally, every year the participants will receive an interest related credit on their respective balance equivalent to the prevailing 30-year Treasury rate. For employees who were participating in this plan prior to January 1, 2007, the benefit formula is a more traditional formula for retirement benefits, whereby the plan pays benefits to employees upon retirement, using a formula which considers years of service and pensionable compensation prior to retirement. Of our pension plan participants,
99%
have their benefit determined pursuant to the cash balance formula.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law on December 8, 2003. This Act introduces a Medicare prescription-drug benefit beginning in 2006 as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit at least “actuarially equivalent” to the Medicare benefit. We concluded that our plans are at least “actuarially equivalent” to the Medicare benefit. For those who are otherwise eligible for the subsidy, we have not included this subsidy per the Act in our benefit calculations. The impact to net periodic benefit cost and to benefits paid did not have a material impact on the consolidated financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Funded Status and Net periodic Benefit Cost
The changes in benefit obligations and plan assets, and our funded status (reported in deferred pension and postretirement benefits on the consolidated balance sheets) were as follows:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Change in Benefit Obligation:
|
|
|
|
Beginning balance as of November 1, 2015 and 2014, respectively
|
$
|
31,035
|
|
|
$
|
29,070
|
|
Service cost
|
3,712
|
|
|
3,288
|
|
Interest cost
|
828
|
|
|
1,026
|
|
Actuarial loss
|
3,008
|
|
|
38
|
|
Benefits paid
|
(1,061
|
)
|
|
(1,925
|
)
|
Administrative expenses
|
(630
|
)
|
|
(462
|
)
|
Projected benefit obligation at October 31,
|
$
|
36,892
|
|
|
$
|
31,035
|
|
Change in Plan Assets:
|
|
|
|
Beginning balance as of November 1, 2015 and 2014, respectively
|
$
|
26,132
|
|
|
$
|
25,329
|
|
Actual return on plan assets
|
1,069
|
|
|
390
|
|
Employer contributions
|
3,700
|
|
|
2,800
|
|
Benefits paid
|
(1,061
|
)
|
|
(1,925
|
)
|
Administrative expenses
|
(630
|
)
|
|
(462
|
)
|
Fair value of plan assets at October 31,
|
$
|
29,210
|
|
|
$
|
26,132
|
|
Non current liability - Funded Status
|
$
|
(7,682
|
)
|
|
$
|
(4,903
|
)
|
As of October 31, 2016 and 2015, included in our accumulated comprehensive loss was a net actuarial loss of
$8.7 million
and
$5.5 million
, respectively. There were no net prior service costs or transition obligations for the years ended October 31, 2016 and 2015.
As of October 31, 2016 and 2015, the accumulated benefit obligation was
$35.7 million
and
$30.3 million
, respectively. The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date, and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels.
The net periodic benefit cost for the years ended October 31, 2016, 2015 and 2014, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Service cost
|
$
|
3,712
|
|
|
$
|
3,288
|
|
|
$
|
3,313
|
|
Interest cost
|
828
|
|
|
1,026
|
|
|
1,063
|
|
Expected return on plan assets
|
(1,617
|
)
|
|
(1,791
|
)
|
|
(1,722
|
)
|
Amortization of net loss
|
384
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
3,307
|
|
|
$
|
2,523
|
|
|
$
|
2,654
|
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The changes in plan assets and projected benefit obligations which were recognized in our other comprehensive loss for the years ended October 31, 2016, 2015 and 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Net loss (gain) arising during the period
|
$
|
3,556
|
|
|
$
|
1,439
|
|
|
$
|
2,596
|
|
Less: Amortization of net loss
|
$
|
384
|
|
|
$
|
159
|
|
|
$
|
—
|
|
Total recognized in other comprehensive loss
|
$
|
3,172
|
|
|
$
|
1,280
|
|
|
$
|
2,596
|
|
As of October 31, 2016, we recorded a
$0.3 million
pre-tax benefit associated with our post retirement benefit plan, described below at "Other Plans."
Measurement Date and Assumptions
We generally determine our actuarial assumptions on an annual basis, with a measurement date of October 31.
The following table presents our assumptions for pension benefit calculations for the years ended October 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Weighted Average Assumptions:
|
Benefit Obligation
|
|
Net Periodic Benefit Cost
|
Discount rate
|
3.41%
|
|
3.92%
|
|
3.64%
|
|
3.92%
|
|
3.64%
|
|
4.18%
|
Rate of compensation increase
|
3.00%
|
|
3.00%
|
|
3.00%
|
|
3.00%
|
|
3.00%
|
|
2.50%
|
Expected return on plan assets
|
n/a
|
|
n/a
|
|
n/a
|
|
6.50%
|
|
6.75%
|
|
7.25%
|
The discount rate was used to calculate the present value of the projected benefit obligation for pension benefits. The rate reflects the amount at which benefits could be effectively settled on the measurement date. For the years ended October 31, 2016 and 2015, we used a RATE: Link Model whereby target yields are developed from bonds across a range of maturity points, and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the curve and used to discount benefit payments associated with each future year. This model assumes spot rates will remain level beyond the 30-year point. We determine the present value of plan benefits by applying the discount rates to projected benefit cash flows. For the year ended October 31, 2014, we determined our discount rate based on a pension discount curve. The rate represents the single rate that, if applied to every year of projected benefits payments, would result in the same discounted value as the array of rates that comprise the pension discount curve. The change in discount rate methodology in 2015 is believed to provide a more precise estimate of the rate that should be applied to specific cash flows by period.
The expected return on plan assets was used to determine net periodic pension expense. The rate of return assumptions were based on projected long-term market returns for the various asset classes in which the plans were invested, weighted by the target asset allocations. We review the return assumption at least annually. The rate of compensation increase represents the long-term assumption for expected increases in salaries.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Plan Assets
The following tables provide our target allocation for the year ended October 31, 2016, as well as the actual asset allocation by asset category and fair value measurements as of October 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Target Allocation
|
|
Actual Allocation
|
|
October 31, 2016
|
|
October 31, 2016
|
|
October 31, 2015
|
Equity securities
|
60.0
|
%
|
|
60.0
|
%
|
|
60.0
|
%
|
Fixed income
|
40.0
|
%
|
|
40.0
|
%
|
|
40.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
October 31, 2016
|
|
October 31, 2015
|
|
(In thousands)
|
Money market fund
|
$
|
31
|
|
|
$
|
142
|
|
|
|
|
|
Large capitalization
|
$
|
9,297
|
|
|
$
|
8,367
|
|
Small capitalization
|
3,442
|
|
|
3,114
|
|
International equity
|
3,191
|
|
|
2,831
|
|
Other
|
1,451
|
|
|
1,290
|
|
Equity securities
|
$
|
17,381
|
|
|
$
|
15,602
|
|
|
|
|
|
High-quality core bond
|
$
|
5,888
|
|
|
$
|
5,186
|
|
High-quality government bond
|
2,954
|
|
|
2,590
|
|
High-yield bond
|
2,956
|
|
|
2,612
|
|
Fixed income
|
$
|
11,798
|
|
|
$
|
10,388
|
|
|
|
|
|
Total securities
(1)
|
$
|
29,210
|
|
|
$
|
26,132
|
|
|
|
(1)
|
Quoted prices in active markets for identical assets (Level 1).
|
Inputs and valuation techniques used to measure the fair value of plan assets vary according to the type of security being valued. All of the equity and debt securities held directly by the plans were actively traded and fair values were determined based on quoted market prices.
Our investment objective for defined benefit plan assets is to meet the plans’ benefit obligations, while minimizing the potential for future required plan contributions. The investment strategies focus on asset class diversification, liquidity to meet benefit payments and an appropriate balance of long-term investment return and risk. Target ranges for asset allocations are determined by matching the actuarial projections of the plans’ future liabilities and benefit payments with expected long-term rates of return on the assets, taking into account investment return volatility and correlations across asset classes. Plan assets are diversified across several investment managers and are generally invested in liquid funds that are selected to track broad market equity and bond indices. Investment risk is carefully controlled with plan assets rebalanced to target allocations on a periodic basis and monitoring of performance of investment managers relative to the investment guidelines established with each investment manager.
Expected Benefit Payments and Funding
Our pension funding policy is to make the minimum annual contributions required pursuant to the plan. We accelerated contributions to target a
100%
funding threshold. Additionally, we consider funding annual requirements early in the fiscal year to potentially maximize the return on assets. For the fiscal years ended October 31, 2016, 2015 and 2014, we made total pension contributions of
$3.7 million
,
$2.8 million
and
$4.1 million
, respectively.
During fiscal 2017, we expect to contribute approximately
$3.9 million
to the pension plan to reach targeted funding levels and meet minimum contribution requirements. This expected contribution level will be dependent on many variables, including the market value of the assets compared to the obligation, as well as other market or regulatory conditions. In addition, we consider the cash requirements of our business investment opportunities. Accordingly, actual funding amounts and the timing of such funding may differ from current estimates.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following table presents the total benefit payments expected to be paid to participants by year, which includes payments funded from our assets, as well as payments paid from the plan for the year ended October 31, (in thousands):
|
|
|
|
|
|
Pension Benefits
|
2017
|
$
|
3,138
|
|
2018
|
2,734
|
|
2019
|
2,986
|
|
2020
|
3,090
|
|
2021
|
3,193
|
|
2022 - 2026
|
17,271
|
|
Total
|
$
|
32,412
|
|
Defined Contribution Plan
We also sponsor a defined contribution plan into which we and our employees make contributions, and we maintain a predecessor plan sponsored by Woodcraft. We match
50%
up to the first
5%
of employee annual salary deferrals under our existing plan, and we match
35%
up to the first
5%
of employee deferrals under the predecessor Woodcraft plan. We do not offer our common stock as a direct investment option under these plans. For the years ended October 31, 2016, 2015 and 2014, we contributed approximately
$2.2 million
,
$1.7 million
and
$2.4 million
for these plans, respectively.
Other Plans
Under our postretirement benefit plan, we provide certain healthcare and life insurance benefits for a small number of eligible retired employees who were employed prior to January 1, 1993. Certain employees may become eligible for those benefits if they reach normal retirement age while working for us. We continue to fund benefit costs on a pay-as-you-go basis. The table below indicates the amount of these liabilities included in the accompanying consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
October 31, 2015
|
|
(In thousands)
|
Accrued liabilities
|
$
|
49
|
|
|
$
|
49
|
|
Deferred pension and postretirement benefits
|
485
|
|
|
798
|
|
Total
|
$
|
534
|
|
|
$
|
847
|
|
Of the change in postretirement benefit obligation,
$0.3 million
(or
$0.2 million
net of tax) was applied to reduce the unrecognized loss in Accumulated Other Comprehensive Income associated with this post-retirement benefit plan to zero, with the remainder recorded as a reduction of selling, general and administrative expenses.
We also have supplemental benefit plans covering certain executive officers and a non-qualified deferred compensation plan covering members of the Board of Directors and certain key employees. As of October 31, 2016 and 2015, our liability under the supplemental benefit plan was approximately
$2.7 million
and
$1.7 million
, respectively, and our liability under the deferred compensation plan was approximately
$3.5 million
and
$3.3 million
, respectively. As of October 31, 2016 and 2015, the current portion of these liabilities was recorded under the caption "Accrued Liabilities," and the long-term portion was included under the caption "Other Liabilities" in the accompanying balance sheets.
10. Warranty Obligations
We accrue warranty obligations as we recognize revenue associated with certain products. We make provisions for our warranty obligations based upon historical experience of costs incurred for such obligations adjusted, as necessary, for current conditions and factors. There are significant uncertainties and judgments involved in estimating our warranty obligations, including changing product designs, differences in customer installation processes and future claims experience which may vary from historical claims experience. Therefore, the ultimate amount we incur as warranty costs in the near and long-term may not be consistent with our current estimate.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
A reconciliation of the activity related to our accrued warranty, including both the current and long-term portions (reported in accrued liabilities and other liabilities, respectively, on the accompanying consolidated balance sheets) follows:
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Beginning balance as of November 1, 2015, and 2014, respectively
|
$
|
535
|
|
|
$
|
671
|
|
Provision for warranty expense
|
90
|
|
|
207
|
|
Change in accrual for preexisting warranties
|
(62
|
)
|
|
—
|
|
Warranty costs paid
|
(117
|
)
|
|
(343
|
)
|
Total accrued warranty
|
$
|
446
|
|
|
$
|
535
|
|
Less: Current portion of accrued warranty
|
295
|
|
|
309
|
|
Long-term portion at October 31,
|
$
|
151
|
|
|
$
|
226
|
|
11. Income Taxes
We provide for income taxes on taxable income at the statutory rates applicable. The following table summarizes the components of income tax expense from continuing operations for the years ended October 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Current
|
|
|
|
|
|
Federal
|
$
|
1,309
|
|
|
$
|
49
|
|
|
$
|
1,271
|
|
State and local
|
154
|
|
|
216
|
|
|
532
|
|
Non-U.S.
|
3,241
|
|
|
2,070
|
|
|
2,535
|
|
Total current
|
4,704
|
|
|
2,335
|
|
|
4,338
|
|
Deferred
|
|
|
|
|
|
Federal
|
(5,932
|
)
|
|
5,766
|
|
|
2,261
|
|
State and local
|
(712
|
)
|
|
439
|
|
|
(258
|
)
|
Non-U.S.
|
(1,825
|
)
|
|
(1,001
|
)
|
|
(873
|
)
|
Total deferred
|
(8,469
|
)
|
|
5,204
|
|
|
1,130
|
|
Total income tax (benefit) provision
|
$
|
(3,765
|
)
|
|
$
|
7,539
|
|
|
$
|
5,468
|
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following table reconciles our effective income tax rate to the federal statutory rate of
35%
for the years ended October 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
U.S. tax at statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local income tax
|
7.4
|
|
|
2.3
|
|
|
2.3
|
|
Non-U.S. income tax
|
32.0
|
|
|
(1.5
|
)
|
|
(0.1
|
)
|
U.S. tax on non U.S. earnings
|
(0.8
|
)
|
|
—
|
|
|
(0.3
|
)
|
Deferred rate change
|
15.2
|
|
|
0.5
|
|
|
5.1
|
|
General business credits
|
6.4
|
|
|
(1.0
|
)
|
|
(1.8
|
)
|
Transaction costs
|
(17.0
|
)
|
|
2.5
|
|
|
—
|
|
Uncertain tax positions
|
—
|
|
|
(3.4
|
)
|
|
(1.2
|
)
|
Change in valuation allowance
|
(0.9
|
)
|
|
(0.5
|
)
|
|
(1.0
|
)
|
Other permanent differences
|
(5.0
|
)
|
|
(1.5
|
)
|
|
1.3
|
|
Return to actual adjustments
|
(5.4
|
)
|
|
0.2
|
|
|
0.3
|
|
Effective tax rate
|
66.9
|
%
|
|
32.6
|
%
|
|
39.6
|
%
|
The increase in the 2016 effective tax rate is due primarily to the foreign and United States tax rate differential, as the foreign tax rate is generally lower than the United States tax rate and a greater percentage of our taxable income was generated by the foreign operations. The overall change in the effective rate was also impacted by transaction costs and a change in the deferred rate. The decrease in the 2015 effective tax rate is attributable to a discrete benefit item resulting from the reassessment of our uncertain tax position related to the 2008 spin-off of Quanex from a predecessor company in January 2015. Excluding this item, the effective tax rate was
36.0%
. The 2014 effective rate was impacted by a change in the tax status of our facility in the United Kingdom (UK). On November 1, 2013, the assets of our UK branch were contributed to a newly formed wholly-owned UK subsidiary. This change resulted in a taxable charge that was booked as a discrete item in the first quarter of 2014. Excluding this discrete item, the 2014 effective tax rate was
34.9%
.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Significant components of our net deferred tax liabilities and assets were as follows:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Deferred tax assets:
|
|
|
|
Employee benefit obligations
|
$
|
16,694
|
|
|
$
|
13,220
|
|
Accrued liabilities and reserves
|
2,929
|
|
|
3,354
|
|
Pension and other benefit obligations
|
4,087
|
|
|
2,956
|
|
Inventory
|
1,759
|
|
|
2,625
|
|
Loss and tax credit carry forwards
|
9,589
|
|
|
12,531
|
|
Other
|
193
|
|
|
187
|
|
Total gross deferred tax assets
|
35,251
|
|
|
34,873
|
|
Less: Valuation allowance
|
1,279
|
|
|
1,064
|
|
Total deferred tax assets, net of valuation allowance
|
33,972
|
|
|
33,809
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
18,946
|
|
|
8,303
|
|
Goodwill and intangibles
|
33,348
|
|
|
16,723
|
|
Total deferred tax liabilities
|
52,294
|
|
|
25,026
|
|
|
|
|
|
Net deferred tax (liabilities) assets
|
$
|
(18,322
|
)
|
|
$
|
8,783
|
|
At October 31, 2016, operating loss carry forwards for tax purposes totaled
$43.8 million
and related to federal and state positions. The majority of such losses begin to expire in 2025. Tax credits available to offset future tax liabilities totaled
$4.0 million
and are expected to be utilized within the next twelve months. We evaluate tax benefits of operating losses and tax credit carry forwards on an ongoing basis, including a review of historical and projected future operating results, the eligible carry forward period and other circumstances. We have recorded a valuation allowance for certain state net operating losses as of October 31, 2016 and 2015, totaling
$1.3 million
(
$0.8 million
net of federal taxes) and
$1.1 million
(
$0.7 million
net of federal taxes), respectively. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets.
The following table reconciles the change in the unrecognized income tax benefit associated with uncertain tax positions for the years ended October 31, 2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
Unrecognized
Income Tax Benefits
|
Balance at October 31, 2013
|
|
$
|
13,238
|
|
Additions for tax positions related to the current year
|
|
—
|
|
Additions for tax positions related to the prior year
|
|
170
|
|
Lapse in statute of limitations
|
|
(1,977
|
)
|
Balance at October 31, 2014
|
|
$
|
11,431
|
|
Additions for tax positions related to the current year
|
|
—
|
|
Additions for tax positions related to the prior year
|
|
16
|
|
Lapse in statute of limitations
|
|
(10,883
|
)
|
Balance at October 31, 2015
|
|
$
|
564
|
|
Additions for tax positions related to the current year
|
|
—
|
|
Additions for tax positions related to the prior year
|
|
15
|
|
Balance at October 31, 2016
|
|
$
|
579
|
|
As of October 31, 2016, our unrecognized tax benefit (UTB) relates to certain state tax items regarding the interpretation of tax laws and regulations. In January 2015, we reassessed our unrecognized tax benefit related to the 2008 spin-off of Quanex
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
from a predecessor company and recognized the full benefit of the tax positions taken. This reduced the liability for uncertain tax positions by
$4.0 million
and increased deferred income taxes (non-current assets) by
$6.8 million
and resulted in a non-cash increase in retained earnings of
$10.0 million
, with an increase in income tax benefit of
$0.8 million
. At October 31, 2016,
$0.6 million
is recorded as a liability for uncertain tax positions. The disallowance of the UTB would not materially affect the annual effective tax rate.
We, along with our subsidiaries, file income tax returns in the United States and various state jurisdictions as well as in the United Kingdom, Germany, Canada and Mexico. In certain jurisdictions the statute of limitations has not yet expired. We generally remain subject to examination of our United States income tax returns for 2013 and subsequent years. We generally remain subject to examination of our various state and foreign income tax returns for a period of four to five years from the date the return was filed. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the state of the federal change.
Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. The final outcome of the future tax consequences of legal proceedings, if any, as well as the outcome of competent authority proceedings, changes in regulatory tax laws, or interpretation of those tax laws could impact our financial statements. We are subject to the effect of these matters occurring in various jurisdictions. We do not believe any of the UTB at October 31, 2016 will be recognized within the next twelve months.
Included in prepaid and other current assets on the accompanying consolidated balance sheets were income tax receivables of
$1.6 million
and
$0.4 million
as of October 31, 2016 and 2015, respectively.
The acquisition of Woodcraft in November 2015 established a net noncurrent deferred tax liability of
$37.4 million
primarily reflecting the book to tax basis difference in intangibles, fixed assets and inventory. The acquisition of Flamstead Holdings, Ltd in June 2015 established a noncurrent deferred tax liability of
$13.2 million
reflecting the book to tax basis difference in intangibles, fixed assets and inventory at the current UK tax rate of
20%
.
Management has determined that the earnings of our foreign subsidiaries are not required as a source of funding for United States operations and we intend to indefinitely reinvest these funds in our foreign jurisdictions. If the investment in our foreign subsidiaries were completely realized, a potential gain of
$25.6 million
could exist resulting in an estimated residual United States tax liability of
$6.3 million
.
On September 13, 2013, the Internal Revenue Service issued final Tangible Property Regulations (TPR) under Internal Revenue Code (IRC) Section 162 and IRC Section 263(a), which prescribe the capitalization treatment of certain repair costs, asset betterments and other costs which could affect temporary deferred taxes. The regulations became effective for tax years beginning on or after January 1, 2014. Pursuant to U.S. GAAP, as of the date of the issuance, the release of the regulations is treated as a change in tax law. The impact of this change in tax law was not material to our financial position or results of operations.
Our federal income tax returns for the tax years ended October 31, 2011 and 2012 were examined by the Internal Revenue Service and no adjustments were made.
We adopted ASU No. 2015-17 as of November 1, 2015 on a retroactive basis. See additional disclosure at Note 21, "New Accounting Guidance Adopted."
12. Commitments and Contingencies
Operating Leases and Purchase Obligations
We have operating leases for certain real estate and equipment used in our business. Rental expense for the years ended October 31, 2016, 2015 and 2014 was
$10.3 million
,
$8.4 million
and
$6.9 million
, respectively. We sublease certain of our facilities as of October 31, 2016, pursuant to which we expect to receive future minimum non-cancelable rentals of
$0.4 million
.
We are a party to non-cancelable purchase obligations primarily for door hardware, primary and secondary steel and primary and secondary aluminum used in our manufacturing processes, as well as expenditures related to capital projects in progress. We paid
$4.6 million
and
$8.1 million
pursuant to these arrangements for the years ended October 31, 2016 and 2015, respectively. These obligations total
$11.3 million
and
$3.7 million
at October 31, 2016 and 2015, respectively, and extend through fiscal 2017. Future amounts paid pursuant to these arrangements will depend, to some extent, on our usage.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following table presents future minimum rental payments under operating leases with remaining terms in excess of one year at October 31, 2016 (in thousands):
|
|
|
|
|
|
Operating
Leases
|
2017
|
$
|
9,794
|
|
2018
|
8,482
|
|
2019
|
7,842
|
|
2020
|
5,904
|
|
2021
|
4,366
|
|
Thereafter
|
30,552
|
|
Total
|
$
|
66,940
|
|
Asset Retirement Obligation
We maintain an asset retirement obligation associated with a leased facility in Kent, Washington. We have estimated our future cash flows associated with this asset retirement obligation and recorded an asset and corresponding liability. We are depreciating the asset and accreting the liability over a seven year term, to culminate in an asset retirement obligation of
$2.2 million
as of July 2020.
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 2017. While we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows.
Spacer Migration
We were notified by certain customers through our German operation that the vapor barrier employed on certain spacer products manufactured prior to March 2014 may fail and permit spacer migration in certain extreme circumstances. This product does not have a specific customer warranty, but we have received claims from customers related to this issue, which we continue to investigate on a claim-by-claim basis. We cannot estimate any future liability with regard to unasserted claims but we have received new claims in 2015 and 2016. We evaluate this reserve at each reporting date. We will investigate any future claims, but we are not obligated to honor any future claims.
A reconciliation of the claims activity related to our spacer migration accrual for the years ended October 31, 2016 and 2015 follows:
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Beginning balance as of November 1, 2015, and 2014, respectively
|
$
|
1,133
|
|
|
$
|
1,187
|
|
Additional claims received
|
1,147
|
|
|
1,049
|
|
Claim payments made
|
(1,476
|
)
|
|
(956
|
)
|
Foreign currency translation adjustment
|
(3
|
)
|
|
(147
|
)
|
Total spacer migration accrual
|
$
|
801
|
|
|
$
|
1,133
|
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Litigation
From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business. We are currently involved in litigation related to alleged defects in a sealant product manufactured and sold by one of our subsidiaries during the 2000s. While we strongly believe that our product was not defective and that we will prevail in these claims, the ultimate resolution and impact of the claims is not presently determinable and we cannot reasonably estimate a range of potential loss, if any, associated with these claims. Nevertheless, we believe that the eventual outcome of such litigation will not have a material adverse effect on our overall financial condition, results of operations or cash flows.
13. Derivative Instruments
Our derivative activities are subject to the management, direction, and control of the Chief Financial Officer and Chief Executive Officer. Certain transactions in excess of specified levels require further approval from the Board of Directors.
The nature of our business activities requires the management of various financial and market risks, including those related to changes in foreign currency exchange rates and aluminum scrap prices. We have historically used foreign currency forwards and options to mitigate or eliminate certain of those risks at our subsidiaries. We use foreign currency contracts to offset fluctuations in the value of accounts receivable and payable balances that are denominated in currencies other than the United States Dollar, including the Euro, British Pound Sterling and Canadian Dollar. Currently, we do not enter into derivative transactions for speculative or trading purposes. We are exposed to credit loss in the event of nonperformance by the counterparties to our derivative transactions. We attempt to mitigate this risk by monitoring the creditworthiness of our counterparties and limiting our exposure to individual counterparties. In addition, we have established master netting agreements in certain cases to facilitate the settlement of gains and losses on specific derivative contracts.
We have not designated any of our derivative contracts as hedges for accounting purposes in accordance with the provisions under the Accounting Standards Codification topic 815
"Derivatives and Hedging
" (ASC 815). Therefore, changes in the fair value of these contracts and the realized gains and losses are recorded in the consolidated statements of income (loss) for the years ended October 31, 2016, 2015 and 2014 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
Derivatives Not Designated as Hedging Instruments
|
Location of Gain or (Loss):
|
2016
|
|
2015
|
|
2014
|
Foreign currency derivatives
|
Other, net
|
77
|
|
|
654
|
|
|
568
|
|
We have chosen not to offset any of our derivative instruments in accordance with the provisions of ASC 815. Therefore, the assets and liabilities are presented on a gross basis on our accompanying consolidated balance sheets. Less than
$0.1 million
of fair value related to foreign currency derivatives was included in prepaid and other current assets as of the years ended October 31, 2016 and 2015, and less than
$0.1 million
of fair value related to foreign currency derivatives was included in accrued liabilities as of October 31, 2016.
The following table summarizes the notional amounts and fair value of outstanding derivative contracts at October 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional as indicated
|
|
Fair Value in $
|
|
|
October 31,
2016
|
|
October 31,
2015
|
|
October 31,
2016
|
|
October 31,
2015
|
Foreign currency derivatives:
|
|
|
|
|
|
|
|
|
Sell EUR, Buy USD
|
EUR
|
5,251
|
|
|
8,076
|
|
|
$
|
(79
|
)
|
|
$
|
37
|
|
Sell CAD, Buy USD
|
CAD
|
186
|
|
|
280
|
|
|
1
|
|
|
1
|
|
Sell GBP, Buy USD
|
GBP
|
187
|
|
|
226
|
|
|
(1
|
)
|
|
3
|
|
Buy EUR, Sell GBP
|
EUR
|
130
|
|
|
2
|
|
|
1
|
|
|
—
|
|
Buy USD, Sell EUR
|
USD
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Buy EUR, Sell USD
|
EUR
|
—
|
|
|
807
|
|
|
—
|
|
|
3
|
|
For the classification in the fair value hierarchy, see Note 14, "Fair Value Measurement of Assets and Liabilities", included herewith.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
14. Fair Value Measurement of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to Level 1 and the lowest priority to Level 3. The three levels of the fair value hierarchy are described below:
|
|
•
|
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
•
|
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
•
|
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
|
The following table summarizes the assets measured on a recurring basis based on the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
October 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
44
|
|
Total assets
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
44
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
$
|
—
|
|
|
$
|
80
|
|
|
$
|
—
|
|
|
$
|
80
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
8,376
|
|
|
8,376
|
|
|
—
|
|
|
—
|
|
|
10,414
|
|
|
10,414
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
80
|
|
|
$
|
8,376
|
|
|
$
|
8,456
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,414
|
|
|
$
|
10,414
|
|
All of our derivative contracts are valued using quoted market prices from brokers or exchanges and are classified within Level 2 of the fair value hierarchy. We liquidated our short-term investments as of June 2015 and used the proceeds, along with borrowings under our revolving credit facility, to acquire HLP. Contingent consideration of
$8.4 million
associated with the HLP acquisition, which was paid during November 2016, is included above as a Level 3 measurement (see Note 2, "Acquisitions").
As of October 31, 2016 and 2015, we had approximately
$2.4 million
of certain property, plant and equipment that was recorded at fair value on a non-recurring basis and classified as Level 3. The fair value was based on broker opinions.
Carrying amounts reported on the balance sheet for cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Our outstanding debt was 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 instruments approximates carrying value at October 31, 2016 and 2015 (Level 3 measurement).
15. Stock-Based Compensation
We have established and maintain an Omnibus Incentive Plan (2008 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards and other stock-based and cash-based awards. The 2008 Plan is administered by the Compensation and Management Development Committee of the Board of Directors.
The aggregate number of shares of common stock originally authorized for grant under the 2008 Plan was
2,900,000
. In February 2011 and February 2014, shareholders approved increases of the aggregate number of shares available for grant by
2,400,000
shares and
2,350,000
shares, respectively. Any officer, key employee and/or non-employee director or any of our affiliates is eligible for awards under the 2008 Plan. Our initial grant of awards under the 2008 Plan was on April 23, 2008. Historically, our practice has been to grant stock options and restricted stock units to non-employee directors on the last business day of each fiscal year, with an additional grant of options to each director on the date of his or her first anniversary of service. In May 2015, the Nominating & Corporate Governance Committee of our Board of Directors changed the structure of the annual
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
grant to our directors to a grant of restricted stock units on the first day of the new fiscal year, November 1 and eliminated the stock option grant to the non -employee directors. Annually, pending approval by the Compensation & Management Development Committee of our Board of Directors in December, we grant stock options, restricted stock awards, restricted stock units and/or performance shares to employees. Occasionally, we may make additional grants to key employees at other times during the year.
Restricted Stock Awards
Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a
three
-year period with service and continued employment as the only vesting criteria. The recipient of the restricted stock awards is entitled to all of the rights of a shareholder, except that the awards are nontransferable during the vesting period. The fair value of the restricted stock award is established on the grant date and then expensed over the vesting period resulting in an increase in additional paid-in-capital. Shares are generally issued from treasury stock at the time of grant.
A summary of non-vested restricted stock awards activity during the years ended October 31, 2016, 2015 and 2014, follows:
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Weighted Average
Grant Date Fair Value per Share
|
Non-vested at October 31, 2013
|
183,400
|
|
|
$
|
17.46
|
|
Granted
|
83,400
|
|
|
17.67
|
|
Vested
|
(30,700
|
)
|
|
17.45
|
|
Forfeited
|
(15,300
|
)
|
|
19.25
|
|
Non-vested at October 31, 2014
|
220,800
|
|
|
17.42
|
|
Granted
|
118,800
|
|
|
20.17
|
|
Vested
|
(34,000
|
)
|
|
15.12
|
|
Forfeited
|
(12,600
|
)
|
|
19.57
|
|
Non-vested at October 31, 2015
|
293,000
|
|
|
18.71
|
|
Granted
|
85,500
|
|
|
19.21
|
|
Vested
|
(102,000
|
)
|
|
17.84
|
|
Forfeited
|
(9,800
|
)
|
|
18.97
|
|
Non-vested at October 31, 2016
|
266,700
|
|
|
$
|
19.19
|
|
The total weighted average grant-date fair value of restricted stock awards that vested during the years ended October 31, 2016, 2015 and 2014 was
$1.8 million
,
$0.5 million
and
$0.5 million
, respectively. As of October 31, 2016, total unrecognized compensation cost related to unamortized restricted stock awards totaled
$2.1 million
. We expect to recognize this expense over the remaining weighted average period of
1.8
years.
Stock Options
Historically, stock options have been awarded to key employees, officers and non-employee directors. Effective May 2015, the director compensation structure was revised to eliminate the grant of stock options to non-employee directors. Key employee and officer stock options typically vest ratably over a
three
-year period with service and continued employment as the vesting conditions. Our stock options may be exercised up to a maximum of
ten
years from the date of grant. The fair value of the stock options is determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital.
We use the Black-Scholes pricing model to estimate the fair value of our stock options. A description of the methodology for the valuation assumption follows:
|
|
•
|
Expected Volatility
– For stock options granted prior to July 1, 2013, we used an estimate of the historical volatility of a selected peer group. Effective July 1, 2013, we determined that we had sufficient historical data to calculate the volatility of our common stock since our spin-off in April 2008. We believe there has been uncertainty in the United States equities market over the past several years and that uncertainty has contributed to volatility in equities in general. We expect this volatility to continue over the foreseeable future. Therefore, we believe that our historical volatility is a proxy for expected volatility. We have not excluded any of our historical data from the volatility calculation, and we are not aware of any specific significant factors which might impact our future volatility.
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
•
|
Expected Term
– For stock options granted prior to July 1, 2013, we determined the expected term using historical information of our former parent company prior to the spin-off in 2008, with regards to option vesting, exercise behavior and contractual expiration, as we believed that this employee group was the most similar to our employee group. Separate groups of employees that have similar historical exercise behavior were considered separately. Effective July 1, 2013, we determined that we had sufficient historical data to estimate our expected term using our own data with regards to the exercise behavior, cancellations, retention patterns and remaining contractual terms. When analyzing these patterns and variables, we considered the stratification of the awards (large grants to relatively few employees versus smaller grants to many others), the age of certain employees with larger grants, the historical exercise behavior of the employee group, and fluctuations/volatility of our underlying common stock, as to whether the stock options are expected to be out-of-the-money. For our directors, stock options vested immediately, and, as such, the expected term approximated the contractual term, after adjusting for historical forfeitures. We believe our estimates are reasonable given these factors.
|
|
|
•
|
Risk-Free Rate
– We base the risk-free rate on the yield at the date of grant of a zero-coupon United States Treasury bond whose maturity period equals the option’s expected term.
|
|
|
•
|
Expected Dividend Yield
– We base the expected dividend yield on our historical dividend payment of approximately
$0.16
per share.
|
The following table summarizes the assumptions used to estimate the fair value of our stock options granted during the years ended October 31, 2016, 2015 and 2014.
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Weighted-average expected volatility
|
37.1%
|
|
47.7%
|
|
55.3%
|
Weighted-average expected term (in years)
|
5.4
|
|
5.6
|
|
6.1
|
Risk-free interest rate
|
1.7%
|
|
1.6%
|
|
1.9%
|
Expected dividend yield over expected term
|
1.0%
|
|
1.0%
|
|
1.0%
|
Weighted average grant date fair value
|
$6.32
|
|
$8.40
|
|
$8.78
|
The following table summarizes our stock option activity for the years ended October 31, 2016, 2015 and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value (000s)
|
Outstanding at October 31, 2013
|
2,875,276
|
|
|
15.64
|
|
|
|
|
$
|
7,748
|
|
Granted
|
189,200
|
|
|
17.99
|
|
|
|
|
|
Exercised
|
(306,611
|
)
|
|
19.27
|
|
|
|
|
|
Forfeited/Expired
|
(169,476
|
)
|
|
18.71
|
|
|
|
|
|
Outstanding at October 31, 2014
|
2,588,389
|
|
|
16.21
|
|
|
6.2
|
|
$
|
10,238
|
|
Granted
|
123,900
|
|
|
20.28
|
|
|
|
|
|
Exercised
|
(327,700
|
)
|
|
15.59
|
|
|
|
|
|
Forfeited/Expired
|
(32,401
|
)
|
|
20.21
|
|
|
|
|
|
Outstanding at October 31, 2015
|
2,352,188
|
|
|
16.46
|
|
|
5.4
|
|
$
|
6,672
|
|
Granted
|
297,900
|
|
|
19.23
|
|
|
|
|
|
Exercised
|
(221,850
|
)
|
|
15.43
|
|
|
|
|
|
Forfeited/Expired
|
(42,018
|
)
|
|
19.78
|
|
|
|
|
|
Outstanding at October 31, 2016
|
2,386,220
|
|
|
16.84
|
|
|
5.1
|
|
$
|
2,384
|
|
Vested or expected to vest at October 31, 2016
|
2,377,254
|
|
|
16.83
|
|
|
5.1
|
|
$
|
2,384
|
|
Exercisable at October 31, 2016
|
1,978,013
|
|
|
$
|
16.34
|
|
|
4.4
|
|
$
|
2,384
|
|
Intrinsic value is the amount by which the market price of the common stock on the date of exercise exceeds the exercise price of the stock option. For the years ended October 31, 2016, 2015 and 2014, the total intrinsic value of our stock options that were exercised totaled
$1.0 million
,
$1.3 million
and
$2.7 million
, respectively. The total fair value of stock options vested during
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
the years ended October 31, 2016, 2015 and 2014, was
$1.9 million
,
$2.8 million
and
$3.8 million
, respectively. As of October 31, 2016, total unrecognized compensation cost related to stock options was
$0.8 million
. We expect to recognize this expense over the remaining weighted average vesting period of
1.8
years.
Restricted Stock Units
Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee directors. The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date. Restricted stock units awarded to employees and officers typically cliff vest after a
three
-year period with service and continued employment as the vesting conditions. Restricted stock units are not considered outstanding shares and do not have voting rights, although the holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares. Once the vesting criteria is met, each restricted stock unit is payable to the holder in cash based on the market value of one share of our common stock. Accordingly, we record a liability for the restricted stock units on our balance sheet and recognize any changes in the market value during each reporting period as compensation expense.
The following table summarizes non-vested restricted stock unit activity during the years ended October 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted Average
Grant Date Fair Value
|
Non-vested at October 31, 2013
|
101,000
|
|
|
$
|
15.62
|
|
Granted
|
12,135
|
|
|
18.58
|
|
Vested
|
(29,635
|
)
|
|
18.35
|
|
Non-vested at October 31, 2014
|
83,500
|
|
|
15.08
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(83,500
|
)
|
|
15.08
|
|
Non-vested at October 31, 2015
|
—
|
|
|
—
|
|
Granted
|
20,445
|
|
|
19.56
|
|
Vested
|
(20,445
|
)
|
|
19.56
|
|
Non-vested at October 31, 2016
|
—
|
|
|
—
|
|
During the years ended October 31, 2015 and 2014, we paid
$1.7 million
and
$0.5 million
, respectively, to settle restricted stock units; we did not make any payments to settle restricted stock units during the year ended October 31, 2016. All outstanding restricted stock units awarded to officers and employees have vested as of October 31, 2016. The directors received a grant of restricted stock units on November 1, 2016, which vested immediately.
Performance Share Awards
We have granted performance share awards to key employees and officers annually in December. In addition, we awarded performance shares in January 2016 to a new officer. These awards cliff vest after a
three
-year period with service and performance measures such as relative total shareholder return and earnings per share growth as vesting conditions. The number of performance share awards earned is variable depending on the metrics achieved. The settlement method is
50%
in cash and
50%
in our common stock.
To account for the performance share awards, we have bifurcated the portion subject to a market condition (relative total shareholder return) and the portion subject to an internal performance measure (earnings per share growth). We have further bifurcated these awards based on the settlement method, as the portion expected to settle in stock (equity component) and the portion expected to settle in cash (liability component).
To value the shares subject to the market condition, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be expensed over the
three
-year term of the award with a credit to additional paid-in-capital. To value the shares subject to the internal performance measure, we used the value of our common stock on the date of grant as the grant-date fair value per share. This amount will be expensed over the
three
-year term of the award, with a credit to additional paid-in-capital, and could fluctuate depending on the number of shares ultimately expected to vest based on our assessment of the probability that the performance conditions will be achieved. For both performance conditions, the portion of the award expected to settle in cash
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
will be recorded as a liability and will be marked to market over the
three
-year term of the award, and could fluctuate depending on the number of shares ultimately expected to vest.
In conjunction with the annual grants in December 2015, 2014 and 2013, we awarded
158,100
,
137,400
and
155,800
performance shares, respectively. We also awarded
4,300
performance shares in January 2016. Depending on the achievement of the performance conditions,
0%
to
200%
of these shares may ultimately vest. During 2016,
9,100
of the performance shares issued in December 2015 were forfeited. During 2015,
9,200
of the performance shares issued in December 2013 were forfeited and
8,200
of the performance shares issued in December 2014 were forfeited. During 2014,
7,000
of the performance shares issued in December 2013 were forfeited. For the years ended October 31, 2016, 2015 and 2014, we have recorded
$2.7 million
,
$1.5 million
and
$1.0 million
of compensation expense related to these performance share awards.
Performance share awards are not considered outstanding shares and do not have voting rights, although dividends are accrued over the performance period and will be payable in cash based upon the number of performance shares ultimately earned.
Performance shares are excluded from the diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares. We evaluate the probability of the performance share vesting within one year of the vesting date. As of October 31, 2016, we have deemed
135,100
performance share awards to vest, of which
67,550
will be paid in our common stock and
67,550
, along with accrued dividends, will settle in cash. The
67,550
awards payable in our common stock are potentially dilutive and considered in the diluted weighted average shares calculation for the year ended October 31, 2016. No contingent shares related to performance shares are included in diluted weighted average shares for the years ended October 31, 2015 or 2014.
The following table summarizes amounts expensed as selling, general and administrative expense related to restricted stock awards, stock options, restricted stock units and performance share awards for the years ended October 31, 2016, 2015 and 2014(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Restricted stock awards
|
$
|
1,911
|
|
|
$
|
1,670
|
|
|
$
|
1,220
|
|
Stock options
|
2,486
|
|
|
1,713
|
|
|
2,301
|
|
Restricted stock units
|
161
|
|
|
(57
|
)
|
|
781
|
|
Performance share awards
|
2,703
|
|
|
1,504
|
|
|
981
|
|
Total compensation expense
|
7,261
|
|
|
4,830
|
|
|
5,283
|
|
Income tax effect
|
4,858
|
|
|
1,575
|
|
|
2,092
|
|
Net compensation expense
|
$
|
2,403
|
|
|
$
|
3,255
|
|
|
$
|
3,191
|
|
16. Stockholders' Equity
As of October 31, 2016, our authorized capital stock consists of
125,000,000
shares of common stock, at par value of
$0.01
per share, and
1,000,000
shares of preferred stock, with no par value. As of October 31, 2016 and 2015, we had
37,560,249
and
37,609,563
shares of common stock issued, respectively, and
34,220,496
and
33,962,460
shares of common stock outstanding, respectively. There were no shares of preferred stock issued or outstanding at October 31, 2016 and 2015.
Stock Repurchase Program and Treasury Stock
On September 5, 2014, our Board cancelled our existing stock repurchase program and approved a new stock repurchase program authorizing us to use up to
$75.0 million
to repurchase shares of our common stock. For the period from September 5, 2014 through October 31, 2014, we purchased
1,316,326
shares at a cost of
$24.2 million
under the new program. During the year ended October 31, 2015, we purchased an additional
2,675,903
shares at a cost of
$50.8 million
. From inception of the program, we purchased
3,992,229
at a cost of
$75.0 million
.
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. 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-
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
in-capital associated with prior issuances to the extent available, with the remainder recorded as a charge to retained earnings. We recorded a charge to retained earnings of
$0.6 million
and
$0.7 million
in the years ended October 31, 2016 and 2015, respectively.
The following table summarizes the treasury stock activity during the year ended October 31, 2016:
|
|
|
|
|
October 31, 2016
|
Beginning balance as of November 1, 2015
|
3,647,103
|
|
Restricted stock awards granted
|
(85,500
|
)
|
Stock options exercised
|
(221,850
|
)
|
Balance at end of period
|
3,339,753
|
|
17. Other Income (Expense)
Other income (expense) included under the caption "Other, net" on the accompanying consolidated statements of income (loss), consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Foreign currency transaction losses
|
$
|
(5,457
|
)
|
|
$
|
(1,433
|
)
|
|
$
|
(695
|
)
|
Foreign currency exchange derivative gains
|
77
|
|
|
654
|
|
|
568
|
|
Interest income
|
106
|
|
|
64
|
|
|
119
|
|
Other
|
(205
|
)
|
|
184
|
|
|
100
|
|
Other (expense) income
|
$
|
(5,479
|
)
|
|
$
|
(531
|
)
|
|
$
|
92
|
|
18. Segment Information
In 2014, we did not disclose segment information as we aggregated
four
operating segments into a common reportable segment. In our Annual Report on Form 10-K as of October 31, 2015 we presented
two
reportable business segments, in accordance with ASC Topic 280-10-50, “
Segment Reporting
” (ASC 280): (1) Engineered Products, comprised of
four
operating segments, focused primarily on North American fenestration, and (2) International Extrusion, comprised solely of HLP that was acquired on June 15, 2015. In addition, we recorded LIFO inventory adjustments, corporate office charges and inter-segment eliminations as Corporate & Other.
With the acquisition of Woodcraft on November 2, 2015, we re-evaluated our reportable operating segment presentation and changed the presentation to have
three
reportable business segments: (1) North American Engineered Components segment (“NA Engineered Components”), comprised of
four
operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass (IG) spacers, screens & other fenestration components; (2) European Engineered Components segment (“EU Engineered Components”), comprised of our United Kingdom-based vinyl extrusion business, manufacturing vinyl profiles & conservatories, and the European insulating glass business manufacturing IG spacers; and (3) North American Cabinet Components segment (“NA Cabinet Components”), comprised solely of the North American cabinet door and components business acquired in November 2015. We continue to maintain what was previously called Corporate & Other, now called Unallocated Corporate & Other, but a portion of the general and administrative costs associated with the corporate office have been allocated to the reportable operating segments, based upon a relative measure of profitability in order to more accurately reflect each reportable operating segment's administrative cost. Certain costs were not allocated to the business segments, but remain in Unallocated Corporate & Other, including transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance and legal costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations. This treatment was applied to avoid an asymmetrical allocation amongst the operating segments for the comparative period due to the timing of acquisitions. The accounting policies of our operating segments are the same as those used to prepare the accompanying consolidated financial statements. The following table summarizes corporate general and administrative expense allocated during the years ended October 31, 2016, 2015 and 2014:
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
NA Engineered Components
|
$
|
10,487
|
|
|
$
|
9,638
|
|
|
$
|
10,170
|
|
EU Engineered Components
|
3,814
|
|
|
2,109
|
|
|
740
|
|
NA Cabinet Components
|
4,767
|
|
|
—
|
|
|
—
|
|
Unallocated Corporate & Other
|
—
|
|
|
5,776
|
|
|
7,581
|
|
Allocated general and administrative expense
|
$
|
19,068
|
|
|
$
|
17,523
|
|
|
$
|
18,491
|
|
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.
Segment information for the years ended October 31, 2016, 2015 and 2014 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA Eng Comp.
|
|
EU Eng. Comp.
|
|
NA Cabinet Comp.
|
|
Unallocated Corp. & Other
|
|
Total
|
Year Ended October 31, 2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
560,029
|
|
|
$
|
150,203
|
|
|
$
|
223,391
|
|
|
$
|
(5,439
|
)
|
|
$
|
928,184
|
|
Depreciation and amortization
|
30,298
|
|
|
9,339
|
|
|
12,948
|
|
|
561
|
|
|
53,146
|
|
Operating income (loss)
|
37,883
|
|
|
13,225
|
|
|
1,821
|
|
|
(16,576
|
)
|
|
36,353
|
|
Capital expenditures
|
22,713
|
|
|
6,141
|
|
|
8,110
|
|
|
279
|
|
|
37,243
|
|
Total assets
|
$
|
290,725
|
|
|
$
|
190,995
|
|
|
$
|
287,012
|
|
|
$
|
11,621
|
|
|
$
|
780,353
|
|
Year Ended October 31, 2015
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
556,550
|
|
|
$
|
93,644
|
|
|
$
|
—
|
|
|
$
|
(4,666
|
)
|
|
$
|
645,528
|
|
Depreciation and amortization
|
28,911
|
|
|
5,020
|
|
|
—
|
|
|
1,289
|
|
|
35,220
|
|
Operating income (loss)
|
39,253
|
|
|
3,253
|
|
|
—
|
|
|
(17,831
|
)
|
|
24,675
|
|
Capital expenditures
|
25,499
|
|
|
4,396
|
|
|
—
|
|
|
87
|
|
|
29,982
|
|
Total assets
|
$
|
314,397
|
|
|
$
|
231,261
|
|
|
$
|
—
|
|
|
$
|
19,858
|
|
|
$
|
565,516
|
|
Year Ended October 31, 2014
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
544,045
|
|
|
$
|
55,891
|
|
|
$
|
—
|
|
|
$
|
(4,552
|
)
|
|
$
|
595,384
|
|
Depreciation and amortization
|
28,888
|
|
|
1,898
|
|
|
—
|
|
|
3,083
|
|
|
33,869
|
|
Operating income (loss)
|
27,604
|
|
|
3,756
|
|
|
—
|
|
|
(17,084
|
)
|
|
14,276
|
|
Capital expenditures
|
$
|
20,990
|
|
|
$
|
2,445
|
|
|
$
|
—
|
|
|
$
|
294
|
|
|
$
|
23,729
|
|
Capital expenditures per the accompanying cash flow statements include
$10.1 million
for the year ended October 31, 2014 related to Nichols business which was discontinued in 2014.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following table reconciles our segment presentation for the years ended October 31, 2015 and 2014 as previously reported in our Annual Report on Form 10-K for the year ended October 31, 2015 to the current presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2015
|
As Previously Reported
|
|
Reclassification
|
|
Current Presentation
|
|
(in thousands)
|
Engineered Products
|
|
|
|
|
|
Net sales
|
$
|
603,296
|
|
|
$
|
(603,296
|
)
|
|
$
|
—
|
|
Depreciation and amortization
|
30,587
|
|
|
(30,587
|
)
|
|
—
|
|
Operating income (loss)
|
52,850
|
|
|
(52,850
|
)
|
|
—
|
|
Capital expenditures
|
28,013
|
|
|
(28,013
|
)
|
|
—
|
|
Total assets
|
$
|
361,281
|
|
|
$
|
(361,281
|
)
|
|
$
|
—
|
|
International Extrusion
|
|
|
|
|
|
Net sales
|
$
|
42,232
|
|
|
$
|
(42,232
|
)
|
|
$
|
—
|
|
Depreciation and amortization
|
3,344
|
|
|
(3,344
|
)
|
|
—
|
|
Operating income (loss)
|
1,404
|
|
|
(1,404
|
)
|
|
—
|
|
Capital expenditures
|
1,882
|
|
|
(1,882
|
)
|
|
—
|
|
Total assets
|
$
|
184,377
|
|
|
$
|
(184,377
|
)
|
|
$
|
—
|
|
Corporate & Other
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Depreciation and amortization
|
1,289
|
|
|
(1,289
|
)
|
|
—
|
|
Operating income (loss)
|
(29,579
|
)
|
|
29,579
|
|
|
—
|
|
Capital expenditures
|
87
|
|
|
(87
|
)
|
|
—
|
|
Total assets
|
$
|
19,858
|
|
|
$
|
(19,858
|
)
|
|
$
|
—
|
|
NA Engineered Components
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
556,550
|
|
|
$
|
556,550
|
|
Depreciation and amortization
|
—
|
|
|
28,911
|
|
|
28,911
|
|
Operating income (loss)
|
—
|
|
|
39,253
|
|
|
39,253
|
|
Capital expenditures
|
—
|
|
|
25,499
|
|
|
25,499
|
|
Total assets
|
$
|
—
|
|
|
$
|
314,397
|
|
|
$
|
314,397
|
|
EU Engineered Components
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
93,644
|
|
|
$
|
93,644
|
|
Depreciation and amortization
|
—
|
|
|
5,020
|
|
|
5,020
|
|
Operating income (loss)
|
—
|
|
|
3,253
|
|
|
3,253
|
|
Capital expenditures
|
—
|
|
|
4,396
|
|
|
4,396
|
|
Total assets
|
$
|
—
|
|
|
$
|
231,261
|
|
|
$
|
231,261
|
|
Unallocated Corporate & Other
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
(4,666
|
)
|
|
$
|
(4,666
|
)
|
Depreciation and amortization
|
—
|
|
|
1,289
|
|
|
1,289
|
|
Operating income (loss)
|
—
|
|
|
(17,831
|
)
|
|
(17,831
|
)
|
Capital expenditures
|
—
|
|
|
87
|
|
|
87
|
|
Total assets
|
$
|
—
|
|
|
$
|
19,858
|
|
|
$
|
19,858
|
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2014
|
As Previously Reported
|
|
Reclassification
|
|
Current Presentation
|
|
(in thousands)
|
Engineered Products
|
|
|
|
|
|
Net sales
|
$
|
595,384
|
|
|
$
|
(595,384
|
)
|
|
$
|
—
|
|
Depreciation and amortization
|
30,785
|
|
|
(30,785
|
)
|
|
—
|
|
Operating income (loss)
|
42,271
|
|
|
(42,271
|
)
|
|
—
|
|
Capital expenditures
|
$
|
23,435
|
|
|
$
|
(23,435
|
)
|
|
$
|
—
|
|
Corporate & Other
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Depreciation and amortization
|
3,084
|
|
|
(3,084
|
)
|
|
—
|
|
Operating income (loss)
|
(27,995
|
)
|
|
27,995
|
|
|
—
|
|
Capital expenditures
|
$
|
294
|
|
|
$
|
(294
|
)
|
|
$
|
—
|
|
NA Engineered Components
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
544,045
|
|
|
$
|
544,045
|
|
Depreciation and amortization
|
—
|
|
|
28,888
|
|
|
28,888
|
|
Operating income (loss)
|
—
|
|
|
27,604
|
|
|
27,604
|
|
Capital expenditures
|
$
|
—
|
|
|
$
|
20,990
|
|
|
$
|
20,990
|
|
EU Engineered Components
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
55,891
|
|
|
$
|
55,891
|
|
Depreciation and amortization
|
—
|
|
|
1,898
|
|
|
1,898
|
|
Operating income (loss)
|
—
|
|
|
3,756
|
|
|
3,756
|
|
Capital expenditures
|
$
|
—
|
|
|
$
|
2,445
|
|
|
$
|
2,445
|
|
Unallocated Corporate & Other
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
(4,552
|
)
|
|
$
|
(4,552
|
)
|
Depreciation and amortization
|
—
|
|
|
3,083
|
|
|
3,083
|
|
Operating income (loss)
|
—
|
|
|
(17,084
|
)
|
|
(17,084
|
)
|
Capital expenditures
|
$
|
—
|
|
|
$
|
294
|
|
|
$
|
294
|
|
The following table summarizes the change in the carrying amount of goodwill by segment for the years ended October 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA Eng. Comp.
|
|
EU Eng. Comp.
|
|
NA Cabinet Comp.
|
|
Unalloc. Corp. & Other
|
|
Total
|
Balance as of October 31, 2014
|
$
|
51,314
|
|
|
$
|
19,232
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
70,546
|
|
HLP acquisition
|
—
|
|
|
61,524
|
|
|
—
|
|
|
—
|
|
|
61,524
|
|
Asset impairment charge
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation adjustment
|
—
|
|
|
(2,300
|
)
|
|
—
|
|
|
—
|
|
|
(2,300
|
)
|
Balance as of October 31, 2015
|
$
|
51,314
|
|
|
$
|
78,456
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
129,770
|
|
Woodcraft acquisition
|
—
|
|
|
—
|
|
|
113,747
|
|
|
—
|
|
|
113,747
|
|
Asset impairment charge
|
(12,602
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,602
|
)
|
Other
|
—
|
|
|
(575
|
)
|
|
—
|
|
|
—
|
|
|
(575
|
)
|
Foreign currency translation adjustment
|
—
|
|
|
(13,305
|
)
|
|
—
|
|
|
—
|
|
|
(13,305
|
)
|
Balance as of October 31, 2016
|
$
|
38,712
|
|
|
$
|
64,576
|
|
|
$
|
113,747
|
|
|
$
|
—
|
|
|
$
|
217,035
|
|
For further details of Goodwill, see Note 6, "Goodwill & Intangible Assets", located herewith.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
We did not allocate non-operating expense or income tax expense to the reportable segments. The following table reconciles operating income (loss) as reported above to net (loss) income for the years ended October 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Operating income
|
$
|
36,353
|
|
|
$
|
24,675
|
|
|
$
|
14,276
|
|
Interest expense
|
(36,498
|
)
|
|
(991
|
)
|
|
(562
|
)
|
Other, net
|
(5,479
|
)
|
|
(531
|
)
|
|
92
|
|
Income tax benefit (expense)
|
3,765
|
|
|
(7,539
|
)
|
|
(5,468
|
)
|
(Loss) income from continuing operations
|
$
|
(1,859
|
)
|
|
$
|
15,614
|
|
|
$
|
8,338
|
|
Geographic Information
Our manufacturing facilities and all long-lived assets are located in the United States, United Kingdom, Germany and Mexico. We attribute our net sales to a geographic region based on the location of the customer. The following tables provide information concerning our net sales for the years ended October 31, 2016, 2015 and 2014, and our long-lived assets as of October 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
Net Sales:
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
724,045
|
|
|
$
|
500,171
|
|
|
$
|
484,601
|
|
Europe
|
150,710
|
|
|
94,564
|
|
|
57,098
|
|
Canada
|
24,141
|
|
|
22,973
|
|
|
26,605
|
|
Asia
|
20,404
|
|
|
19,268
|
|
|
18,867
|
|
Other foreign countries
|
8,884
|
|
|
8,552
|
|
|
8,213
|
|
Total net sales
|
$
|
928,184
|
|
|
$
|
645,528
|
|
|
$
|
595,384
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
Long-lived assets, net
|
2016
|
|
2015
|
United States
|
$
|
428,203
|
|
|
$
|
214,479
|
|
Germany
|
19,479
|
|
|
20,117
|
|
United Kingdom
|
121,416
|
|
|
156,656
|
|
Mexico
|
614
|
|
|
—
|
|
Total long-lived assets, net
|
$
|
569,712
|
|
|
$
|
391,252
|
|
Long-lived assets, net includes: property, plant and equipment, net; goodwill; and intangible assets, net.
Product Sales
We produce a wide variety of products that are used in the fenestration industry, including: window and door systems design, engineering and fabrication; accessory trim profiles with real wood veneers and wood grain laminate finishes; window spacer systems; extruded vinyl products; metal fabrication; and astragals, thresholds and screens. In addition, we produce certain non-fenestration products, including: kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other products.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following table summarizes our product sales for the years ended October 31, 2016, 2015 and 2014 into general groupings to provide additional information to our shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
NA Engineered Components:
|
|
|
|
|
|
United States - fenestration
|
$
|
466,351
|
|
|
$
|
462,650
|
|
|
$
|
453,571
|
|
International - fenestration
|
38,439
|
|
|
33,991
|
|
|
43,345
|
|
United States - non-fenestration
|
36,986
|
|
|
42,143
|
|
|
33,583
|
|
International - non-fenestration
|
18,253
|
|
|
17,766
|
|
|
13,546
|
|
|
$
|
560,029
|
|
|
$
|
556,550
|
|
|
$
|
544,045
|
|
EU Engineered Components:
|
|
|
|
|
|
United States - fenestration
|
$
|
412
|
|
|
$
|
44
|
|
|
$
|
—
|
|
International - fenestration
|
134,631
|
|
|
87,943
|
|
|
55,891
|
|
International - non-fenestration
|
15,160
|
|
|
5,657
|
|
|
—
|
|
|
$
|
150,203
|
|
|
$
|
93,644
|
|
|
$
|
55,891
|
|
NA Cabinet Components:
|
|
|
|
|
|
United States
|
$
|
220,715
|
|
|
$
|
—
|
|
|
$
|
—
|
|
International
|
2,676
|
|
|
—
|
|
|
—
|
|
|
$
|
223,391
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Unallocated Corporate & Other
|
|
|
|
|
|
Eliminations
|
$
|
(5,439
|
)
|
|
$
|
(4,666
|
)
|
|
$
|
(4,552
|
)
|
|
$
|
(5,439
|
)
|
|
$
|
(4,666
|
)
|
|
$
|
(4,552
|
)
|
Net sales
|
$
|
928,184
|
|
|
$
|
645,528
|
|
|
$
|
595,384
|
|
19. (Loss) Earnings Per Share
We compute basic (loss) earnings per share by dividing net (loss) 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.
Basic and diluted loss per share was
$0.05
for the twelve months ended October 31, 2016. The computation of diluted earnings per share excludes outstanding stock 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. During the twelve-month period ended October 31, 2016,
378,542
shares of common stock equivalents,
152,227
shares of restricted stock and
67,550
contingent shares related to performance share awards were excluded from the computation of diluted earnings per share.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The computation of basic and diluted earnings per share for the years ended October 31, 2015 and 2014 was as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2015
|
|
Net Income from Continuing Operations
|
|
Weighted Average Shares
|
|
Per Share
|
Basic earnings per common share
|
$
|
15,614
|
|
|
33,993
|
|
|
$
|
0.46
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options
|
—
|
|
|
378
|
|
|
|
Restricted stock
|
—
|
|
|
131
|
|
|
|
Diluted earnings per common share
|
$
|
15,614
|
|
|
34,502
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2014
|
|
Net Income from Continuing Operations
|
|
Weighted Average Shares
|
|
Per Share
|
Basic earnings per common share
|
$
|
8,338
|
|
|
37,128
|
|
|
$
|
0.22
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options
|
—
|
|
|
467
|
|
|
|
Restricted stock
|
—
|
|
|
84
|
|
|
|
Diluted earnings per common share
|
$
|
8,338
|
|
|
37,679
|
|
|
$
|
0.22
|
|
There were no potentially dilutive contingent shares related to performance share awards for the years ended October 31, 2015 and 2014.
For the years ended October 31, 2016, 2015 and 2014, we had
807,372
,
860,272
and
954,372
securities, respectively, that were potentially dilutive in future earnings per share calculations. Such dilution will be dependent on the excess of the market price of our stock over the exercise price and other components of the treasury stock method.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
20. Unaudited Quarterly Data
Selected quarterly financial data for the years ended October 31, 2016 and 2015 was as follows (amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
January 31, 2016
|
|
April 30, 2016
|
|
July 31, 2016
|
|
October 31, 2016
|
Net sales
|
$
|
201,468
|
|
|
$
|
229,460
|
|
|
$
|
248,085
|
|
|
$
|
249,171
|
|
Cost of sales (excluding depreciation and amortization)
|
159,348
|
|
|
176,497
|
|
|
186,631
|
|
|
188,168
|
|
Depreciation and amortization
|
12,970
|
|
|
13,816
|
|
|
12,973
|
|
|
13,387
|
|
Operating (loss) income
|
(2,138
|
)
|
|
10,556
|
|
|
19,930
|
|
|
8,005
|
|
(Loss) income from continuing operations
|
(7,249
|
)
|
|
3,935
|
|
|
(3,976
|
)
|
|
5,431
|
|
Net (loss) income
|
$
|
(7,249
|
)
|
|
$
|
3,935
|
|
|
$
|
(3,976
|
)
|
|
$
|
5,431
|
|
Basic (loss) earnings per share, continuing operations
|
$
|
(0.21
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.16
|
|
Diluted (loss) earnings per share, continuing operations
|
(0.21
|
)
|
|
0.12
|
|
|
(0.12
|
)
|
|
0.16
|
|
Basic (loss) earnings per share
|
(0.21
|
)
|
|
0.11
|
|
|
(0.12
|
)
|
|
0.16
|
|
Diluted (loss) earnings per share
|
(0.21
|
)
|
|
0.11
|
|
|
(0.12
|
)
|
|
0.16
|
|
Cash dividends paid per common share
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
January 31, 2015
|
|
April 30, 2015
|
|
July 31, 2015
|
|
October 31, 2015
|
Net sales
|
$
|
127,893
|
|
|
$
|
141,970
|
|
|
$
|
180,206
|
|
|
$
|
195,459
|
|
Cost of sales (excluding depreciation and amortization)
|
105,804
|
|
|
110,812
|
|
|
136,853
|
|
|
145,628
|
|
Depreciation and amortization
|
8,208
|
|
|
7,831
|
|
|
8,502
|
|
|
10,679
|
|
Operating (loss) income
|
(5,615
|
)
|
|
3,689
|
|
|
9,828
|
|
|
16,773
|
|
(Loss) income from continuing operations
|
(3,094
|
)
|
|
2,294
|
|
|
6,471
|
|
|
9,943
|
|
Net (loss) income
|
$
|
(3,071
|
)
|
|
$
|
2,294
|
|
|
$
|
6,927
|
|
|
$
|
9,943
|
|
Basic (loss) earnings per share, continuing operations
|
$
|
(0.09
|
)
|
|
$
|
0.07
|
|
|
$
|
0.20
|
|
|
$
|
0.30
|
|
Diluted (loss) earnings per share, continuing operations
|
(0.09
|
)
|
|
0.07
|
|
|
0.19
|
|
|
0.29
|
|
Basic (loss) earnings per share
|
(0.09
|
)
|
|
0.07
|
|
|
0.21
|
|
|
0.30
|
|
Diluted (loss) earnings per share
|
(0.09
|
)
|
|
0.07
|
|
|
0.20
|
|
|
0.29
|
|
Cash dividends paid per common share
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Quarterly earnings (loss) per share results may not sum to the consolidated earnings per share results on the accompanying consolidated statements of income (loss) due to rounding and changes in weighted average shares during the respective periods.
21. New Accounting Guidance Adopted
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. The amendments require deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. We adopted ASU No. 2015-17 as of November 1, 2015 on a retrospective basis. As a result, our presentation of deferred taxes at October 31, 2016 and October 31, 2015 is consistent with this guidance, and therefore the October 31, 2015 presentation reflects a reclassification of current deferred income tax asset of
$14.0 million
and the noncurrent deferred income tax liability of
$5.2 million
as a noncurrent deferred income tax asset of
$8.8 million
.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In April 2015, the FASB issued ASU No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
This amendment requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the treatment of debt discounts. In August 2015, the FASB issued ASU 2015-15,
Interest - Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,
to clarify guidance within ASU 2015-03 with respect to line-of-credit arrangements. ASU 2015-15 allows an entity, in the case of a line-of-credit arrangement, to either follow ASU 2015-03 or defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. For the years ended October 31, 2016 and 2015, we elected to forgo the option to present line-of-credit debt issuance costs as an asset provided in ASU 2015-15 and have presented outstanding unamortized deferred loan costs as a direct deduction from the carrying value of all debt outstanding to the extent there is debt outstanding. We elected to early adopt ASU No. 2015-03 as of October 31, 2016 on a retrospective basis. As a result, our presentation of all debt issuance costs at October 31, 2016 and October 31, 2015 is a direct deduction from the carrying amount of the outstanding debt, and the October 31, 2015 presentation reflects a reclassification of
$1.3 million
of unamortized deferred financing fees from other assets to long term debt, resulting in other assets of
$7.3 million
and long-term debt of
$53.8 million
(see Note 8, "Debt and Capital Lease Obligations").
In April 2014, the FASB issued ASU No. 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.
This new guidance clarifies the definition of a discontinued operation as a disposal of a component of any entity, or a group of such components, which represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. This guidance should result in fewer applications of discontinued operations accounting treatment. However, if such accounting treatment is required, the guidance requires additional footnote disclosures with regard to the major classes of line items constituting pretax profit or loss of the discontinued operation, a reconciliation of the major classes of assets and liabilities of the discontinued operation, and additional disclosure with regard to cash flows of the discontinued operation. This guidance became effective for fiscal years beginning on or after December 15, 2014. We adopted this guidance during fiscal 2016 with no material impact on our consolidated financial statements.