QUANEX BUILDING PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended October 31, 2019, 2018 and 2017
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|
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|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Operating activities:
|
|
|
|
|
|
Net (loss) income
|
$
|
(46,730
|
)
|
|
$
|
26,553
|
|
|
$
|
18,683
|
|
Adjustments to reconcile net (loss) income to cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
49,586
|
|
|
51,822
|
|
|
57,495
|
|
Loss (gain) on disposition of capital assets
|
732
|
|
|
(142
|
)
|
|
1,528
|
|
Stock-based compensation
|
2,045
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|
|
1,874
|
|
|
5,189
|
|
Deferred income tax
|
3,260
|
|
|
(5,556
|
)
|
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(112
|
)
|
Charge for deferred loan costs and debt discount
|
—
|
|
|
1,064
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|
|
—
|
|
Asset impairment charges
|
74,600
|
|
|
—
|
|
|
—
|
|
Other, net
|
2,176
|
|
|
135
|
|
|
1,741
|
|
Changes in assets and liabilities, net of effects from acquisitions:
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|
|
|
|
|
Decrease (increase) in accounts receivable
|
574
|
|
|
(5,550
|
)
|
|
5,378
|
|
Decrease (increase) in inventory
|
3,797
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|
|
17,230
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|
|
(3,240
|
)
|
(Increase) decrease in other current assets
|
(2,014
|
)
|
|
217
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|
|
186
|
|
Increase (decrease) in accounts payable
|
8,124
|
|
|
8,325
|
|
|
(4,893
|
)
|
(Decrease) increase in accrued liabilities
|
(6,760
|
)
|
|
6,892
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|
|
(7,521
|
)
|
Increase in income taxes
|
3,416
|
|
|
676
|
|
|
4,670
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|
Increase in deferred pension and postretirement benefits
|
2,531
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|
|
2,038
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|
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(271
|
)
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Increase (decrease) in other long-term liabilities
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513
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(523
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)
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|
1,382
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Other, net
|
522
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|
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(444
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)
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(437
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)
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Cash provided by operating activities
|
96,372
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|
|
104,611
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|
|
79,778
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|
Investing activities:
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|
|
|
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Capital expenditures
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(24,883
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)
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(26,484
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)
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(34,564
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)
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Proceeds from disposition of capital assets
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1,324
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|
|
432
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|
|
1,937
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Cash used for investing activities
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(23,559
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)
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(26,052
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)
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(32,627
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)
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Financing activities:
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|
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Borrowings under credit facility
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83,500
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268,500
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53,500
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Repayments of credit facility borrowings
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(136,000
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)
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(296,250
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)
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(98,875
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)
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Debt issuance costs
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—
|
|
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(1,001
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)
|
|
—
|
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Repayments of other long-term debt
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(1,526
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)
|
|
(1,798
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)
|
|
(2,722
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)
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Common stock dividends paid
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(10,644
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)
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|
(7,020
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)
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(5,516
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)
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Issuance of common stock
|
3,287
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|
|
4,746
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|
|
7,953
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|
Payment of acquisition earn-out contingency
|
—
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|
|
—
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|
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(8,497
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)
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Payroll tax paid to settle shares forfeited upon vesting of stock
|
(330
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)
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|
(960
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)
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(976
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)
|
Purchase of treasury stock
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(9,551
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)
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|
(32,034
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)
|
|
—
|
|
Cash used for financing activities
|
(71,264
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)
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|
(65,817
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)
|
|
(55,133
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
316
|
|
|
(1,194
|
)
|
|
(89
|
)
|
Increase (decrease) in cash and cash equivalents
|
1,865
|
|
|
11,548
|
|
|
(8,071
|
)
|
Cash and cash equivalents at beginning of period
|
29,003
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|
|
17,455
|
|
|
25,526
|
|
Cash and cash equivalents at end of period
|
$
|
30,868
|
|
|
$
|
29,003
|
|
|
$
|
17,455
|
|
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, trim moldings, vinyl decking, fencing, water retention barriers, and conservatory roof components. We have organized our business into three reportable business segments: (1) North American Fenestration (NA Fenestration), (2) European Fenestration (EU Fenestration) and (3) North American Cabinet Components (NA Cabinet Components). For additional discussion of our reportable business segments, see Note 17, "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 (U.K.), and also serve customers in international markets through our operating plants in the U.K. and Germany, as well as through sales and marketing efforts in other countries.
Unless the context indicates otherwise, references to "Quanex", the "Company", "we", "us" and "our" refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries.
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, pension and retirement liabilities, 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, 2017, 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 from Contracts with Customers
On November 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method and applying ASC Topic 606 to all revenue contracts with customers. Results for reporting periods beginning on or after November 1, 2018 are presented under ASC Topic 606. In accordance with the modified retrospective approach, prior period amounts were not adjusted and are reported under ASC Topic 605, “Revenue Recognition.” As a result of adoption, there was not a material impact on our consolidated financial statements. We expect the impact of the adoption of ASC Topic 606 to continue to be immaterial to our net income on an ongoing basis.
Revenue recognition
The core principle of ASC Topic 606 is to recognize revenue that reflects the consideration we expect to receive for product sales when the promised items are transferred to customers. Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we expect to be entitled to consideration in exchange for transferring those products. We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those services, and when collectability of the consideration due is probable.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Performance obligations
A performance obligation is a promise to provide the customer with a good or service. Our performance obligations include product sales, with each product included in a customer contract being recognized as a separate performance obligation. For contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable.
Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to account for product returns related to general returns and product nonconformance.
Pricing and sales incentives
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts.
Practical expedients and exemptions
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Shipping and handling costs
We have elected to account for shipping and handling services as fulfillment services in accordance ASC Topic 606 guidance; accordingly, freight revenue will be combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in Cost of sales in the accompanying Condensed Consolidated Statements of Income.
Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration.
Disaggregation of revenue
We produce a wide variety of products that are used in the fenestration industry, including insulating glass spacer systems; extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we produce certain non-fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other products.
The following table summarizes our product sales for the three years ended October 31, 2019, 2018, and 2017 into groupings by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. For further details regarding our results by segment, refer to Note 17, “Segment Information”.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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Year Ended October 31,
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2019
|
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2018
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|
2017
|
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(in thousands)
|
NA Fenestration:
|
|
|
|
|
|
United States - fenestration
|
$
|
439,536
|
|
|
$
|
412,000
|
|
|
$
|
399,694
|
|
International - fenestration
|
31,106
|
|
|
39,309
|
|
|
34,279
|
|
United States - non-fenestration
|
17,061
|
|
|
18,211
|
|
|
25,263
|
|
International - non-fenestration
|
16,134
|
|
|
15,846
|
|
|
15,642
|
|
|
$
|
503,837
|
|
|
$
|
485,366
|
|
|
$
|
474,878
|
|
EU Fenestration:
|
|
|
|
|
|
United States - fenestration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
303
|
|
International - fenestration
|
139,638
|
|
|
135,415
|
|
|
129,140
|
|
International - non-fenestration
|
25,359
|
|
|
24,558
|
|
|
18,520
|
|
|
$
|
164,997
|
|
|
$
|
159,973
|
|
|
$
|
147,963
|
|
NA Cabinet Components:
|
|
|
|
|
|
United States - fenestration
|
$
|
13,144
|
|
|
$
|
14,596
|
|
|
$
|
17,083
|
|
United States - non-fenestration
|
214,211
|
|
|
232,990
|
|
|
229,550
|
|
International - non-fenestration
|
2,289
|
|
|
2,227
|
|
|
2,175
|
|
|
$
|
229,644
|
|
|
$
|
249,813
|
|
|
$
|
248,808
|
|
Unallocated Corporate & Other:
|
|
|
|
|
|
Eliminations
|
$
|
(4,637
|
)
|
|
$
|
(5,367
|
)
|
|
$
|
(5,094
|
)
|
|
$
|
(4,637
|
)
|
|
$
|
(5,367
|
)
|
|
$
|
(5,094
|
)
|
Net sales
|
$
|
893,841
|
|
|
$
|
889,785
|
|
|
$
|
866,555
|
|
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.
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 years ended October 31, 2019, 2018 and 2017, no customers provided more than 10% of our consolidated net sales.
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, 2019.
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 assets and liabilities acquired. We account for contingent assets and liabilities at fair value on the acquisition date, and record changes to fair value associated with these assets and liabilities as a period cost as incurred. We use established valuation techniques and engage reputable valuation specialists to assist us with these valuations.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Inventory
We record inventory at the lower of cost or net realizable value. Inventories are valued using the first-in first-out (FIFO) method. Fixed costs related to excess manufacturing capacity are evaluated and expensed in the period, to insure that inventory is properly capitalized. 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.
During the year ended October 31, 2019, we changed the method of inventory costing for certain inventory in two plants located in our NA Fenestration reportable business segment to the first-in first-out (FIFO) method from the last-in first-out method. We utilize the FIFO method to determine costs at all of our other operating locations. We believe that the FIFO method is preferable as it provides uniformity of inventory valuation across our global operations, aligns with how we internally manage inventory, and provides better matching of revenues and expenses. The impact of this change in accounting principle on the financial statements for each period presented is further explained in Note 3, “Inventories.”
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 circumstance 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 circumstance 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 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 throughout 2019 and 2017 impacted our long-term forecasts of future operating results with regard to the reduction of significant sales volume to a large customer of our United States (U.S.) 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 the years ended October 31, 2019 and 2017. There were no indicators of triggering events noted for the year ended October 31, 2018.
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.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2019 were as follows:
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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.
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 at least annually. We perform our annual goodwill assessment as of August 31, or more frequently if indicators of impairment exist. The first step in our annual goodwill assessment is to perform the optional qualitative assessment allowed by ASC Topic 350 “Intangibles - Goodwill and Other” (ASC 350). In our qualitative assessment, we evaluate relevant events or circumstances to determine whether it is more likely than not (i.e., greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, ASC 350 requires us to compare the fair value of such reporting unit to its carrying value including goodwill. To determine the 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 that utilizes market multiples and a selection of guideline public companies. 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 action is required. Otherwise, an impairment loss is recorded to the extent that the carrying amount of the reporting unit including goodwill exceeds the fair value of that reporting unit. We believe the estimates and assumptions used in our impairment assessment are reasonable based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated during current or future periods.
During the second quarter of 2019, our reporting unit included in our NA Cabinet Components segment experienced financial performance for the year to date period ended March 31, 2019 that was below our budget. As a result, we developed a new long-range forecast for this reporting unit that was below its previous long-range forecast as a result of an industry-wide shift from semi-custom cabinets to stock cabinets. We determined that the combination of i) actual financial results below planned performance, ii) a downward revision of the long-range forecast, and iii) the historical narrow margin of fair value over carrying value in previous annual and interim goodwill assessments represented a triggering event that would more likely than not indicate that the carrying value of this reporting unit was greater than its fair value. Therefore, we performed a quantitative impairment test of the goodwill balance at March 31, 2019. The quantitative impairment test was conducted using multiple valuation techniques, including a discounted cash flow analysis, which utilizes Level 3 fair value inputs, and resulted in an asset impairment charge of $30.0 million during the second quarter of 2019.
At our annual testing date, August 31, 2019, we had five reporting units with goodwill balances: two reporting units included in our NA Fenestration operating segment, two reporting units included in our EU Fenestration operating segment, and one reporting unit included in our NA Cabinet Components operating segment. We performed a qualitative assessment of the two reporting units in the NA Fenestration segment and the two reporting units in the EU Fenestration segment. This review included an analysis of historical goodwill test results, operating results relative to forecast, projected results over the next five years, and other measures and concluded that there were no indicators of potential impairment associated with these reporting units. Therefore, no additional testing was deemed necessary for the reporting units in the NA Fenestration segment and the EU Fenestration segment. Also, at
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
our annual testing date, we performed a quantitative assessment of the reporting unit in our NA Cabinet Components segment primarily due to the recent impairment of goodwill during the second quarter of 2019 and the history of a narrow margin of fair value above carrying value in quantitative assessments performed in prior years. We determined that the fair value of this reporting unit exceeded its carrying value by approximately 5%. At that date, we concluded that no impairment was necessary.
After the annual assessment date and prior to our fiscal year end of October 31, 2019, the reporting unit in our NA Cabinet Components segment was notified about a change in strategy at one of our large customers that may result in lower sales volumes in the future. In addition, we continued to experience lower-than-expected volumes as a result of the ongoing shift in demand from semi-custom cabinets to stock cabinets. Based on this information, we updated our long-range forecast for this reporting unit to reflect the expected volume declines. This revised long-range forecast was utilized to perform another quantitative impairment test of this reporting unit as of October 31, 2019, which resulted in an asset impairment charge of $44.6 million during the fourth quarter of 2019. As a result of the quantitative assessments performed in the second and fourth quarters of 2019, we recorded impairment charges totaling $74.6 million during the year ended October 31, 2019, reducing the goodwill balance applicable to the reporting unit included in our NA Cabinet Components operating segment from $113.7 million to $39.1 million.
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 assumed 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 September 2017, we closed a kitchen and bathroom cabinet door plant in Lansing, Kansas. We expensed $4.6 million associated with our restructuring efforts for the year ended October 31, 2017, including cost of equipment moves, employee termination costs and severance, professional fees and operating lease costs. Our facility lease obligations were deemed to be at fair market value. We negotiated the exit of one of the vinyl facilities during September 2018, and the lease of the cabinet door plant expired during fiscal 2018. We incurred $0.4 million and $1.5 million of expenses related to operating leases costs during the years ended October 31, 2019 and 2018, respectively, and we expect to incur costs related to the operating leases for the remaining vinyl facility during fiscal 2020 until we are able to sublet or otherwise exit the lease.
In addition, we evaluated the remaining depreciable lives of property, plant and equipment that has been abandoned, displaced or otherwise disposed as a result of the plant closures. We recorded a change in estimate associated with the remaining useful lives of these assets which resulted in an increase in depreciation expense of $4.3 million for the year ended October 31, 2017. Furthermore, we evaluated the remaining service lives of intangible assets with defined lives associated with our U.S. 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 $1.9 million for the year ended October 31, 2017. We did not incur similar increases in depreciation or amortization expenses related to restructuring activities during the years ended October 31, 2019 and 2018.
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.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2019 and net income for the years ended October 31, 2018 and 2017. We have recorded pre-tax cumulative income from operations of $43.2 million for the three-year period ended October 31, 2019. We believe we will fully realize our deferred tax assets, net of a 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. We have recorded a liability for uncertain tax positions which stem from certain state tax items related to the interpretation of tax laws and regulations. We continue to evaluate our positions regarding various state tax interpretations at each reporting date, until the applicable statute of limitations lapse.
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. The Act reduced our federal income tax statutory rate from 35.0% to 21.0% and 23.3% for the fiscal years ended October 31, 2019 and 2018, respectively. We have re-measured our deferred income tax assets and liabilities and have recorded tax expense for the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings. For further details of the impact of the Act, see Note 10, "Income Taxes."
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 U.K. 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 (loss) income 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, 2019 and 2018. See Note 15, “Stock-based Compensation.”
In addition, we have granted performance share units which settle in cash and shares upon vesting. The awards granted during the years ended October 31, 2018 and 2017 have vesting criteria based on a market condition (relative total shareholder return) and an internal performance condition (earnings per share growth). The award granted during the year ended October 31, 2019 utilizes return on net assets as the vesting condition and settles in cash. 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
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
We have also granted performance restricted stock units which settle in shares upon vesting. These awards cliff vest upon a three-year service period with the absolute performance of our common stock as the vesting criteria. We utilized a Monte Carlo simulation model to arrive at a grant-date value of these performance restricted stock units. This amount, which is settled in our common stock, is expensed over the three-year term of the award with a credit to additional paid-in-capital.
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 effects 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 and performance restricted stock units 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, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Cash paid for interest
|
$
|
9,020
|
|
|
$
|
7,890
|
|
|
$
|
9,019
|
|
Cash paid for income taxes
|
5,081
|
|
|
4,217
|
|
|
3,334
|
|
Cash received from income tax refunds
|
1,020
|
|
|
95
|
|
|
1,167
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
Investment in capital leases
|
567
|
|
|
799
|
|
|
16,846
|
|
Increase in capitalized expenditures in accounts payable and accrued liabilities
|
2,897
|
|
|
264
|
|
|
392
|
|
Related Party Transactions
During the years ended October 31, 2018 and 2017, we leased several operating facilities from a company that was directly owned by the former owner of our U.K.-based vinyl extrusion business, who was our employee until his retirement in October 2018. We recorded rent expense of $1.3 million and $1.2 million related to the related party leases for the years ended October 31, 2018 and 2017. We did not participate in any related party transactions during the year ended October 31, 2019.
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. Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consisted of the following as of October 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Trade receivables
|
$
|
82,745
|
|
|
$
|
83,828
|
|
Other
|
594
|
|
|
511
|
|
Total
|
$
|
83,339
|
|
|
$
|
84,339
|
|
Less: Allowance for doubtful accounts
|
393
|
|
|
325
|
|
Accounts receivable, net
|
$
|
82,946
|
|
|
$
|
84,014
|
|
The changes in our allowance for doubtful accounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Beginning balance as of November 1, 2018, 2017 and 2016, respectively
|
$
|
325
|
|
|
$
|
333
|
|
|
$
|
251
|
|
Bad debt expense
|
700
|
|
|
46
|
|
|
131
|
|
Amounts written off
|
(916
|
)
|
|
(54
|
)
|
|
(49
|
)
|
Recoveries
|
284
|
|
|
—
|
|
|
—
|
|
Balance as of October 31,
|
$
|
393
|
|
|
$
|
325
|
|
|
$
|
333
|
|
3. Inventories
Inventories consisted of the following at October 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Raw materials
|
$
|
32,818
|
|
|
$
|
41,584
|
|
Finished goods and work in process
|
35,538
|
|
|
31,727
|
|
Supplies and other
|
2,593
|
|
|
1,794
|
|
Total
|
$
|
70,949
|
|
|
$
|
75,105
|
|
Less: Inventory reserves
|
3,790
|
|
|
4,375
|
|
Inventories, net
|
$
|
67,159
|
|
|
$
|
70,730
|
|
The changes in our inventory reserve accounts were as follows for the years ended October 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Beginning balance as of November 1, 2018, 2017 and 2016, respectively
|
$
|
4,375
|
|
|
$
|
4,620
|
|
|
$
|
3,929
|
|
Charged to cost of sales
|
341
|
|
|
1,201
|
|
|
1,296
|
|
Write-offs
|
(939
|
)
|
|
(1,415
|
)
|
|
(661
|
)
|
Other
|
13
|
|
|
(31
|
)
|
|
56
|
|
Balance as of October 31,
|
$
|
3,790
|
|
|
$
|
4,375
|
|
|
$
|
4,620
|
|
As described in Note 1, “Nature of Operations and Basis of Presentation - Inventories,” during the year ended October 31, 2019, we elected to change our method of accounting for certain inventory in our NA Fenestration reportable business segment from LIFO to FIFO. We applied this change in method of inventory costing by retrospectively adjusting the prior period financial statements. As a result of the retrospective adjustment of the change in accounting principle, certain amounts in our consolidated
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
statements of net income for the three months and year ended October 31, 2018 was adjusted as follows (there was no impact to the corresponding three months and year ended October 31, 2017):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31, 2018
|
|
Year ended October 31, 2018
|
|
As Reported (1)
|
|
Impact of change to FIFO
|
|
As Adjusted
|
|
As Reported (1)
|
|
Impact of change to FIFO
|
|
As Adjusted
|
|
(In thousands, except per share amounts)
|
Cost of sales
|
$
|
187,960
|
|
|
$
|
(300
|
)
|
|
$
|
187,660
|
|
|
$
|
697,322
|
|
|
$
|
(300
|
)
|
|
$
|
697,022
|
|
Operating income
|
11,396
|
|
|
300
|
|
|
11,696
|
|
|
35,397
|
|
|
300
|
|
|
35,697
|
|
Income before income taxes
|
8,153
|
|
|
300
|
|
|
8,453
|
|
|
25,453
|
|
|
300
|
|
|
25,753
|
|
Income tax (expense) benefit
|
(1,661
|
)
|
|
(75
|
)
|
|
(1,736
|
)
|
|
875
|
|
|
(75
|
)
|
|
800
|
|
Net income
|
6,492
|
|
|
$
|
225
|
|
|
6,717
|
|
|
26,328
|
|
|
$
|
225
|
|
|
26,553
|
|
Basic earnings per common share
|
$
|
0.19
|
|
|
$
|
—
|
|
|
$
|
0.19
|
|
|
$
|
0.76
|
|
|
$
|
0.01
|
|
|
$
|
0.77
|
|
Diluted earnings per common share
|
$
|
0.19
|
|
|
$
|
—
|
|
|
$
|
0.19
|
|
|
$
|
0.75
|
|
|
$
|
0.01
|
|
|
$
|
0.76
|
|
(1) As reported cost of sales and operating income have been updated to reflect the adoption of accounting standards update 2017-07. See Note 20, "New Accounting Guidance " for further details.
The consolidated balance sheet for the year ended October 31, 2018 was adjusted as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2018
|
|
As Reported
|
|
Impact of change to FIFO
|
|
As Adjusted
|
|
(In thousands)
|
Inventories, net
|
$
|
69,365
|
|
|
$
|
1,365
|
|
|
$
|
70,730
|
|
Deferred income taxes
|
17,215
|
|
|
295
|
|
|
17,510
|
|
Retained earnings
|
242,834
|
|
|
1,070
|
|
|
243,904
|
|
The consolidated statement of cash flow for the year ended October 31, 2018 was adjusted as follows (there was no impact to the corresponding year ended October 31, 2017):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2018
|
|
As Reported
|
|
Impact of change to FIFO
|
|
As Adjusted
|
|
(In thousands)
|
Net income
|
$
|
26,328
|
|
|
$
|
225
|
|
|
$
|
26,553
|
|
Deferred income tax
|
(5,631
|
)
|
|
75
|
|
|
(5,556
|
)
|
Decrease in inventory
|
17,530
|
|
|
(300
|
)
|
|
17,230
|
|
During the fourth quarter of 2019, we updated our assessment of the impact of the change in method of inventory costing and noted the impact would have not changed significantly.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at October 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Land and land improvements
|
$
|
10,298
|
|
|
$
|
10,366
|
|
Buildings and building improvements
|
101,569
|
|
|
98,212
|
|
Machinery and equipment
|
386,953
|
|
|
371,106
|
|
Construction in progress
|
12,348
|
|
|
10,293
|
|
Property, plant and equipment, gross
|
511,168
|
|
|
489,977
|
|
Less: Accumulated depreciation
|
317,568
|
|
|
288,607
|
|
Property, plant and equipment, net
|
$
|
193,600
|
|
|
$
|
201,370
|
|
Depreciation expense for the years ended October 31, 2019, 2018, and 2017 was $34.3 million, $35.6 million and $39.1 million, respectively.
Assets recorded under capital leases had a historical cost of $16.6 million and $22.2 million, respectively, and accumulated depreciation of $3.7 million and $3.4 million, respectively as of October 31, 2019 and 2018. Depreciation expense related to these assets totaled $0.2 million, $1.1 million and $2.0 million for the periods ended October 31, 2019, 2018, and 2017, respectively. Refer to Note 7, ""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 did not incur impairment losses associated with these assets for the years ended October 31, 2019, 2018, and 2017. See further discussion at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Property, Plant and Equipment and Intangible Assets with Defined Lives."
5. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the years ended October 31, 2019 and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Beginning balance as of November 1, 2018 and 2017
|
$
|
219,627
|
|
|
$
|
222,194
|
|
Goodwill impairment charge
|
(74,600
|
)
|
|
—
|
|
Foreign currency translation adjustment
|
536
|
|
|
(2,567
|
)
|
Balance as of October 31,
|
$
|
145,563
|
|
|
$
|
219,627
|
|
At our annual testing date, August 31, 2019, we had five reporting units with goodwill balances. Two of these units were included in our NA Fenestration segment and had goodwill balances of $35.9 million and $2.8 million, two units were included in our EU Fenestration segment with goodwill balances of $50.9 million and $16.8 million, and our NA Cabinet Components segment had one unit with a goodwill balance of $83.8 million. During the the year ended October 31, 2019, we recorded impairment charges of $74.6 million associated with our NA Cabinet Components segment. The details of the impairment charges, as well as the results of our goodwill assessment as of August 31, 2019 are more fully described at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Goodwill."
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of October 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2019
|
|
October 31, 2019
|
|
October 31, 2018
|
|
Remaining Weighted Average Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
|
(In thousands)
|
Customer relationships
|
10 years
|
|
$
|
153,950
|
|
|
$
|
70,103
|
|
|
$
|
153,704
|
|
|
$
|
59,332
|
|
Trademarks and trade names
|
10 years
|
|
55,745
|
|
|
35,210
|
|
|
55,583
|
|
|
32,668
|
|
Patents and other technology
|
3 years
|
|
22,386
|
|
|
19,471
|
|
|
22,278
|
|
|
17,646
|
|
Total
|
|
|
$
|
232,081
|
|
|
$
|
124,784
|
|
|
$
|
231,565
|
|
|
$
|
109,646
|
|
We do not estimate a residual value associated with these intangible assets. During the year ended October 31, 2017, we determined that triggering events 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 $1.9 million for the year ended October 31, 2017. We did not incur any corresponding incremental amortization expense during the years ended October 31, 2019 and 2018. See additional disclosure at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring."
During each of the years ended October 31, 2019 and 2018, we retired fully amortized identifiable assets of $0.3 million related to customer relationships and patents and other technology, respectively.
The aggregate amortization expense associated with identifiable intangible assets for the years ended October 31, 2019, 2018, and 2017 was $15.3 million, $16.2 million and $18.4 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
|
2020
|
$
|
14,284
|
|
2021
|
12,562
|
|
2022
|
11,941
|
|
2023
|
11,194
|
|
2024
|
10,464
|
|
Thereafter
|
46,852
|
|
Total
|
$
|
107,297
|
|
We did not incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2019, 2018, and 2017.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Accrued Liabilities
Accrued liabilities consisted of the following at October 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Payroll, payroll taxes and employee benefits
|
$
|
19,637
|
|
|
$
|
28,202
|
|
Accrued insurance and workers compensation
|
3,514
|
|
|
3,095
|
|
Sales allowances
|
6,323
|
|
|
6,514
|
|
Deferred compensation (current portion)
|
1,231
|
|
|
153
|
|
Deferred revenue
|
1,251
|
|
|
287
|
|
Warranties
|
136
|
|
|
148
|
|
Audit, legal, and other professional fees
|
2,561
|
|
|
2,170
|
|
Accrued taxes
|
2,403
|
|
|
2,286
|
|
Other
|
2,165
|
|
|
3,113
|
|
Accrued liabilities
|
$
|
39,221
|
|
|
$
|
45,968
|
|
7. Debt and Capital Lease Obligations
Long-term debt consisted of the following at October 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Revolving Credit Facility
|
$
|
142,500
|
|
|
$
|
195,000
|
|
Capital lease obligations
|
15,865
|
|
|
17,043
|
|
Unamortized deferred financing fees
|
$
|
(1,205
|
)
|
|
$
|
(1,487
|
)
|
Total debt
|
$
|
157,160
|
|
|
$
|
210,556
|
|
Less: Current maturities of long-term debt
|
746
|
|
|
1,224
|
|
Long-term debt
|
$
|
156,414
|
|
|
$
|
209,332
|
|
Revolving Credit Facility
On July 29, 2016, we entered into a $450.0 million credit agreement comprising a $150.0 million Term Loan A and a $300.0 million revolving credit facility (collectively, the “2016 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 2016 Credit Agreement had a five-year term, maturing on July 29, 2021, and required interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin (0.50% to 1.25%) or the LIBOR Rate plus an applicable margin (1.50% to 2.25%). At the time of the initial borrowing, the applicable rate was LIBOR + 2.00%. In addition, we were subject to commitment fees for the unused portion of the 2016 Credit Agreement (0.20% to 0.30%).
On October 18, 2018, we amended and extended the 2016 Credit Agreement by entering into a $325.0 million revolving credit facility (the “2018 Credit Facility”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A. serving as Syndication Agent. The 2018 Credit Facility has a five-year term, maturing on October 18, 2023, and required interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin or the LIBOR Rate plus an applicable margin. At the time of the initial borrowing, the applicable rate was LIBOR + 1.50%. In addition, we are subject to commitment fees for the unused portion of the 2018 Credit Facility.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The applicable margin and commitment fees are outlined in the following table:
|
|
|
|
|
|
|
|
|
|
Pricing Level
|
|
Consolidated Leverage Ratio
|
|
Commitment Fee
|
|
LIBOR Rate Loans
|
|
Base Rate Loans
|
I
|
|
Less than or equal to 1.50 to 1.00
|
|
0.200%
|
|
1.25%
|
|
0.25%
|
II
|
|
Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00
|
|
0.225%
|
|
1.50%
|
|
0.50%
|
III
|
|
Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00
|
|
0.250%
|
|
1.75%
|
|
0.75%
|
IV
|
|
Greater than 3.00 to 1.00
|
|
0.300%
|
|
2.00%
|
|
1.00%
|
In the event of default, outstanding borrowings accrue interest at the Default Rate, as defined, whereby the obligations will bear interest at a per annum rate equal to 2% above the total per annum rate otherwise applicable.
The 2018 Credit Facility provides for incremental revolving credit commitments for a minimum principal amount of $10.0 million, up to an aggregate amount of $150.0 million, subject to the lender's discretion to elect or decline the incremental increase. We can also borrow up to the lesser of $15.0 million or the revolving credit commitment, as defined, under a Swingline feature of the Credit Agreement.
The 2018 Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than 2.25 to 1.00, and (2) Consolidated Leverage Ratio requirement whereby we must not permit the Consolidated Leverage Ratio, as defined, must be greater than 3.25 to 1.00.
In addition to maintaining these financial covenants, the 2018 Credit Facility also limits our ability to enter into certain business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted payments, pay dividends (limited to $20.0 million per year) and other transactions as further defined in the 2018 Credit Facility. Some of these limitations, however, do not take effect so long as total leverage is less than or equal to 2.75 to 1.00 and available liquidity exceeds $25 million. Substantially all of our domestic assets, with the exception of real property were utilized as collateral for the Credit Agreement.
We utilized initial borrowings of $205.0 million from the 2018 Credit Facility, along with additional funding of $10.0 million of cash on hand, to repay outstanding borrowings under the 2016 Credit Agreement of $213.5 million, to settle outstanding interest accrued and loan fees under the prior facility, and to pay loan fees associated with the 2018 Credit Agreement which totaled $1.0 million. We expensed $1.1 million of unamortized deferred financing fees associated with the 2016 Credit Agreement, while deferring the remaining $0.5 million of unamortized deferred financing fees attributable to the remaining lenders from the previous facility over the life of the 2018 Credit Facility.
As of October 31, 2019, we had $142.5 million of borrowings outstanding under the 2018 Credit Facility (reduced by unamortized debt issuance costs of $1.2 million), $4.8 million of outstanding letters of credit and $15.9 million outstanding under capital leases. We had $177.7 million available for use under the 2018 Credit Facility at October 31, 2019. The borrowings outstanding as of October 31, 2019 under the 2018 Credit Facility accrue interest at 3.30% per annum, and our weighted average borrowing rate for borrowings outstanding during the years ended October 31, 2019 and 2018 was 4.07% and 3.76%, respectively. We were in compliance with our debt covenants as of October 31, 2019.
Other Debt Instruments
We maintain certain capital lease obligations related to equipment purchases, vehicles, and warehouse space. The cost and accumulated depreciation of property, plant and equipment under capital leases at October 31, 2019 was $16.6 million and $3.7 million. These obligations accrue interest at an average rate of 3.60%, and extend through the year 2037.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below presents the scheduled maturity dates of our long-term debt outstanding (excluding deferred loan costs of $1.2 million ) at October 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
|
Capital Leases and Other Obligations
|
|
Aggregate Maturities
|
2020
|
$
|
—
|
|
|
$
|
1,050
|
|
|
$
|
1,050
|
|
2021
|
—
|
|
|
842
|
|
|
842
|
|
2022
|
—
|
|
|
849
|
|
|
849
|
|
2023
|
142,500
|
|
|
1,008
|
|
|
143,508
|
|
2024
|
—
|
|
|
728
|
|
|
728
|
|
Thereafter
|
—
|
|
|
11,388
|
|
|
11,388
|
|
Total
|
$
|
142,500
|
|
|
$
|
15,865
|
|
|
$
|
158,365
|
|
8. 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 the majority of 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 obligation and plan assets, and our funded status (reported in deferred pension and postretirement benefits on the consolidated balance sheets) were as follows:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2019
|
|
2018
|
Change in Benefit Obligation:
|
(In thousands)
|
Beginning balance as of November 1, 2018 and 2017, respectively
|
$
|
35,959
|
|
|
$
|
38,323
|
|
Service cost
|
3,629
|
|
|
3,908
|
|
Interest cost
|
1,456
|
|
|
1,130
|
|
Actuarial loss (gain)
|
7,690
|
|
|
(4,296
|
)
|
Benefits paid
|
(3,581
|
)
|
|
(2,551
|
)
|
Administrative expenses
|
(830
|
)
|
|
(555
|
)
|
Projected benefit obligation at October 31,
|
$
|
44,323
|
|
|
$
|
35,959
|
|
Change in Plan Assets:
|
|
|
|
Beginning balance as of November 1, 2018 and 2017, respectively
|
$
|
32,064
|
|
|
$
|
34,340
|
|
Actual return on plan assets
|
2,869
|
|
|
66
|
|
Employer contributions
|
690
|
|
|
764
|
|
Benefits paid
|
(3,581
|
)
|
|
(2,551
|
)
|
Administrative expenses
|
(830
|
)
|
|
(555
|
)
|
Fair value of plan assets at October 31,
|
$
|
31,212
|
|
|
$
|
32,064
|
|
Non current liability - Funded Status
|
$
|
(13,111
|
)
|
|
$
|
(3,895
|
)
|
As of October 31, 2019 and 2018, included in our accumulated comprehensive loss was a net actuarial loss of $6.7 million and $3.0 million, respectively. There were no net prior service costs or transition obligations for the years ended October 31, 2019 and 2018.
As of October 31, 2019 and 2018, the accumulated benefit obligation was $43.3 million and $35.4 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, 2019, 2018 and 2017, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Service cost
|
$
|
3,629
|
|
|
$
|
3,908
|
|
|
$
|
3,794
|
|
Interest cost
|
1,456
|
|
|
1,130
|
|
|
859
|
|
Expected return on plan assets
|
(1,977
|
)
|
|
(2,172
|
)
|
|
(1,863
|
)
|
Amortization of net loss
|
125
|
|
|
64
|
|
|
574
|
|
Net periodic benefit cost
|
$
|
3,233
|
|
|
$
|
2,930
|
|
|
$
|
3,364
|
|
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, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Net loss (gain) arising during the period
|
$
|
6,697
|
|
|
$
|
(2,189
|
)
|
|
$
|
(2,888
|
)
|
Less: Amortization of net loss
|
$
|
125
|
|
|
$
|
64
|
|
|
$
|
574
|
|
Total recognized in other comprehensive loss
|
$
|
6,572
|
|
|
$
|
(2,253
|
)
|
|
$
|
(3,462
|
)
|
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, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Weighted Average Assumptions:
|
Benefit Obligation
|
|
Net Periodic Benefit Cost
|
Discount rate
|
3.10%
|
|
4.44%
|
|
3.68%
|
|
4.44%
|
|
3.68%
|
|
3.66%
|
Rate of compensation increase
|
3.00%
|
|
3.00%
|
|
3.00%
|
|
3.00%
|
|
3.00%
|
|
3.00%
|
Expected return on plan assets
|
n/a
|
|
n/a
|
|
n/a
|
|
6.50%
|
|
6.50%
|
|
6.50%
|
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. 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.
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, 2019, as well as the actual asset allocation by asset category and fair value measurements as of October 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
Target Allocation
|
|
Actual Allocation
|
|
October 31, 2019
|
|
October 31, 2019
|
|
October 31, 2018
|
Equity securities
|
60.0
|
%
|
|
61.0
|
%
|
|
61.0
|
%
|
Fixed income
|
40.0
|
%
|
|
39.0
|
%
|
|
39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
October 31, 2019
|
|
October 31, 2018
|
|
(In thousands)
|
Money market fund
|
$
|
574
|
|
|
$
|
597
|
|
|
|
|
|
Large capitalization
|
$
|
8,092
|
|
|
$
|
8,362
|
|
Small capitalization
|
2,489
|
|
|
2,559
|
|
International equity
|
6,219
|
|
|
6,385
|
|
Other
|
1,848
|
|
|
1,913
|
|
Equity securities
|
$
|
18,648
|
|
|
$
|
19,219
|
|
|
|
|
|
High-quality core bond
|
$
|
9,525
|
|
|
$
|
9,736
|
|
High-quality government bond
|
1,228
|
|
|
1,251
|
|
High-yield bond
|
1,237
|
|
|
1,261
|
|
Fixed income
|
$
|
11,990
|
|
|
$
|
12,248
|
|
Total securities(1)
|
$
|
31,212
|
|
|
$
|
32,064
|
|
|
|
(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, 2019, 2018 and 2017, we made total pension contributions of $0.7 million, $0.8 million and $3.6 million, respectively.
During fiscal 2020, we expect to contribute approximately $3.7 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
|
2020
|
$
|
3,211
|
|
2021
|
3,227
|
|
2022
|
3,181
|
|
2023
|
3,187
|
|
2024
|
3,322
|
|
2025 - 2029
|
17,098
|
|
Total
|
$
|
33,226
|
|
Defined Contribution Plan
We also sponsor a defined contribution plan into which we and our employees make contributions. We merged a predecessor plan sponsored by Woodcraft into our defined contribution plan effective January 1, 2017. We match 50% up to the first 5% of employee annual salary deferrals under our existing plan. Beginning January 1, 2018, the plan was amended to provide the same match to Woodcraft employees. Prior to January 1, 2018, we matched 35% up to the first 5% of employee deferrals for employees who participated in 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, 2019, 2018 and 2017, we contributed approximately $2.7 million, $2.6 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, 2019
|
|
October 31, 2018
|
|
(In thousands)
|
Accrued liabilities
|
$
|
49
|
|
|
$
|
49
|
|
Deferred pension and postretirement benefits
|
311
|
|
|
323
|
|
Total
|
$
|
360
|
|
|
$
|
372
|
|
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. Our liability under the supplemental benefit plan was approximately $4.2 million and $3.4 million as of October 31, 2019 and 2018, and our liability under the deferred compensation plan was approximately $3.8 million and $3.5 million, respectively. As of October 31, 2019 and 2018, 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.
9. 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,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Beginning balance as of November 1, 2018, and 2017, respectively
|
$
|
295
|
|
|
$
|
323
|
|
Provision for warranty expense
|
—
|
|
|
4
|
|
Change in accrual for preexisting warranties
|
(20
|
)
|
|
(16
|
)
|
Warranty costs paid
|
(15
|
)
|
|
(16
|
)
|
Total accrued warranty
|
$
|
260
|
|
|
$
|
295
|
|
Less: Current portion of accrued warranty
|
136
|
|
|
148
|
|
Long-term portion at October 31,
|
$
|
124
|
|
|
$
|
147
|
|
10. Income Taxes
We provide for income taxes on taxable income at the applicable statutory rates. The following table summarizes the components of income tax expense (benefit) for the years ended October 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Current
|
|
|
|
|
|
Federal
|
$
|
3,338
|
|
|
$
|
983
|
|
|
$
|
1,991
|
|
State and local
|
299
|
|
|
417
|
|
|
873
|
|
Non-United States
|
3,879
|
|
|
3,356
|
|
|
4,067
|
|
Total current
|
7,516
|
|
|
4,756
|
|
|
6,931
|
|
Deferred
|
|
|
|
|
|
Federal
|
1,497
|
|
|
(5,828
|
)
|
|
1,860
|
|
State and local
|
1,087
|
|
|
670
|
|
|
(450
|
)
|
Non-United States
|
676
|
|
|
(398
|
)
|
|
(1,522
|
)
|
Total deferred
|
3,260
|
|
|
(5,556
|
)
|
|
(112
|
)
|
Total income tax expense (benefit)
|
$
|
10,776
|
|
|
$
|
(800
|
)
|
|
$
|
6,819
|
|
For financial reporting purposes, (loss) income before income taxes for the years ended October 31, 2019, 2018 and 2017 includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Domestic
|
$
|
(58,247
|
)
|
|
$
|
9,721
|
|
|
$
|
9,189
|
|
Foreign
|
22,293
|
|
|
16,032
|
|
|
16,313
|
|
Total (loss) income before income taxes
|
$
|
(35,954
|
)
|
|
$
|
25,753
|
|
|
$
|
25,502
|
|
The following table reconciles our effective income tax rate to the federal statutory rate for the years ended October 31, 2019, 2018 and 2017:
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
United States tax at statutory rate
|
21.0
|
%
|
|
23.3
|
%
|
|
35.0
|
%
|
State and local income tax
|
3.1
|
|
|
3.4
|
|
|
1.7
|
|
Non-United States income tax
|
(0.5
|
)
|
|
(1.6
|
)
|
|
(9.1
|
)
|
Deferred rate impact
|
—
|
|
|
—
|
|
|
(4.1
|
)
|
General business credits
|
(4.7
|
)
|
|
(0.4
|
)
|
|
(0.5
|
)
|
Change in valuation allowance
|
(1.5
|
)
|
|
(0.1
|
)
|
|
(0.6
|
)
|
Other permanent differences
|
3.0
|
|
|
—
|
|
|
3.3
|
|
Deferred rate impact of enactment of tax reform
|
—
|
|
|
(30.5
|
)
|
|
—
|
|
Foreign tax positions under the Act (GILTI and FDII)
|
3.3
|
|
|
—
|
|
|
—
|
|
Tax impact of stock based compensation
|
(1.6
|
)
|
|
(0.5
|
)
|
|
—
|
|
Impact of deemed repatriation
|
(1.1
|
)
|
|
4.8
|
|
|
—
|
|
Asset impairment charges
|
(50.7
|
)
|
|
—
|
|
|
—
|
|
Return to actual adjustments
|
(0.3
|
)
|
|
(1.5
|
)
|
|
1.0
|
|
Effective tax rate
|
(30.0
|
)%
|
|
(3.1
|
)%
|
|
26.7
|
%
|
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. The Act reduced our federal income tax statutory rate from 35.0% to 21.0% for the fiscal year ending October 31, 2019 and 23.3% for the fiscal year ended October 31, 2018, which reflects the period November 1, 2017 to December 31, 2017 at the previous 35.0% rate and the period January 1, 2018 to October 31, 2018 at the new 21.0% rate. The Act also imposed additional tax law changes that became effective during fiscal 2019, which include new requirements for a global intangible low-taxed income provision (GILTI) and a deduction for foreign-derived intangible income (FDII). We elected to account for the tax on GILTI as a period cost and therefore have not recorded deferred taxes related to GILTI on our foreign subsidiaries.
The October 31, 2019 effective rate was primarily impacted by a net charge of $1.2 million related to GILTI and FDII, as well as discrete charge of $0.4 million for the adjustment of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings and $0.6 million related to the vesting or exercise of equity-based compensation awards. Additionally, during the year ended October 31, 2019, we recorded a $74.6 million asset impairment charge, which was primarily non-deductible, in the NA Cabinet Components segment, as further explained in Note 5, "Goodwill and Intangible Assets."
Discrete items contributing to the October 31, 2018 income tax benefit included $7.7 million for the re-measurement of our deferred income tax assets and liabilities due to the decrease in the federal corporate income tax rate, a benefit of $0.2 million for the true up of our accruals and related deferred taxes from prior year filings and settled tax audits, and a benefit of $0.2 million related to the vesting or exercise of equity-based compensation awards, partially offset by a tax expense of $1.2 million for the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings.
The decrease in the October 31, 2017 effective tax rate is due primarily to a greater proportion of U.S. taxable income in relation to foreign taxable income for the year. The U.S. tax rate is generally higher than the foreign tax rate. The effective rate is also lower due to a change over a period of three years in the deferred tax rate, primarily in the U.K., from 19% to 17%.
Given the significance of the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period”. As of October 31, 2019, we have completed the accounting for the tax effects of the Act.
In light of the Act, we repatriated $24.2 million and $2.8 million of foreign earnings from our international operations during the years ended October 31, 2019 and 2018, respectively. This was repatriation of excess cash that was a portion of the one-time mandatory transition tax discussed above. We will continue to evaluate our foreign cash position and may repatriate additional foreign earnings in the future. With the exception of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings, we do not anticipate any material tax impact from any potential repatriation of previously unremitted foreign earnings. If the investment in our foreign subsidiaries were completely realized, we could incur an estimated residual U.S. tax liability of $0.1 million.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The decrease in the 2017 effective tax rate is due primarily to a greater proportion of U.S. taxable income in relation to foreign taxable income for the year. The U.S. tax rate is generally higher than the foreign tax rate. The effective rate is also lower due to a change over a period of three years in the deferred tax rate, primarily in the U.K., from 19% to 17%.
Significant components of our net deferred tax liabilities and assets were as follows:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Deferred tax assets:
|
|
|
|
Employee benefit obligations
|
$
|
7,227
|
|
|
$
|
9,910
|
|
Accrued liabilities and reserves
|
1,646
|
|
|
1,609
|
|
Pension and other benefit obligations
|
4,365
|
|
|
1,872
|
|
Inventory
|
632
|
|
|
548
|
|
Loss and tax credit carry forwards
|
2,915
|
|
|
3,716
|
|
Other
|
110
|
|
|
119
|
|
Total gross deferred tax assets
|
16,895
|
|
|
17,774
|
|
Less: Valuation allowance
|
1,560
|
|
|
1,275
|
|
Total deferred tax assets, net of valuation allowance
|
15,335
|
|
|
16,499
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
11,075
|
|
|
10,577
|
|
Goodwill and intangibles
|
23,623
|
|
|
23,432
|
|
Total deferred tax liabilities
|
34,698
|
|
|
34,009
|
|
|
|
|
|
Net deferred tax liabilities
|
$
|
19,363
|
|
|
$
|
17,510
|
|
At October 31, 2019, state operating loss carry forwards totaled $37.5 million. The majority of these losses begin to expire in 2025. Tax credits available to offset future tax liabilities totaled $1.4 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, 2019 and 2018, totaling $1.6 million and $1.3 million, respectively ($1.2 million and $1.0 million, respectively, net of federal taxes) for the respective periods. 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, 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
Unrecognized
Income Tax Benefits
|
Balance at October 31, 2016
|
|
$
|
579
|
|
Additions for tax positions related to the current year
|
|
—
|
|
Additions for tax positions related to the prior year
|
|
12
|
|
Balance at October 31, 2017
|
|
$
|
591
|
|
Additions for tax positions related to the current year
|
|
—
|
|
Additions for tax positions related to the prior year
|
|
15
|
|
Balance at October 31, 2018
|
|
$
|
606
|
|
Additions for tax positions related to the current year
|
|
—
|
|
Additions for tax positions related to the prior year
|
|
16
|
|
Reassessment of position
|
|
(66
|
)
|
Balance at October 31, 2019
|
|
$
|
556
|
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of October 31, 2019, our unrecognized tax benefit (UTB) relates to certain state tax items regarding the interpretation of tax laws and regulations. At October 31, 2019, $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 U.S. and various state jurisdictions as well as in the U.K., Germany and Canada. In certain jurisdictions, the statute of limitations has not yet expired. We generally remain subject to examination of our U.S. income tax returns for 2016 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, 2019 will be recognized within the next twelve months.
11. 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, 2019, 2018 and 2017 was $9.9 million, $9.5 million and $10.5 million, respectively.
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 $11.1 million and $5.2 million pursuant to these arrangements for the years ended October 31, 2019 and 2018, respectively. These obligations total $18.7 million and $16.7 million at October 31, 2019 and 2018, respectively, and extend through fiscal 2018. Future amounts paid pursuant to these arrangements will depend, to some extent, on our usage.
The following table presents future minimum rental payments under operating leases with remaining terms in excess of one year at October 31, 2019 (in thousands):
|
|
|
|
|
|
Operating
Leases
|
2020
|
$
|
9,121
|
|
2021
|
6,981
|
|
2022
|
6,012
|
|
2023
|
5,506
|
|
2024
|
4,699
|
|
Thereafter
|
15,220
|
|
Total
|
$
|
47,539
|
|
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 February 2025.
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
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 2020. While we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows.
Litigation
From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal injury, environmental matters, product performance or warranties, product liability, insurance coverage and personnel and employment disputes.
We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks to the extent deemed prudent by our management and to the extent such insurance is available. However, there is no assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations.
We have been and are currently party to multiple claims, some of which are in litigation, relating to alleged defects in a commercial sealant product that was manufactured and sold during the 2000's. During the years ended October 31, 2018 and 2017, our insurance carrier reimbursed fees and expenses originally incurred as part of our defense of these various commercial sealant claims totaling $0.5 million and $4.0 million, respectively. There were no corresponding reimbursements during 2019. While we believe that our product was not defective and that we would prevail in these commercial sealant product claims if taken to trial, the timing, ultimate resolution and potential impact of these claims is not currently determinable. Nevertheless, after taking into account all currently available information, including our defenses, the advice of our counsel, and the extent and currently-expected availability of our existing insurance coverage, we believe that the eventual outcome of these commercial sealant claims will not have a material adverse effect on our overall financial condition, results of operations or cash flows, and we have not recorded any accrual with regard to these claims.
12. 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 (loss) income for the years ended October 31, 2019, 2018 and 2017 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
Derivatives Not Designated as Hedging Instruments
|
Location of (Loss) or Gain:
|
2019
|
|
2018
|
|
2017
|
Foreign currency derivatives
|
Other, net
|
$
|
(10
|
)
|
|
$
|
(11
|
)
|
|
$
|
(88
|
)
|
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, 2019 and 2018, and less than $0.1 million of fair value related to foreign currency derivatives was included in accrued liabilities as of October 31, 2019.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the notional amounts and fair value of outstanding derivative contracts at October 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional as indicated
|
|
Fair Value in $
|
|
|
October 31,
2019
|
|
October 31,
2018
|
|
October 31,
2019
|
|
October 31,
2018
|
Foreign currency derivatives:
|
|
|
|
|
|
|
|
|
Buy EUR, Sell USD
|
EUR
|
301
|
|
|
455
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Sell CAD, Buy USD
|
CAD
|
405
|
|
|
229
|
|
|
2
|
|
|
—
|
|
Sell GBP, Buy USD
|
GBP
|
73
|
|
|
22
|
|
|
—
|
|
|
—
|
|
Buy EUR, Sell GBP
|
EUR
|
57
|
|
|
34
|
|
|
—
|
|
|
—
|
|
Buy USD, Sell EUR
|
USD
|
13
|
|
|
12
|
|
|
—
|
|
|
—
|
|
For the classification in the fair value hierarchy, see Note 13, "Fair Value Measurements of Assets and Liabilities", included herewith.
13. Fair Value Measurements 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.
|
As of October 31, 2019 and 2018, foreign currency derivatives were the only instruments being measured on a recurring basis. Less than $0.1 million of foreign currency derivatives were included in total assets as of October 31, 2019 and less than $0.1 million of foreign currency derivatives were included in total assets and total liabilities as of October 31, 2018. 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.
As of October 31, 2019 and 2018, we had approximately $2.4 million of certain property, plant and equipment located in our NA Fenestration segment 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 is variable rate debt that re-prices frequently, thereby limiting our exposure to significant changes in interest rate risk. As a result, the fair value of our debt instruments approximates carrying value at October 31, 2019 and 2018 (Level 2 measurement).
The liability portion of our performance share awards are marked-to-market on a quarterly basis during a three-year vesting period based on market data (Level 2 measurement). For further information, refer to Note 14, "Stock-Based Compensation - Performance Share Awards."
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. 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, performance restricted stock units, 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 authorized for grant under the 2008 Plan is 7,650,000 as approved by the shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 2008 Plan. We grant restricted stock units to non-employee directors on the first business day of each fiscal year. Annually, pending approval by the Compensation & Management Development Committee of our Board of Directors in December, we grant a mix of restricted stock awards, performance shares and/or performance restricted stock units to officers, management and key employees. We also historically granted stock options to certain officers, directors and key employees. Occasionally, we may make additional grants to key employees at other times during the year.
Restricted Stock Awards
Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a three-year period with service and continued employment as the only vesting criteria. The recipient of the restricted stock 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, 2019, 2018 and 2017, follows:
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Weighted Average
Grant Date Fair Value per Share
|
Non-vested at October 31, 2016
|
266,700
|
|
|
$
|
19.19
|
|
Granted
|
93,800
|
|
|
19.46
|
|
Vested
|
(73,100
|
)
|
|
17.67
|
|
Forfeited
|
(3,100
|
)
|
|
19.65
|
|
Non-vested at October 31, 2017
|
284,300
|
|
|
19.66
|
|
Granted
|
73,400
|
|
|
20.70
|
|
Vested
|
(111,800
|
)
|
|
20.16
|
|
Forfeited
|
(28,700
|
)
|
|
19.66
|
|
Non-vested at October 31, 2018
|
217,200
|
|
|
19.76
|
|
Granted
|
124,800
|
|
|
13.78
|
|
Vested
|
(42,500
|
)
|
|
17.87
|
|
Forfeited
|
(69,400
|
)
|
|
19.19
|
|
Non-vested at October 31, 2019
|
230,100
|
|
|
$
|
17.02
|
|
The total weighted average grant-date fair value of restricted stock awards that vested during the years ended October 31, 2019, 2018 and 2017 was $1.3 million, $2.3 million and $1.3 million, respectively. As of October 31, 2019, total unrecognized compensation cost related to unamortized restricted stock awards totaled $1.5 million. We expect to recognize this expense over the remaining weighted average period of 1.8 years.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. In December 2017, the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted stock units as further described below. As a result, stock options were not granted during the years ended October 31, 2019 and 2018. 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. For employees who are nearing retirement-eligibility, we recognize stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date.
We use the Black-Scholes pricing model to estimate the fair value of our stock options. A description of the methodology for the valuation assumptions 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 U.S. 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.
|
|
|
•
|
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 year ended October 31, 2017.
|
|
|
|
Year Ended October 31, 2017
|
Weighted-average expected volatility
|
34.7%
|
Weighted-average expected term (in years)
|
5.7
|
Risk-free interest rate
|
2.0%
|
Expected dividend yield over expected term
|
1.0%
|
Weighted average grant date fair value
|
$6.25
|
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our stock option activity for the years ended October 31, 2019, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value (000s)
|
Outstanding at October 31, 2016
|
2,386,220
|
|
|
$
|
16.84
|
|
|
5.1
|
|
$
|
2,384
|
|
Granted
|
292,600
|
|
|
19.45
|
|
|
|
|
|
Exercised
|
(507,660
|
)
|
|
15.67
|
|
|
|
|
|
Forfeited/Expired
|
(18,402
|
)
|
|
19.90
|
|
|
|
|
|
Outstanding at October 31, 2017
|
2,152,758
|
|
|
17.44
|
|
|
5.2
|
|
$
|
9,700
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(377,218
|
)
|
|
12.58
|
|
|
|
|
|
Forfeited/Expired
|
(21,884
|
)
|
|
19.28
|
|
|
|
|
|
Outstanding at October 31, 2018
|
1,753,656
|
|
|
18.47
|
|
|
5.0
|
|
$
|
51
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(204,770
|
)
|
|
15.76
|
|
|
|
|
|
Forfeited/Expired
|
(132,700
|
)
|
|
20.01
|
|
|
|
|
|
Outstanding at October 31, 2019
|
1,416,186
|
|
|
18.71
|
|
|
4.2
|
|
$
|
1,449
|
|
Vested or expected to vest at October 31, 2019
|
1,416,186
|
|
|
18.71
|
|
|
4.2
|
|
$
|
1,449
|
|
Exercisable at October 31, 2019
|
1,334,714
|
|
|
$
|
18.67
|
|
|
4.0
|
|
$
|
1,449
|
|
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, 2019, 2018 and 2017, the total intrinsic value of our stock options that were exercised totaled $0.4 million, $2.9 million and $3.1 million, respectively. The total fair value of stock options vested during the years ended October 31, 2019, 2018 and 2017, was $1.1 million, $1.5 million and $1.8 million, respectively. As of October 31, 2019, substantially all compensation cost related to stock options has been recognized.
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.
During the years ended October 31, 2019, 2018 and 2017, 34,050, 18,050 and 24,560 restricted stock units, respectively, were granted and immediately vested with corresponding weighted average grant date fair value of $15.51, $21.85 and $15.65, respectively. As of October 31, 2019, there were 4,616 non-vested restricted stock units from the fiscal 2019 grant which will vest in December 2020. As of October 31, 2018 and 2017, there were no non-vested restricted stock units. During the year ended October 31, 2019, we paid less than $0.4 million to settle restricted stock units. We did not make any payments to settle restricted stock units during the years ended October 31, 2018 and 2017.
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 (R-TSR) and earnings per share (EPS) 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. Performance share awards issued during the year ended October 31, 2019 vest with return on net assets (RONA) as the vesting condition and pay out 100% in cash.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
To account for these awards, we have bifurcated the portion subject to a market condition (R-TSR) and the portion subject to an internal performance measure (EPS or RONA). 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 EPS and RONA performance measures, 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. The portion of the awards expected to settle in cash is recorded as a liability and is marked to market over the three-year term of the award, and could fluctuate depending on the number of shares ultimately expected to vest. Depending on the achievement of the performance conditions, 0% to 200% of the awarded performance shares may ultimately vest.
The following table summarizes our performance share grants and the grant date fair value for the EPS, R-TSR, and RONA performance metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date Fair Value
|
|
|
Grant Date
|
Shares Awarded
|
|
EPS
|
|
R-TSR
|
|
RONA
|
|
Forfeited
|
November 30, 2016
|
186,500
|
|
|
$
|
19.45
|
|
|
$
|
26.61
|
|
|
—
|
|
|
42,230
|
|
December 7, 2017
|
146,500
|
|
|
20.70
|
|
|
21.81
|
|
|
—
|
|
|
33,208
|
|
December 5, 2018
|
131,500
|
|
|
—
|
|
|
—
|
|
|
13.63
|
|
|
18,100
|
|
On December 3, 2018 and January 25, 2019, 139,164 shares vested pursuant to the December 2013 grant and a total of 4,300 shares vested pursuant to the January 2016 grant, however, performance conditions resulted in no share issuances or cash payments for either of these awards. The November 2016 and December 2017 grants include a return on invested capital (ROIC) metric which, if achieved, could enhance the number of shares that are ultimately issued but cannot exceed the maximum (200%). Due to the uncertainty with regard to achieving this metric, no value has been assigned. In the event and at such time as the metric is deemed achievable, compensation expense will begin to be recognized through the remaining vesting period. For the years ended October 31, 2019 and 2017, we recorded $1.1 million and $3.0 million, respectively, of compensation expense related to performance share awards. For the year ended October 31, 2018, we recorded a decrease in compensation expense of $0.9 million, which reflected a decrease in the number of shares expected to vest in November 2019 associated with the November 30, 2016 performance share grant.
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 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, 2019, we have deemed 56,103 performance share awards from our November 30, 2016 grant to vest, of which 28,051 will be paid in our common stock and 28,051, along with accrued dividends, will settle in cash. For the years ended October 31, 2019 and 2017, there were 28,051 and 23,175 shares, respectively, related to performance shares that were potentially dilutive and considered in the diluted weighted average shares calculations. No contingent shares related to performance shares are included in diluted weighted average shares for the year ended October 31, 2018.
Performance Restricted Stock Units
We awarded performance restricted stock units to key employees and officers beginning in December 2017. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of performance restricted stock units earned is variable depending on the metric achieved, and the settlement method is 100% in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the shares had been outstanding throughout the performance period.
To value the performance restricted stock units, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Depending on the achievement of the performance conditions, a minimum of 0% and a maximum of 150% of the
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
awarded performance restricted stock units may vest. Specifically, the awards vest on a continuum with the following Absolute Total Shareholder Return (A-TSR) milestones:
|
|
|
|
|
|
Vesting Level
|
|
Vesting Criteria
|
|
Percentage of Award Vested
|
Level 1
|
|
A-TSR greater than or equal to 50%
|
|
150%
|
Level 2
|
|
A-TSR less than 50% and greater than or equal to 20%
|
|
100%
|
Level 3
|
|
A-TSR less than 20% and greater than or equal to -20%
|
|
50%
|
Level 4
|
|
A-TSR less than -20%
|
|
—%
|
The following table summarizes our performance restricted stock unit grants and the grant date fair value for the A-TSR performance metric:
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Shares Awarded
|
|
Grand Date Fair Value
|
|
Shares Forfeited
|
December 7, 2017
|
|
78,200
|
|
|
$
|
17.76
|
|
|
17,754
|
|
December 5, 2018
|
|
89,200
|
|
|
$
|
13.63
|
|
|
13,800
|
|
During the years ended October 31, 2019 and 2018, we recorded compensation expense of approximately $0.7 million and $0.4 million related to our performance share restricted units.
Similar to performance shares, the performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares.
The following table summarizes amounts expensed as selling, general and administrative expense related to restricted stock awards, stock options, restricted stock units, performance share awards and performance restricted stock units for the years ended October 31, 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
Restricted stock awards
|
$
|
1,018
|
|
|
$
|
1,462
|
|
|
$
|
1,810
|
|
Stock options
|
158
|
|
|
467
|
|
|
1,820
|
|
Restricted stock units
|
950
|
|
|
(364
|
)
|
|
855
|
|
Performance share awards
|
1,131
|
|
|
(944
|
)
|
|
3,001
|
|
Performance restricted stock units
|
708
|
|
|
401
|
|
|
—
|
|
Total compensation expense
|
3,965
|
|
|
1,022
|
|
|
7,486
|
|
Income tax effect
|
997
|
|
|
(35
|
)
|
|
1,999
|
|
Net compensation expense
|
$
|
2,968
|
|
|
$
|
1,057
|
|
|
$
|
5,487
|
|
15. Stockholders' Equity
As of October 31, 2019, 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, 2019 and 2018, we had 37,370,402 and 37,433,817 shares of common stock issued, respectively, and 33,021,789 and 33,339,032 shares of common stock outstanding, respectively. There were no shares of preferred stock issued or outstanding at October 31, 2019 and 2018.
Stock Repurchase Program and Treasury Stock
On August 30, 2018, our Board of Directors approved a stock repurchase program that authorized the repurchase of up to $60.0 million worth of shares of our common stock. Repurchases under the new program will be made in open market transactions or privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. The program does not have an expiration date or a limit on the number of shares that may be purchased. During the years ended October 31, 2019 and 2018, we purchased 583,398 shares and 1,900,000 shares, respectively, at a cost of $9.6 million and $32.0 million, respectively, under this program.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We record treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Shares are generally issued from treasury stock at the time of grant of restricted stock awards, upon the exercise of stock options, and upon the vesting of performance shares and performance restricted stock units. On the subsequent issuance of treasury shares, we record proceeds in excess of cost as an increase in additional paid in capital. A deficiency of such proceeds relative to costs would be applied to reduce paid-in-capital associated with prior issuances to the extent available, with the remainder recorded as a charge to retained earnings. We recorded a charge to retained earnings of $0.3 million and $2.1 million in the years ended October 31, 2019 and 2018, respectively.
For a summary of treasury stock activity for the years ended October 31, 2019, 2018 and 2017, refer to the Consolidated Statement of Stockholders' Equity located elsewhere herein.
16. Other Income (Expense)
Other income included under the caption "Other, net" on the accompanying consolidated statements of (loss) income, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
Foreign currency transaction (losses) gains
|
$
|
(187
|
)
|
|
$
|
113
|
|
|
$
|
713
|
|
Foreign currency exchange derivative losses
|
(197
|
)
|
|
(11
|
)
|
|
(88
|
)
|
Pension service benefit
|
396
|
|
|
978
|
|
|
430
|
|
Interest income
|
63
|
|
|
69
|
|
|
86
|
|
Other
|
41
|
|
|
7
|
|
|
19
|
|
Other income
|
$
|
116
|
|
|
$
|
1,156
|
|
|
$
|
1,160
|
|
Other income for the years ended October 31, 2018 and 2017 has been updated to reflect the adoption of Accounting Standards Update 2017-07. For further information, see Note 21, "New Accounting Guidance".
17. Segment Information
We present three reportable business segments: (1) NA Fenestration, comprising three operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens & other fenestration components; (2) EU Fenestration, comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles & conservatories, and the European insulating glass business manufacturing insulating glass spacers; and (3) NA Cabinet Components, comprising our cabinet door and components operations. We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance 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, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. Other general and administrative costs associated with the corporate office are allocated to the reportable segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as those used to prepare the accompanying consolidated financial statements. Corporate general and administrative expenses allocated during the years ended October 31, 2019, 2018 and 2017 were $18.3 million, $18.7 million and $17.0 million, respectively.
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.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Segment information for the years ended October 31, 2019, 2018 and 2017 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA Fenestration(1)
|
|
EU Fenestration(1)
|
|
NA Cabinet Comp.
|
|
Unallocated Corp. & Other
|
|
Total
|
Year Ended October 31, 2019
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
503,837
|
|
|
$
|
164,997
|
|
|
$
|
229,644
|
|
|
$
|
(4,637
|
)
|
|
$
|
893,841
|
|
Depreciation and amortization
|
27,054
|
|
|
8,845
|
|
|
13,178
|
|
|
509
|
|
|
49,586
|
|
Operating income (loss)
|
39,765
|
|
|
19,040
|
|
|
(74,236
|
)
|
|
(10,996
|
)
|
|
(26,427
|
)
|
Capital expenditures
|
12,984
|
|
|
6,365
|
|
|
5,383
|
|
|
151
|
|
|
24,883
|
|
Total assets
|
$
|
226,243
|
|
|
$
|
212,239
|
|
|
$
|
181,416
|
|
|
$
|
25,212
|
|
|
$
|
645,110
|
|
Year Ended October 31, 2018
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
485,366
|
|
|
$
|
159,973
|
|
|
$
|
249,813
|
|
|
$
|
(5,367
|
)
|
|
$
|
889,785
|
|
Depreciation and amortization
|
27,248
|
|
|
9,607
|
|
|
14,401
|
|
|
566
|
|
|
51,822
|
|
Operating income (loss)
|
30,633
|
|
|
12,702
|
|
|
3,167
|
|
|
(10,805
|
)
|
|
35,697
|
|
Capital expenditures
|
13,929
|
|
|
5,450
|
|
|
6,965
|
|
|
140
|
|
|
26,484
|
|
Total assets
|
$
|
239,915
|
|
|
$
|
214,704
|
|
|
$
|
272,313
|
|
|
$
|
16,282
|
|
|
$
|
743,214
|
|
Year Ended October 31, 2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
474,878
|
|
|
$
|
147,963
|
|
|
$
|
248,808
|
|
|
$
|
(5,094
|
)
|
|
$
|
866,555
|
|
Depreciation and amortization
|
34,308
|
|
|
8,833
|
|
|
13,811
|
|
|
543
|
|
|
57,495
|
|
Operating income (loss)
|
25,955
|
|
|
13,673
|
|
|
4,089
|
|
|
(9,780
|
)
|
|
33,937
|
|
Capital expenditures
|
$
|
18,822
|
|
|
$
|
7,841
|
|
|
$
|
7,349
|
|
|
$
|
552
|
|
|
$
|
34,564
|
|
(1) NA Fenestration and EU Fenestration were previously named "NA Engineered Components" and "EU Engineered Components".
The following table summarizes the change in the carrying amount of goodwill by segment for the years ended October 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA Fenestration
|
|
EU Fenestration
|
|
NA Cabinet Comp.
|
|
Unallocated Corp. & Other
|
|
Total
|
Balance as of October 31, 2017
|
$
|
38,712
|
|
|
$
|
69,735
|
|
|
$
|
113,747
|
|
|
$
|
—
|
|
|
$
|
222,194
|
|
Foreign currency translation adjustment
|
—
|
|
|
(2,567
|
)
|
|
—
|
|
|
—
|
|
|
(2,567
|
)
|
Balance as of October 31, 2018
|
$
|
38,712
|
|
|
$
|
67,168
|
|
|
$
|
113,747
|
|
|
$
|
—
|
|
|
$
|
219,627
|
|
Asset impairment charge
|
—
|
|
|
—
|
|
|
(74,600
|
)
|
|
—
|
|
|
(74,600
|
)
|
Foreign currency translation adjustment
|
—
|
|
|
536
|
|
|
—
|
|
|
—
|
|
|
536
|
|
Balance as of October 31, 2019
|
$
|
38,712
|
|
|
$
|
67,704
|
|
|
$
|
39,147
|
|
|
$
|
—
|
|
|
$
|
145,563
|
|
For further details of Goodwill, see Note 5, "Goodwill and Intangible Assets", located herewith.
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, 2019, 2018 and 2017:
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(in thousands)
|
Operating (loss) income
|
$
|
(26,427
|
)
|
|
$
|
35,697
|
|
|
$
|
33,937
|
|
Interest expense
|
(9,643
|
)
|
|
(11,100
|
)
|
|
(9,595
|
)
|
Other, net
|
116
|
|
|
1,156
|
|
|
1,160
|
|
Income tax (expense) benefit
|
(10,776
|
)
|
|
800
|
|
|
(6,819
|
)
|
Net (loss) income
|
$
|
(46,730
|
)
|
|
$
|
26,553
|
|
|
$
|
18,683
|
|
Geographic Information
Our manufacturing facilities and all long-lived assets are located in the U.S., U.K. and Germany. 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, 2019, 2018 and 2017, and our long-lived assets as of October 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
Net sales
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
683,204
|
|
|
$
|
676,776
|
|
|
$
|
667,063
|
|
Europe
|
162,106
|
|
|
159,652
|
|
|
148,370
|
|
Canada
|
20,088
|
|
|
23,610
|
|
|
24,442
|
|
Asia
|
18,360
|
|
|
18,584
|
|
|
17,028
|
|
Other foreign countries
|
10,083
|
|
|
11,163
|
|
|
9,652
|
|
Total net sales
|
$
|
893,841
|
|
|
$
|
889,785
|
|
|
$
|
866,555
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
Long-lived assets, net
|
2019
|
|
2018
|
United States
|
$
|
288,722
|
|
|
$
|
384,595
|
|
Germany
|
16,899
|
|
|
16,507
|
|
United Kingdom
|
140,839
|
|
|
141,814
|
|
Total long-lived assets, net
|
$
|
446,460
|
|
|
$
|
542,916
|
|
Long-lived assets, net includes: property, plant and equipment, net; goodwill; and intangible assets, net.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. 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.
The computation of basic and diluted earnings per share for the years ended October 31, 2019, 2018 and 2017 follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
Weighted Average Shares
|
|
Per Share
|
Year Ended October 31, 2019
|
|
|
|
|
|
Basic loss per common share
|
$
|
(46,730
|
)
|
|
32,960
|
|
|
$
|
(1.46
|
)
|
Diluted loss per common share (1)
|
$
|
(46,730
|
)
|
|
32,960
|
|
|
$
|
(1.46
|
)
|
Year Ended October 31, 2018
|
|
|
|
|
|
Basic earnings per common share
|
$
|
26,553
|
|
|
34,701
|
|
|
$
|
0.77
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options
|
|
|
198
|
|
|
|
Restricted stock
|
|
|
126
|
|
|
|
Diluted earnings per common share
|
$
|
26,553
|
|
|
35,025
|
|
|
$
|
0.76
|
|
Year Ended October 31, 2017
|
|
|
|
|
|
Basic earnings per common share
|
$
|
18,683
|
|
|
34,230
|
|
|
$
|
0.55
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options
|
|
|
446
|
|
|
|
Restricted stock
|
|
|
138
|
|
|
|
Performance shares
|
|
|
23
|
|
|
|
Diluted earnings per common share
|
$
|
18,683
|
|
|
34,837
|
|
|
$
|
0.54
|
|
(1) The computation of diluted earnings per share excludes outstanding stock options and other common stock equivalents when their inclusion would be anti-dilutive. During the twelve-month period ended October 31, 2019, 39,766 shares of common stock equivalents, 113,383 shares of restricted stock and 28,051 contingent shares related to performance share awards and performance restricted stock units were excluded from the computation of diluted earnings per share.
For the years ended October 31, 2019, 2018 and 2017, we had 1,267,141, 1,000,356, and 686,650 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)
19. Unaudited Quarterly Data
Selected quarterly financial data for the years ended October 31, 2019 and 2018 was as follows (amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
January 31, 2019
|
|
April 30, 2019
|
|
July 31, 2019
|
|
October 31, 2019
|
Net sales
|
$
|
196,808
|
|
|
$
|
218,203
|
|
|
$
|
238,461
|
|
|
$
|
240,369
|
|
Cost of sales (excluding depreciation and amortization)
|
158,557
|
|
|
171,378
|
|
|
181,357
|
|
|
183,128
|
|
Depreciation and amortization
|
12,572
|
|
|
12,404
|
|
|
12,182
|
|
|
12,428
|
|
Operating (loss) income
|
(2,450
|
)
|
|
(19,363
|
)
|
|
19,110
|
|
|
(23,724
|
)
|
Net (loss) income
|
$
|
(3,649
|
)
|
|
$
|
(23,974
|
)
|
|
$
|
11,841
|
|
|
$
|
(30,948
|
)
|
Basic earnings per share
|
(0.11
|
)
|
|
(0.73
|
)
|
|
0.36
|
|
|
(0.94
|
)
|
Diluted earnings per share
|
(0.11
|
)
|
|
(0.73
|
)
|
|
0.36
|
|
|
(0.94
|
)
|
Cash dividends paid per common share
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
January 31, 2018
|
|
April 30, 2018
|
|
July 31, 2018
|
|
October 31, 2018
|
Net sales
|
$
|
191,666
|
|
|
$
|
214,212
|
|
|
$
|
239,821
|
|
|
$
|
244,086
|
|
Cost of sales (excluding depreciation and amortization)
|
154,521
|
|
|
169,030
|
|
|
185,811
|
|
|
187,660
|
|
Depreciation and amortization
|
13,273
|
|
|
13,310
|
|
|
12,691
|
|
|
12,548
|
|
Operating (loss) income
|
(596
|
)
|
|
7,767
|
|
|
16,830
|
|
|
11,696
|
|
Net (loss) income
|
$
|
4,947
|
|
|
$
|
4,136
|
|
|
$
|
10,753
|
|
|
$
|
6,717
|
|
Basic (loss) earnings per share
|
0.14
|
|
|
0.12
|
|
|
0.31
|
|
|
0.19
|
|
Diluted (loss) earnings per share
|
0.14
|
|
|
0.12
|
|
|
0.31
|
|
|
0.19
|
|
Cash dividends paid per common share
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
Quarterly (loss) earnings per share results may not sum to the consolidated earnings per share results on the accompanying consolidated statements of (loss) income due to rounding and changes in weighted average shares during the respective periods. Results for the 2018 quarters have been updated to reflect the impact of an accounting change from the LIFO inventory method to the FIFO inventory method and for the adoption of Accounting Standards Update 2017-07. See Note 3, "Inventories" and Note 20, "New Accounting Guidance" for further details.
20. New Accounting Guidance
Accounting Standards Recently Adopted
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09, Compensation - Stock Compensation (Topic 718), which provides guidance as to when changes in share-based payment awards under Topic 718 should be accounted for as a modification of the award. Essentially, the changes should be considered a modification unless specific criteria are met. We adopted this guidance as of November 1, 2018 with no impact to the financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update provides explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. We adopted this change retrospectively as of November 1, 2018, resulting in a reclassification for the twelve months ended October 31, 2018 and 2017 of $0.8 million and $0.3 million of benefit, respectively, from the "Cost of sales" line item and approximately $0.2 million and $0.1 million of benefit for the corresponding periods from the "Selling, general and administrative" line item to the "Other, net" line item on the accompanying condensed consolidated statement of income.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which provides clarity when determining whether a set of assets and activities constitutes a business. Specifically, if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
is not deemed to be a business. We adopted this change prospectively as of November 1, 2018 with no impact to the financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This guidance simplifies the current two-step goodwill impairment test by eliminating the second step. Essentially, the entity compares the fair value of a reporting unit with its carrying value amount and recognizes an impairment charge for the amount by which the carrying value exceeds the fair value. The resulting loss is limited to the amount of goodwill. This guidance also eliminates the requirement for a reporting unit with zero or negative carrying value to perform a qualitative assessment of goodwill and apply step-two of the goodwill impairment test if the qualitative assessment fails. Thus, the same impairment assessment will be applied to all reporting units (even if the carrying value is zero or negative). We prospectively adopted this guidance as of February 1, 2019 with no material impact to the consolidated financial statements. See Note 5, "Goodwill and Intangible Assets," for further details of the goodwill impairment analysis performed during the year ended October 31, 2019.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. This amendment is intended to reduce diversity in practice as to how certain cash receipts and cash payments are presented and classified in the statement of cash flows by providing guidance for several specific cash flow issues. We adopted this change retrospectively as of November 1, 2018 which resulted in a reclassification of $8.5 million of earn-out payments related to a prior period acquisition from investing activities to financing activities within the Statement of Cash Flow for the year ended October 31, 2017.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This guidance prescribes a methodology to determine when revenue is recognizable and constitutes a principles-based approach to revenue recognition based on the consideration to which the entity expects to be entitled in exchange for goods or services. In addition, this guidance requires additional disclosure in the notes to the financial statements with regard to the methodology applied. This pronouncement essentially superseded and replaced existing revenue recognition rules in U.S. GAAP, including industry-specific guidance. We adopted this guidance using the modified retrospective approach on November 1, 2018. Based on our evaluation, we have concluded that the adoption of this new guidance did not have a material impact on our consolidated financial statements. For additional information, refer to Note 1, “Nature of Operations and Basis of Presentation - Revenue from Contracts with Customers”.
Accounting Standards Not Yet Adopted
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard is effective for us on November 1, 2019, with early adoption permitted. We plan to adopt using a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application. We expect to adopt the new standard on November 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to November 1, 2019.
The new standard provides a number of optional practical expedients in transition. We will elect all of the new standard’s available transition practical expedients.
This standard will have a material effect on our financial statements. The most significant effects on our financial statements relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our operating leases and providing significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between now and adoption.
On adoption, we will recognize additional operating liabilities ranging from $40.0 million to $45.0 million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.
The new standard also provides practical expedients for an entity’s ongoing accounting. We will elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.