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Quanex Building Products CORP - Quarter Report: 2014 April (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 ________________________________________________
FORM 10-Q
 ________________________________________________
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number 1-33913
  ________________________________________________
 QUANEX BUILDING PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
  ________________________________________________
 
DELAWARE
 
26-1561397
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1800 West Loop South, Suite 1500, Houston, Texas 77027
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (713) 961-4600
  ________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
Class
 
Outstanding at June 2, 2014
Common Stock, par value $0.01 per share
 
37,514,676

 



QUANEX BUILDING PRODUCTS CORPORATION

INDEX
 
PART I.
 
 
 
Item 1:
Financial Statements (Unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets – April 30, 2014 and October 31, 2013
 
 
 
 
Condensed Consolidated Statements of Income (Loss) – Three and Six Months Ended April 30, 2014 and 2013
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended April 30, 2014 and 2013
 
 
 
 
Condensed Consolidated Statements of Cash Flow – Six Months Ended April 30, 2014 and 2013
 
 
 
 
Condensed Consolidated Statement of Stockholders’ Equity – Six Months Ended April 30, 2014
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Item 2:
 
 
 
Item 3:
 
 
 
Item 4:
 
 
PART II.
 
 
 
Item 2:
 
 
 
Item 6:


Table of Contents                    
                        

    


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) 
 
April 30,
2014
 
October 31,
2013
 
(In thousands, except share 
amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
126,984

 
$
49,734

Accounts receivable, net of allowance for doubtful accounts of $846 and $481
52,335

 
59,460

Inventories, net (Note 3)
54,986

 
41,679

Deferred income taxes (Note 8)
20,502

 
16,348

Prepaid and other current assets
5,068

 
4,912

Current assets of discontinued operations (Note 1)

 
64,151

Total current assets
259,875

 
236,284

Property, plant and equipment, net of accumulated depreciation of $197,233 and $185,269
111,906

 
106,821

Deferred income taxes (Note 8)
7,004

 
7,030

Goodwill (Note 4)
72,411

 
71,866

Intangible assets, net (Note 4)
75,106

 
78,962

Other assets
5,638

 
5,572

Non-current assets of discontinued operations (Note 1)

 
65,283

Total assets
$
531,940

 
$
571,818

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
42,134

 
$
37,533

Accrued liabilities
31,262

 
34,810

Income taxes payable (Note 8)
998

 

Current maturities of long-term debt (Note 5)
178

 
162

Current liabilities of discontinued operations (Note 1)

 
49,364

Total current liabilities
74,572

 
121,869

Long-term debt (Note 5)
593

 
701

Deferred pension and postretirement benefits (Note 6)
3,935

 
3,479

Liability for uncertain tax positions (Note 8)
5,481

 
5,396

Other liabilities
11,351

 
14,640

Non-current liabilities of discontinued operations (Note 1)

 
9,539

Total liabilities
95,932

 
155,624

Commitments and contingencies (Note 9)

 
 
Stockholders’ equity:
 
 
 
Preferred stock, no par value, shares authorized 1,000,000; issued and outstanding - none

 

Common stock, $0.01 par value, shares authorized 125,000,000; issued 37,640,432 and 37,653,639, respectively
376

 
377

Additional paid-in-capital
247,695

 
247,642

Retained earnings
190,690

 
177,456

Accumulated other comprehensive loss
(982
)
 
(2,400
)
Less: Treasury stock at cost, 125,756 and 488,385 shares, respectively
(1,771
)
 
(6,881
)
Total stockholders’ equity
436,008

 
416,194

Total liabilities and stockholders' equity
$
531,940

 
$
571,818

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

1

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QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share amounts)
Net sales
$
135,208


$
125,140

 
$
261,587

 
$
231,259

Cost and expenses:
 
 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization)
108,649


95,730

 
204,838

 
179,025

Selling, general and administrative
20,393


28,202

 
42,895

 
52,026

Depreciation and amortization
8,494


9,812

 
17,038

 
17,842

Asset impairment charges
500

 

 
505

 

Operating loss
(2,828
)
 
(8,604
)
 
(3,689
)
 
(17,634
)
Non-operating income (expense):
 
 
 
 
 
 
 
Interest expense
(143
)

(174
)
 
(284
)
 
(294
)
Other, net
(22
)

9

 
74

 
(82
)
Loss from continuing operations before income taxes
(2,993
)
 
(8,769
)
 
(3,899
)
 
(18,010
)
Income tax benefit
963


1,906

 
658

 
5,977

Loss from continuing operations
(2,030
)
 
(6,863
)
 
(3,241
)
 
(12,033
)
Income (loss) from discontinued operations, net of tax of $13,481, $(283), $11,902 and $(2,010), respectively
22,161

 
(485
)
 
19,472

 
(3,433
)
Net income (loss)
$
20,131

 
$
(7,348
)
 
$
16,231

 
$
(15,466
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
Loss per share from continuing operations
$
(0.05
)
 
$
(0.19
)
 
$
(0.09
)
 
$
(0.33
)
Earnings (loss) per share from discontinued operations
0.59

 
(0.01
)
 
0.53

 
(0.09
)
Earnings (loss) per share, basic
$
0.54

 
$
(0.20
)
 
$
0.44

 
$
(0.42
)
 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Loss per share from continuing operations
$
(0.05
)
 
$
(0.19
)
 
$
(0.09
)
 
$
(0.33
)
Earnings (loss) per share from discontinued operations
0.58

 
(0.01
)
 
0.52

 
(0.09
)
Earnings (loss) per share, diluted
$
0.53

 
$
(0.20
)
 
$
0.43

 
$
(0.42
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
37,217

 
36,850

 
37,108

 
36,830

Diluted
37,838

 
36,850

 
37,726

 
36,830

 
 
 
 
 
 
 
 
Cash dividends per share
$
0.04

 
$
0.04

 
$
0.08

 
$
0.08


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


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QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net income (loss)
$
20,131

 
$
(7,348
)
 
$
16,231

 
$
(15,466
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments gain (loss) (pretax)
1,227

 
(1,227
)
 
1,282

 
(326
)
Foreign currency translation adjustments tax benefit

 
148

 
14

 
273

Change in pension from net unamortized gain adjustment (pretax)

 

 
122

 

Other comprehensive income (loss), net of tax
1,227

 
(1,079
)
 
1,418

 
(53
)
Comprehensive income (loss)
$
21,358

 
$
(8,427
)
 
$
17,649

 
$
(15,519
)

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


3

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QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
 
 
Six Months Ended
 
April 30,
 
2014
 
2013
 
(In thousands)
Operating activities:
 
 
 
Net income (loss)
$
16,231

 
$
(15,466
)
Adjustments to reconcile net income (loss) to cash used for operating activities:
 
 
 
Depreciation and amortization
20,078

 
21,196

Stock-based compensation
1,944

 
3,408

Deferred income tax provision (benefit)
8,128

 
(8,740
)
Excess tax benefit from share-based compensation
(639
)
 
(171
)
Asset impairment charges
1,007

 

Gain on sale of discontinued operations
(39,645
)
 

Other, net
1,427

 
778

Changes in assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
(Increase) decrease in accounts receivable
3,964

 
(6,380
)
Increase in inventory
(22,834
)
 
(6,267
)
(Increase) decrease in other current assets
(583
)
 
1,046

Increase (decrease) in accounts payable
10,127

 
(4,236
)
Decrease in accrued liabilities
(6,234
)
 
(7,468
)
Increase in income taxes payable
1,667

 
1,766

Increase (decrease) in deferred pension and postretirement benefits
297

 
(1,475
)
Increase (decrease) in other long-term liabilities
(3,539
)
 
1,066

Other, net
(2,419
)
 
160

Cash used for operating activities
(11,023
)
 
(20,783
)
Investing activities:
 
 
 
Proceeds from sale of discontinued operations
110,000

 

Acquisitions, net of cash acquired
(5,161
)
 
(22,096
)
Capital expenditures
(18,597
)
 
(24,983
)
Proceeds from property insurance claim
1,400

 

Proceeds from disposition of capital assets
304

 
22

Cash provided by (used in) investing activities
87,946

 
(47,057
)
Financing activities:
 
 
 
Borrowings under credit facility

 
14,500

Repayments of credit facility borrowings

 
(4,500
)
Repayments of other long-term debt
(144
)
 
(142
)
Common stock dividends paid
(2,989
)
 
(2,964
)
Issuance of common stock
2,882

 
694

Excess tax benefit from share-based compensation
639

 
171

Debt issuance costs

 
(1,163
)
Other
35

 

Cash provided by financing activities
423

 
6,596

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(96
)
 
(383
)
 
 
 
 
Increase (decrease) in cash and cash equivalents
77,250

 
(61,627
)
Cash and cash equivalents at beginning of period
49,734

 
71,255

Cash and cash equivalents at end of period
$
126,984

 
$
9,628

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

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QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Six Months Ended April 30, 2014
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Loss
 
Treasury
Stock
 
Total
Stockholders’
Equity
 
(In thousands, no per share amounts shown except in verbiage)
Balance at October 31, 2013
$
377

 
$
247,642

 
$
177,456

 
$
(2,400
)
 
$
(6,881
)
 
$
416,194

Net income

 

 
16,231

 

 

 
16,231

Foreign currency translation adjustment (tax benefit of $14)

 

 

 
1,296

 

 
1,296

Change in pension from net unamortized gain
 
 
 
 
 
 
122

 
 
 
122

Common dividends ($0.08 per share)

 

 
(2,989
)
 

 

 
(2,989
)
Stock-based compensation activity:
 
 
 
 
 
 
 
 
 
 

Expense related to stock-based compensation

 
1,944

 

 

 

 
1,944

Stock options exercised

 
(1,095
)
 

 

 
3,977

 
2,882

Tax benefit from share-based compensation

 
499

 

 

 

 
499

Restricted stock awards granted

 
(1,133
)
 

 

 
1,133

 

Other
(1
)
 
(162
)
 
(8
)
 

 

 
(171
)
Balance at April 30, 2014
$
376

 
$
247,695

 
$
190,690

 
$
(982
)
 
$
(1,771
)
 
$
436,008


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


5

Table of Contents
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. Nature of Operations and Basis of Presentation
Quanex Building Products Corporation is a leading component supplier of engineered products such as (1) energy efficient window components that include flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, (4) solar panel sealants and (5) precision-formed metal and wood products for original equipment manufacturers (OEMs). Quanex Building Products Corporation serves a primary customer base in North America and also serves customers in international markets through operating plants in the United Kingdom and Germany, as well as through sales and marketing efforts in other countries.
Unless the context indicates otherwise, references to "Quanex", the "Company", "we", "us" and "our" refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries.
The accompanying interim condensed consolidated financial statements include the accounts of Quanex Building Products Corporation. All intercompany accounts and transactions have been eliminated in consolidation. These financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet as of October 31, 2013 was derived from audited financial information, but does not include all disclosures required by U.S. GAAP. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2013. In our opinion, the accompanying financial statements contain all adjustments (which consist of normal recurring adjustments, except as disclosed herein) necessary to fairly present our financial position, results of operations and cash flows for the interim periods. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year or for any future periods.
In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. We review our estimates on an on-going basis, including those related to impairment of long lived assets and goodwill, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.
Discontinued Operations
Prior to April 1, 2014, we had two reportable business segments: (1) Engineered Products and (2) Aluminum Sheet Products. On April 1, 2014, we sold our interest in a limited liability company which held the assets of the Nichols Aluminum business (Nichols), the sole operating segment included in our Aluminum Sheet Products reportable segment, to Aleris International, Inc., a privately held, Delaware corporation which provides aluminum rolled products and extrusions, aluminum recycling and specification aluminum alloy production. We received proceeds of $110.0 million, subject to a working capital adjustment, resulting in a preliminary gain on the transaction of $24.6 million, net of related taxes of $15.1 million. We entered into a transition services agreement to provide certain administrative services to Nichols through May 31, 2014, including information technology support, benefit administration and payroll services.
Nichols represented a significant portion of our assets and operations. We accounted for this sale as a discontinued operation. We revised our financial statements and reclassified the assets and liabilities of Nichols as discontinued operations as of October 31, 2013, and removed the results of operations of Nichols from net income (loss) from continuing operations, and presented separately as income (loss) from discontinued operations, net of taxes, for each of the accompanying condensed consolidated statements of income (loss).
We have included cash held by Nichols as a component of current assets of discontinued operations for the accompanying condensed consolidated balance sheet at October 31, 2013, rather than including this amount as cash and cash equivalents of the consolidated entity at October 31, 2013. For cash flow statement presentation, the sources and uses of cash for Nichols are presented as operating, investing and financing cash flows, as applicable, combined with such cash flows for continuing operations, as permitted by U.S. GAAP.
We have historically purchased approximately $12.0 million of rolled aluminum product from Nichols annually. We expect to continue to purchase aluminum from Nichols in the normal course of business. We considered whether these aluminum purchases and the services anticipated under the transition services agreement constituted significant continuing involvement with Nichols. Since these purchases are in the normal course of business and the services provided are for a relatively short period and are customary for similar transactions, we determined that this involvement was not deemed significant and does not preclude accounting for the transaction as a discontinued operation. Our purchases of aluminum product from Nichols for the three- and

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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


six-month periods ended April 30, 2014 and 2013 were $3.3 million and $6.8 million, respectively, and $2.4 million and $7.4 million, respectively.
As of April 30, 2014, we recorded a receivable from Aleris International, Inc. of $3.6 million, of which $0.3 million represented a service fee pursuant to the transition services agreement, and $3.3 million represented reimbursable costs, primarily payroll funding. In addition, we recorded accrued liabilities of $4.2 million related to the transaction, a portion of which related to a property casualty claim resulting from a fire in November 2013, and an estimate of liability pursuant to the working capital adjustment expected to be settled during the third quarter of 2014.
In November 2013, Nichols experienced a fire at its Decatur, Alabama facility, which damaged a cold mill used to roll aluminum sheet to a desired thickness. The loss was insured, subject to a $0.5 million deductible. We capitalized $6.5 million to rebuild the asset, which was returned to service as of March 31, 2014. We incurred cost of $2.3 million associated with this loss, including an impairment of $0.5 million to retire the asset, moving costs, outside service costs, clean-up and the deductible. To date, we have received insurance proceeds of $1.4 million. We expect to receive total proceeds of approximately $8.1 million, resulting in an expected gain on involuntary conversion of $5.7 million. We have recorded a receivable of $0.9 million as of April 30, 2014, equal to the loss incurred to date (difference between the expense incurred of $2.3 million and the proceeds received of $1.4 million), as we believe it is probable and estimable that we will receive proceeds at least equal to our loss incurred. We estimate the remaining gain on involuntary conversion at $4.8 million. We expect to recognize this gain during the third quarter of 2014, when and to the extent that insurance proceeds are received, which will result in an increase in income from discontinued operations, net of tax.
The following table presents the assets and liabilities of Nichols as of October 31, 2013:
 
 
October 31,
2013
 
 
Current assets:
 
 
Cash and cash equivalents
 
$
2

Accounts receivable, net
 
39,374

Inventories, net
 
16,637

Income taxes receivable
 
2,314

Deferred income taxes
 
4,123

Prepaid and other current assets
 
1,701

Current assets of discontinued operations
 
$
64,151

Non-current assets:
 
 
Property, plant and equipment, net
 
$
50,398

Deferred income taxes
 
6,413

Other assets
 
8,472

Non-current assets of discontinued operations
 
$
65,283

Current liabilities:
 
 
Accounts payable
 
$
39,367

Accrued liabilities
 
9,975

Current maturities of long-term debt
 
22

Current liabilities of discontinued operations
 
$
49,364

Non-current liabilities:
 
 
Long-term debt
 
$
51

Deferred pension and postretirement benefits
 
233

Non-current environmental reserves
 
9,255

Non-current liabilities of discontinued operations
 
$
9,539




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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


The following table summarizes the operating results for Nichols for the three-and six-month periods ended April 30, 2014 and 2013:
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share amounts)
Net sales
$
63,306

 
$
109,691

 
$
142,797

 
$
194,294

Operating loss
(4,931
)
 
(768
)
 
(9,182
)
 
(5,425
)
Loss before income taxes, before gain on sale
(4,003
)
 
(768
)
 
(8,271
)
 
(5,443
)
Income tax benefit, before gain on sale
1,584

 
283

 
3,163

 
2,010

Gain on sale, net of tax of $15,065, $0, $15,065 and $0, respectively
24,580

 

 
24,580

 

Net income (loss)
$
22,161

 
$
(485
)
 
$
19,472

 
$
(3,433
)
Basic earnings (loss) per common share
$
0.59

 
$
(0.01
)
 
$
0.53

 
$
(0.09
)
Diluted earnings (loss) per common share
$
0.58

 
$
(0.01
)
 
$
0.52

 
$
(0.09
)
2. Acquisitions
On December 31, 2013, we acquired certain vinyl extrusion assets of Atrium Windows and Doors, Inc. (Atrium) at a facility in Greenville, Texas, for $5.2 million in cash (Greenville). We accounted for this transaction as a business combination resulting in an insignificant gain on the purchase. We entered into a supply agreement with Atrium related to the products produced at Greenville. We believe this acquisition expands our vinyl extrusion capacity and positions us with a platform from which to better serve our customers in the southern United States.
The purchase price has been allocated to the fair value of the assets acquired and liabilities assumed, as indicated in the table below. This allocation is based on estimates and assumptions that are subject to change within the purchase price allocation period (generally one year from the acquisition date).
 
As of Date of
Opening Balance Sheet
 
(In thousands)
Net assets acquired:
 
Inventories
$
161

Prepaid and other current assets
145

Property, plant and equipment
4,695

Intangible assets
290

Deferred income tax liability
(50
)
Net assets acquired
$
5,241

Consideration:
 
Cash, net of cash and cash equivalents acquired
$
5,161

 
 
Gain recognized on bargain purchase
$
80

We used recognized valuation techniques to determine the fair value of the assets and liabilities, including the income approach for customer relationships, with a discount rate that reflects the risk of the expected future cash flows. The gain on bargain purchase of approximately $0.1 million is included in "Other, net" on our condensed consolidated statement of income (loss) for the six months ended April 30, 2014.
Pro forma results of operations were not presented because this acquisition was not deemed to be material to our results of operations for the six months ended April 30, 2014.



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QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


Alumco
On December 31, 2012, we acquired substantially all of the assets of Alumco, Inc. and its subsidiaries (Alumco), including its aluminum screen business, for $22.4 million in cash. The purchase agreement contains (1) a working capital clause that provides for an adjustment to the purchase price based on the working capital balance as of the acquisition date and (2) an earn-out clause that provides for the payment of an additional $0.5 million to Alumco contingent upon the achievement of certain financial targets. We received $0.4 million from the prior owner of Alumco pursuant to the working capital clause which reduced the consideration paid from $22.4 million to $22.1 million during the second quarter of 2013. We recorded contingent consideration of $0.3 million as the fair value of the earn-out included in the purchase price. As of October 31, 2013, we determined that the earn-out provision criteria would not be met and decreased expense by $0.3 million.
The purchase price has been allocated to the fair value of the assets acquired and liabilities assumed, as indicated in the table below.
 
As of Date of
Opening Balance Sheet
 
(In thousands)
Net assets acquired:
 
Accounts receivable
$
3,638

Inventories
5,062

Prepaid and other current assets
140

Property, plant and equipment
4,682

Intangible assets
8,939

Accounts payable
(2,066
)
Accrued liabilities
(993
)
Current maturities of long-term debt
(14
)
Long-term debt
(77
)
Goodwill
2,785

Net assets acquired
$
22,096

Consideration:
 
Cash, net of cash and cash equivalents acquired
$
22,096


We used recognized valuation techniques to determine the fair value of the assets and liabilities, including the income approach for customer relationships, with a discount rate that reflects the risk of the expected future cash flows. The goodwill balance is deductible for tax purposes. We believe that this acquisition expanded our product portfolio and geographic distribution capabilities particularly in the vinyl window segment in the screen market.
The Alumco acquisition was not deemed material to our results of operations for the six months ended April 30, 2013. Therefore, we have not presented pro forma results of operations.
3. Inventories
Inventories consisted of the following at April 30, 2014 and October 31, 2013:
 
April 30,
2014
 
October 31,
2013
 
(In thousands)
Raw materials
$
31,653

 
$
26,201

Finished goods and work in process
27,446

 
19,767

Supplies and other
999

 
751

Total
60,098

 
46,719

Less: Inventory reserves
5,112

 
5,040

Inventories, net
$
54,986

 
$
41,679

Fixed costs related to excess manufacturing capacity, if any, have been expensed in the period they were incurred and, therefore, are not capitalized into inventory.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


Our inventories at April 30, 2014 and October 31, 2013 were valued using the following costing methods:
 
April 30,
2014
 
October 31,
2013
 
(In thousands)
LIFO
$
4,316

 
$
2,090

FIFO
50,670

 
39,589

Total
$
54,986

 
$
41,679

During interim periods, we estimate a LIFO reserve based on our expectations of year-end inventory levels and costs. If our calculations indicate that an adjustment at year-end will be required, we record a proportionate share of this amount during the period. At year-end, we calculate the actual LIFO reserve and record an adjustment for the difference between the annual calculation and any estimates recognized during the interim periods.  Because the interim projections are subject to many factors beyond our control, the results could differ significantly from the year-end LIFO calculation. We recorded no interim LIFO allocation for the three- and six-month periods ended April 30, 2014 and 2013.
For inventories valued under the LIFO method, replacement cost exceeded the LIFO value by approximately $1.5 million as of April 30, 2014 and October 31, 2013.
4. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the six months ended April 30, 2014 was as follows:
 
Six Months Ended
 
April 30, 2014
 
(In thousands)
Beginning balance as of November 1, 2013
$
71,866

Foreign currency translation adjustment
545

Balance as of the end of the period
$
72,411

Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of April 30, 2014 and October 31, 2013:
 
April 30, 2014
 
October 31, 2013
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
(In thousands)
Customer relationships
$
53,351

 
$
17,747

 
$
52,793

 
$
15,630

Trademarks and trade names
44,910

 
19,033

 
44,576

 
17,498

Patents and other technology
25,460

 
12,345

 
25,390

 
11,319

Other
1,392

 
882

 
1,392

 
742

Total
$
125,113

 
$
50,007

 
$
124,151

 
$
45,189


Included in intangible assets as of April 30, 2014 were customer relationships of $0.3 million associated with the Greenville acquisition. These assets have estimated useful lives of 5 years. See Note 2, "Acquisitions", included herewith.
For the three- and six-month periods ended April 30, 2014 and 2013, we had aggregate amortization expense of $2.3 million and $4.6 million, respectively, and $2.2 million and $4.4 million, respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


Estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for each of the fiscal years ending October 31, was as follows (in thousands):
 
Estimated
Amortization Expense
2014 (remaining six months)
$
4,560

2015
9,003

2016
8,732

2017
8,626

2018
8,371

Thereafter
35,814

Total
$
75,106

5. Debt and Capital Lease Obligations
Debt consisted of the following at April 30, 2014 and October 31, 2013:
 
April 30,
2014
 
October 31,
2013
 
(In thousands)
Revolving Credit Facility
$

 
$

City of Richmond, Kentucky Industrial Building Revenue Bonds
600

 
700

Capital lease obligations
171

 
163

Total debt
771

 
863

Less: Current maturities of long-term debt
178

 
162

Long-term debt
$
593

 
$
701

On January 28, 2013, we entered into a Senior Unsecured Revolving Credit Facility (the Credit Facility) that has a five-year term and permits aggregate borrowings at any time of up to $150 million, with a letter of credit sub-facility, a swing line sub-facility and a multi-currency sub-facility. Borrowings denominated in U.S. dollars bear interest at a spread above the London Interbank Borrowing Rate (LIBOR) or a base rate derived from the prime rate. Foreign denominated borrowings would bear interest at a spread above the LIBOR applicable to such currencies. Subject to customary conditions, we may request that the aggregate commitments under the Credit Facility be increased by up to $100 million, with total commitments not to exceed $250 million. The Credit Facility replaced our previous senior unsecured revolving credit facility (the Retired Facility) that was scheduled to expire on April 23, 2013.
The Credit Facility requires us to comply with certain financial covenants, the terms of which are defined therein. Specifically, we must not permit, on a quarterly basis, our ratio of consolidated EBITDA to consolidated interest expense as defined (Minimum Interest Coverage Ratio), to fall below 3.00:1 or our ratio of consolidated funded debt to consolidated EBITDA, as defined (Maximum Consolidated Leverage Ratio), to exceed 3.25:1. The Maximum Consolidated Leverage Ratio is the ratio of consolidated EBITDA to consolidated interest expense, in each case for the previous four consecutive fiscal quarters. EBITDA is defined by the indenture to include pro forma EBITDA of acquisitions and to exclude certain items such as goodwill and intangible asset impairments and certain other non-cash charges and non-recurring items. Subject to our compliance with the covenant requirements, the amount available under the Credit Facility is a function of: (1) our trailing twelve-month EBITDA; (2) the Minimum Interest Coverage Ratio and Maximum Consolidated Leverage Ratio allowed under the Credit Facility; and (3) the aggregate amount of our outstanding debt and letters of credit. As of April 30, 2014, we were in compliance with the financial covenants set forth in the Credit Facility.
As of April 30, 2014, the amount available to us for use under the Credit Facility was limited to $143.0 million and we had outstanding letters of credit of $6.2 million. For the six-month period ended April 30, 2014, we did not borrow any amounts under the Credit Facility, and thus had no outstanding borrowings at April 30, 2014. Our current borrowing rate under the Credit Facility was 3.25% and 1.20% for the swing-line sub facility and the revolver, respectively, at April 30, 2014. As of October 31, 2013, the amount available to us for use under the Credit Facility was limited to $139.0 million and we had outstanding letters of credit of $6.2 million. Our borrowing rate under the Credit Facility was 3.25% and 1.20% for the swing-line sub facility and the revolver, respectively, at October 31, 2013.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


Prior to January 28, 2013, we maintained a $270.0 million senior unsecured revolving credit facility (the Retired Facility) which had been executed on April 23, 2008 and was scheduled to mature on April 23, 2013. The Retired Facility provided for up to $50.0 million of standby letters of credit, limited based on availability, as defined. Amounts borrowed under the facility were to bear interest at a spread above LIBOR based on a combined leverage and ratings grid. In addition, the Retired Facility contained restrictive debt covenants, as defined in the indenture, and contained certain limits on additional indebtedness, asset or equity sales and acquisitions. During the period from November 1, 2012 through January 28, 2013, we were in compliance with our debt covenants and did not borrow funds pursuant to the Retired Facility.
6. Retirement Plans
Pension Plan
Our non-contributory, single employer defined benefit pension plan covers substantially all non-union employees. The net periodic pension cost for this plan for the three- and six-month periods ended April 30, 2014 and 2013 was as follows:
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Service cost
$
737

 
$
1,003

 
$
1,657

 
$
1,910

Interest cost
269

 
200

 
532

 
394

Expected return on plan assets
(438
)
 
(335
)
 
(861
)
 
(700
)
Amortization of net loss

 
122

 

 
184

Net periodic benefit cost
$
568

 
$
990

 
$
1,328

 
$
1,788

In February 2014, we contributed $1.1 million to fund our plan and currently expect to make additional contributions in September 2014.
Other Plans
We also have a supplemental benefit plan covering certain executive officers and a non-qualified deferred compensation plan covering members of the Board of Directors and certain key employees. As of April 30, 2014 and October 31, 2013, our liability under the supplemental benefit plan was approximately $1.8 million and $3.6 million, respectively, and under the deferred compensation plan was approximately $3.6 million and $6.7 million, respectively. In February 2014, we paid $1.7 million to our former Chairman, President and Chief Executive Officer, Mr. David Petratis pursuant to our supplemental employee retirement plan, and in January 2014, we distributed $3.3 million to Mr. Petratis, which represented his vested balances under our deferred compensation plan.
7. 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. During January 2014, we reduced our warranty accrual by $2.8 million for certain products associated with our insulating glass business that were discontinued in a prior year and for which claim activity for a particular customer had ceased. 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.

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NOTES TO UNAUDITED CONDENSED 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 condensed consolidated balance sheet) follows:
 
Six Months Ended
 
April 30, 2014
 
(In thousands)
Beginning balance as of November 1, 2013
$
3,684

Provision for warranty expense
490

Change in accrual for pre-existing warranties
(3,071
)
Warranty costs paid
(251
)
Total accrued warranty as of the end of the period
852

Less: Current portion of accrued warranty
398

Long-term portion of accrued warranty
$
454

8. Income Taxes
To determine our income tax expense for interim periods, consistent with accounting standards, we apply the estimated annual effective income tax rate to year-to-date results. The rate is based on the annualized forecast of pretax income, permanent book versus tax differences and estimated tax credits. Our estimated annual effective tax rates from continuing operations for the six months ended April 30, 2014 and 2013, were a benefit of 16.9% and 33.2%, respectively. The decrease in the 2014 benefit effective rate is attributable to the change in the tax status of our facility in the United Kingdom (UK). On November 1, 2013, the assets of our UK branch were contributed to a newly formed wholly-owned UK subsidiary. This change resulted in a U.S. taxable charge and was booked as a discrete item in the first quarter. We intend to indefinitely reinvest any future undistributed earnings of the new subsidiary.
We evaluate the likelihood of realization of our deferred tax assets by considering both positive and negative evidence. We believe there is no need for a valuation allowance of the federal net operating losses. However, if we record three years of cumulative losses, after adjusting for non-recurring items, we may be required to increase our valuation allowance to the full extent of our net deferred tax assets of $35.3 million. We will continue to evaluate our position throughout the year. We maintain a valuation allowance for certain state net operating losses which totaled $2.5 million at April 30, 2014.
Our unrecognized tax benefit (UTB) is related to the 2008 spin-off of Quanex from its former parent and certain state tax items regarding the interpretation of tax laws and regulations. The total UTB as of April 30, 2014 is $13.3 million. Of this, $5.5 million is recorded as a liability for uncertain tax positions and $7.8 million is recorded in non-current deferred income taxes. The UTB includes $12.5 million for which the recognition of such items would not affect the annual effective tax rate.
Judgment is required in assessing the future tax consequences of events that have been recognized in 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 believe it is reasonably possible that a decrease of approximately $2.0 million in the UTB may be recognized within the next twelve months as a result of the lapse in the statute of limitations.
Our federal income tax returns for the tax years ended October 31, 2011 and 2012 are currently under examination by the Internal Revenue Service.
9. Contingencies
Environmental
We are subject to extensive laws and regulations concerning the discharge of materials into the environment and the remediation of chemical contamination. To satisfy such requirements, we must invest capital and make other expenditures on an on-going basis. We accrue for remediation obligations and adjust our accruals as information becomes available and circumstances develop. Those estimates may change substantially depending on various factors, including the nature and extent of contamination, appropriate remediation technologies, and regulatory approvals. When we accrue for environmental remediation liabilities, costs of future expenditures are not discounted to their present value, unless the amount and timing of the expenditures are fixed or reliably determinable. When environmental laws are deemed to impose joint and several liability for the costs of responding to

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


contamination, information indicates that it is probable we have incurred a loss, and such amount is estimable, we accrue our allocable share of liability taking into account the number of parties participating, the ability of such counter-parties to pay their share of the costs, the volume and nature of the wastes involved, the nature of anticipated response actions, and the nature of our alleged connection to the contamination. The cost of environmental matters has not had a material adverse effect on our operations or financial condition in the past, and we are not currently aware of any conditions that, we believe, are likely to have a material adverse effect on our operations, financial condition or cash flows.
We are currently not subject to any remediation activities. Prior to April 1, 2014, we had remediation activities associated with one of our subsidiaries, Nichols Aluminum-Alabama, LLC, a component business unit of Nichols. As discussed in Note 1, "Nature of Operations and Basis of Presentation - Discontinued Operations", on April 1, 2014, we sold Nichols and the liabilities associated with this on-going remediation effort were assumed by Aleris International, Inc.
Litigation
From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business. Although the ultimate resolution and impact of such litigation is not presently determinable, we believe that the eventual outcome of such litigation will not have a material adverse effect on our overall financial condition, results of operations or cash flows.
10. 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, and aluminum swap contracts 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 U.S. dollar, including the Euro, British Pound and Canadian Dollar. Historically, we have entered into swap contracts to minimize our exposure to aluminum commodity prices. Through the use of swap contracts, we attempt to protect ourselves from the effects of changing prices of aluminum on our cost of sales. To the extent that the raw material costs factored into the firm price sales commitments are matched with firm price raw material purchase commitments, changes in aluminum prices should have no effect. 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 condensed consolidated statements of income (loss) for the three- and six-month periods ended April 30, 2014 and 2013 as follows (in thousands):
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
April 30,
 
April 30,
Location of Gain or (Loss):
 
 
2014
 
2013
 
2014
 
2013
Other, net
Foreign currency derivatives
 
$
(208
)
 
$
326

 
$
(94
)
 
$
(382
)
Cost of sales
Aluminum derivatives
 
$

 
$
(236
)
 
$

 
$
(244
)
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 condensed consolidated balance sheets.





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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


The fair values of our outstanding derivative contracts as of April 30, 2014 and October 31, 2013 were as follows (in thousands):
 
April 30, 2014
 
October 31, 2013
Prepaid and other current assets:
 
 
 
Foreign currency derivatives
$

 
$
164

Accrued liabilities:
 
 
 
Foreign currency derivatives
19

 
39

Aluminum derivatives
$

 
$
64

The following table summarizes the notional amounts and fair value of outstanding derivative contracts at April 30, 2014 and October 31, 2013 (in thousands):
 
 
Notional as indicated
 
Fair Value in $
 
 
April 30,
2014
 
October 31,
2013
 
April 30,
2014
 
October 31,
2013
Foreign currency derivatives:
 
 
 
 
 
 
 
 
Sell EUR, buy USD
EUR
4,136

 
7,258

 
$
(15
)
 
$
150

Sell CAD, buy USD
CAD
344

 
615

 
(3
)
 
(2
)
Sell GBP, Buy USD
GBP
100




(1
)


Buy EUR, sell GBP
EUR
43

 
967

 

 
(12
)
Buy GBP, sell USD
GBP

 
2,435

 

 
(25
)
Sell EUR, buy GBP
EUR

 
880

 

 
14

Aluminum derivatives
LBS

 
187

 
$

 
$
(64
)
For the classification in the fair value hierarchy, see Note 11, "Fair Value Measurement of Assets and Liabilities", included herewith.
11. Fair Value Measurement of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to Level 1 and the lowest priority to Level 3. The three levels of the fair value hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.






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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


The following table summarizes the assets and liabilities measured on a recurring basis based on the fair value hierarchy (in thousands):
 
April 30, 2014
 
October 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments
$
69,972

 
$

 
$

 
$
69,972

 
$
42,639

 
$

 
$

 
$
42,639

Foreign currency derivatives

 

 

 

 

 
164

 

 
164

Total assets
$
69,972

 
$

 
$

 
$
69,972

 
$
42,639

 
$
164

 
$

 
$
42,803

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aluminum derivatives
$

 
$

 
$

 
$

 
$

 
$
(64
)
 
$

 
$
(64
)
Foreign currency derivatives

 
(19
)
 

 
(19
)
 

 
(39
)
 

 
(39
)
Total liabilities
$

 
$
(19
)
 
$

 
$
(19
)
 
$

 
$
(103
)
 
$

 
$
(103
)
We held short-term investments (with an original maturity of three months or less) in commercial paper at April 30, 2014. As of October 31, 2013, we had short-term investments in money market funds. We have included these investments as cash and cash equivalents in the accompanying condensed consolidated balance sheets. These investments are measured at fair value based on active market quotations and are therefore classified as Level 1. 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 April 30, 2014 and October 31, 2013, we had approximately $2.9 million and $3.7 million, respectively, of certain property, plant and equipment that was recorded at fair value on a non-recurring basis and classified as Level 3. The fair value was based on broker opinions. The decrease in value of $0.8 million from October 31, 2013 to April 30, 2014 was due to an asset sale of $0.3 million and an asset impairment charge of $0.5 million associated with a facility in Barbourville, Kentucky.
Carrying amounts reported on the balance sheet for cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Our outstanding debt was variable rate debt that re-prices frequently, thereby limiting our exposure to significant change in interest rate risk. As a result, the fair value of our debt instruments approximates carrying value at April 30, 2014 and October 31, 2013 (Level 3 measurement).
12. Stock-Based Compensation
We have established and maintain an Omnibus Incentive Plan (2008 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards and other stock-based and cash-based awards. The 2008 Plan is administered by the Compensation and Management Development Committee of the Board of Directors.
The aggregate number of shares of common stock originally authorized for grant under the 2008 Plan was 2,900,000. At our annual shareholder meeting held in February 2011, the shareholders approved an amendment which increased the aggregate number of shares available for grant by 2,400,000 shares; and at our annual shareholder meeting held in February 2014, the shareholders approved an amendment which increased the aggregate number of shares available for grant under the 2008 Plan by an additional 2,350,000 shares.
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.





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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


A summary of non-vested restricted stock awards activity during the six months ended April 30, 2014 is presented below:
 
Restricted Stock Awards
 
Weighted Average
Grant Date  Fair Value per Share
Non-vested at October 31, 2013
183,400

 
$
17.46

Granted
80,400

 
17.63

Cancelled
(3,900
)
 
21.11

Vested
(30,700
)
 
17.45

Non-vested at April 30, 2014
229,200

 
$
17.46

The total weighted average grant-date fair value of restricted stock awards that vested during the six-month periods ended April 30, 2014 and 2013 was $0.5 million and $1.1 million, respectively. As of April 30, 2014, total unrecognized compensation cost related to unamortized restricted stock awards was $2.6 million. We expect to recognize this expense over the remaining weighted average period of 2.2 years.
Stock Options
Stock options are awarded to key employees, officers and non-employee directors. Director stock options vest immediately while employee and officer stock options typically vest ratably over a three-year period with service and continued employment as the vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of the stock options is determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital.
We use a Black-Scholes pricing model to estimate the fair value of stock options. A description of the methodology for the valuation assumptions was disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2013.
The following table provides a summary of assumptions used to estimate the fair value of our stock options issued during the six-month periods ended April 30, 2014 and 2013.
  
Six Months Ended
 
April 30,
 
2014
 
2013
Weighted-average expected volatility
55.7%
 
54.0%
Weighted-average expected term (in years)
5.9
 
5.0
Risk-free interest rate
1.8%
 
0.6%
Expected dividend yield over expected term
1.0%
 
1.0%
Weighted average grant date fair value
$8.52
 
$8.99
The following table summarizes our stock option activity for the six months ended April 30, 2014:
 
Stock Options
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining Contractual
Term (in years)
 
Aggregate
Intrinsic
Value (000s)
Outstanding at October 31, 2013
2,875,276

 
$
15.64

 
 
 
 
Granted
157,300

 
17.64

 
 
 
 
Exercised
(282,229
)
 
10.21

 
 
 
 
Forfeited/Expired
(121,313
)
 
18.15

 
 
 
 
Outstanding at April 30, 2014
2,629,034

 
$
16.23

 
6.6
 
$
7,832

Vested or expected to vest at April 30, 2014
2,587,069

 
$
16.18

 
6.6
 
$
7,786

Exercisable at April 30, 2014
1,919,186

 
$
15.54

 
5.8
 
$
6,767

Intrinsic value is the amount by which the market price of the common stock on the date of exercise exceeds the exercise price of the stock option. The total intrinsic value of stock options exercised during the six months ended April 30, 2014 and 2013, was $2.6 million and $0.4 million, respectively. The total fair value of stock options vested during the six months ended April 30,

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


2014 and 2013, was $3.0 million and $2.7 million, respectively. As of April 30, 2014, total unrecognized compensation cost related to stock options was $3.1 million. We expect to recognize this expense over the remaining weighted average period of 2.0 years.
Restricted Stock Units
Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee directors. The director restricted stock units vest immediately, whereas restricted stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued employment as the vesting conditions. Restricted stock units are not considered outstanding shares and do not have voting rights, although the holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares. Once the vesting criteria is met, each restricted stock unit is payable to the holder in cash based on the market value of one share of our common stock. Accordingly, we record a liability for the restricted stock units on our balance sheet and recognize any changes in the market value during each reporting period as compensation expense.
The following table summarizes non-vested restricted stock unit activity during the six months ended April 30, 2014:
 
Restricted Stock Units
 
Weighted Average
Grant Date  Fair Value per Share
Non-vested at October 31, 2013
101,000

 
$
15.62

Granted
5,700

 
17.63

Vested
(23,200
)
 
18.05

Non-vested at April 30, 2014
83,500

 
$
15.08

Cash used to settle restricted stock units during the six-month period ended April 30, 2014 was $0.5 million.
Performance Share Awards
Historically, we have granted performance units to key employees and officers annually. These awards cliff vest after a three-year period with service and performance measures such as relative total shareholder return and earnings per share growth as vesting conditions. These awards were treated as a liability and marked to market based upon our assessment of the achievement of the performance measures, with the assistance of third-party compensation consultants.
For the annual grant which occurred in December 2013, we granted performance shares rather than performance units. These performance share awards have the same performance measures (relative total shareholder return and earnings per share growth). However, the number of shares earned is variable depending on the metrics achieved, and the settlement method is 50% in cash and 50% in our common stock.
To account for this award, we have bi-furcated the portion subject to a market condition (relative total shareholder return) and the portion subject to an internal performance measure (earnings per share growth). We have further bi-furcated these awards based on the settlement method, as the portion expected to settle in stock (equity component) and the portion expected to settle in cash (liability component).
To value the shares subject to the market condition, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be expensed over the three-year term of the award with a credit to additional paid-in-capital. To value the shares subject to the internal performance measure, we used the value of our common stock on the date of grant as the grant-date fair value per share. This amount will be expensed over the three-year term of the award, with a credit to additional paid-in-capital, and could fluctuate depending on the number of shares ultimately expected to vest based on our assessment of the probability that the performance conditions will be achieved. For both performance conditions, the portion of the award expected to settle in cash will be recorded as a liability and will be marked to market over the three-year term of the award, and could fluctuate depending on the number of shares ultimately expected to vest.
In conjunction with the annual grant in December 2013, we awarded 155,800 performance shares, of which 0% to 200% of these shares may ultimately vest, depending on the achievement of the performance conditions. For the period from the date of grant through April 30, 2014, we have recorded $0.5 million of compensation expense related to these performance share awards.
Performance share awards are not considered outstanding shares and do not have voting rights, although dividends are accrued over the performance period and will be payable in cash based upon the number of performance shares ultimately earned.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


Treasury Shares
Shares are generally issued from treasury stock at the time of grant of restricted stock awards and exercise of stock options. On the subsequent issuance of treasury shares, we record proceeds in excess of cost as an increase in additional paid in capital.
The following table summarizes the treasury stock activity during the six months ended April 30, 2014:
 
Six Months Ended
 
April 30, 2014
Beginning balance as of November 1, 2013
488,385

Restricted stock awards granted
(80,400
)
Stock options exercised
(282,229
)
Balance at end of period
125,756

13. Other Income (Expense)
Other income (expense) included under the caption "Other, net" on the accompanying condensed consolidated statements of income (loss), consisted of the following for the three- and six-month periods ended April 30, 2014 and 2013:
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Foreign currency transaction gains (losses)
$
170

 
$
(331
)
 
$
66

 
$
331

Foreign currency derivative gains (losses)
(208
)
 
326

 
(94
)
 
(382
)
Interest income
16

 
14

 
22

 
34

Other

 

 
80

 
(65
)
Other income (expense)
$
(22
)
 
$
9

 
$
74

 
$
(82
)
14. Segment Information
We have four operating segments which we aggregate into one reportable segment, in accordance with ASC Topic 280-10-50, “Segment Reporting” (ASC 280). This aggregation is based on factors including, but not limited to: (1) similar nature of products serving the building products industry, specifically 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 original equipment manufacturers (OEMs) in the window and door industry; (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. The primary market drivers of our business are residential remodeling and replacement activity (R&R) and new home construction.
Prior to April 1, 2014, we presented two reportable operating segments: (1) Engineered Products and (2) Aluminum Sheet Products. In addition, we recorded LIFO inventory adjustments, corporate office charges and inter-segment eliminations as Corporate & Other. On April 1, 2014, we sold Nichols, the sole operating segment included in our Aluminum Sheet Products reportable segment. To account for Nichols as a discontinued operation, we reclassified certain costs from Corporate & Other to Nichols, including a portion of the LIFO reserve and incurred but not reported workers compensation accruals, to properly reflect these direct expenses as a component of the disposal group.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


The following table reconciles our segment presentation as previously reported in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2013, to the current presentation.
Three Months Ended April 30, 2013
As Previously Reported
 
Discontinued Operations
 
Reclassification
 
Current Presentation
Net Sales
 
 
 
 
 
 
 
Engineered Products
$
125,158

 
$

 
$
(18
)
 
$
125,140

Aluminum Sheet Products
109,691

 
(109,691
)
 

 

Inter-segment Eliminations
(2,391
)
 
2,373

 
18

 

Consolidated
$
232,458

 
$
(107,318
)
 
$

 
$
125,140

 
 
 
 
 
 
 
 
Operating Income (Loss):
 
 
 
 
 
 
 
Engineered Products
$
5,908

 
$

 
$
(14,512
)
 
$
(8,604
)
Aluminum Sheet Products
(468
)
 
468

 

 

Corporate & Other
(14,813
)
 
301

 
14,512

 

Consolidated
$
(9,373
)
 
$
769

 
$

 
$
(8,604
)
Six Months Ended April 30, 2013
As Previously Reported
 
Discontinued Operations
 
Reclassification
 
Current Presentation
Net Sales
 
 
 
 
 
 
 
Engineered Products
$
231,277

 
$

 
$
(18
)
 
$
231,259

Aluminum Sheet Products
194,294

 
(194,294
)
 

 

Inter-segment Eliminations
(7,400
)
 
7,382

 
18

 

Consolidated
$
418,171

 
$
(186,912
)
 
$

 
$
231,259

 
 
 
 
 
 
 
 
Operating Income (Loss):
 
 
 
 
 
 
 
Engineered Products
$
8,741

 
$

 
$
(26,375
)
 
$
(17,634
)
Aluminum Sheet Products
(4,698
)
 
4,698

 

 

Corporate & Other
(27,101
)
 
726

 
26,375

 

Consolidated
$
(23,058
)
 
$
5,424

 
$

 
$
(17,634
)
15. Earnings Per Share
We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common shares include the weighted average of additional shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock as determined using the treasury stock method prescribed by U.S. GAAP and contingent shares associated with performance share awards, if dilutive.
Basic and diluted earnings per share for the three- and six-month periods ended April 30, 2014, were calculated as follows (in thousands, except per share data):
 
Three Months Ended April 30, 2014
 
Net Income
 
Weighted Average Shares
 
Per Share
Basic earnings per common share
$
20,131

 
37,217

 
$
0.54

Effect of dilutive securities:
 
 
 
 
 
Stock options

 
513

 
 
Restricted stock awards

 
108

 
 
Diluted earnings per common share
$
20,131

 
37,838

 
$
0.53


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


 
Six Months Ended April 30, 2014
 
Net Income
 
Weighted Average Shares
 
Per Share
Basic earnings per common share
$
16,231

 
37,108

 
$
0.44

Effect of dilutive securities:
 
 
 
 
 
Stock options

 
522

 
 
Restricted stock awards

 
96

 
 
Diluted earnings per common share
$
16,231

 
37,726

 
$
0.43

Basic and diluted loss per share was $0.20 and $0.42 for the three- and six-month periods ended April 30, 2013, respectively. The computation of diluted earnings per share excludes outstanding stock options and other common stock equivalents when their inclusion would be anti-dilutive. This is always the case when an entity incurs a net loss, as we did for the three- and six-month periods ended April 30, 2013. During these periods, 389,440 and 491,260 of common stock equivalents, respectively, and 87,174 and 97,636 shares of restricted stock, respectively, were excluded from the computation of diluted earnings per share.
For the three- and six-month period ended April 30, 2014 and 2013, there were no potentially dilutive contingent shares related to performance share awards.
For the three- and six-month periods ended April 30, 2014 and 2013, we had 920,662 and 971,284 securities, respectively, and 1,232,748 and 706,574 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.
16. New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 becomes effective for annual reporting periods beginning after December 15, 2016, and will essentially supersede and replace existing revenue recognition rules in U.S. GAAP, including industry-specific guidance.  We expect to adopt this pronouncement in fiscal 2018, and we are currently evaluating the impact on our consolidated financial statements.
In April 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This new guidance clarifies the definition of a discontinued operation as a disposal of a component of any entity, or a group of such components, which represent a strategic shift that has or will have a major effect on an entity’s operations and financial results.  This guidance should result in fewer applications of discontinued operations accounting treatment.  However, if such accounting treatment is required, the guidance requires additional footnote disclosures with regard to the major classes of line items constituting pretax profit or loss of the discontinued operation, a reconciliation of the major classes of assets and liabilities of the discontinued operation, and additional disclosure with regard to cash flows of the discontinued operation.  This guidance becomes effective for fiscal years beginning on or after December 15, 2014.  We expect to adopt this guidance during fiscal 2016, and we are currently evaluating the impact on our consolidated financial statements.
In July 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides guidance related to the presentation of current and deferred income taxes on the balance sheet. In general, an entity must present an unrecognized tax benefit related to a net operating loss carryforward, similar tax loss or tax credit carryforward, as a reduction of a deferred tax asset, except in prescribed circumstances through which liability presentation would be appropriate. This guidance becomes effective for fiscal years beginning after December 15, 2013. We expect to adopt this guidance during fiscal 2015 with no material impact on our consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-2, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



 


respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted ASU 2013-2 as of November 1, 2013, with no material impact on our consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires entities to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope of this standard, which was subsequently clarified by ASU 2013-1, includes derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. These disclosures assist users of financial statements in evaluating the effect or potential effect of netting arrangements on an entity's financial position. We adopted ASU 2011-11 as of November 1, 2013, with no material impact on our consolidated financial statements.
17. Subsequent Events
On May 22, 2014, we sold a facility in Barbourville, Kentucky, which had been held for sale since 2012, and was written down to fair market value of $0.5 million at April 30, 2014. We received sales proceeds of $0.4 million and realized a loss of $0.1 million in the third quarter.

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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.
Cautionary Note Regarding Forward-Looking Statements
Certain of the statements contained in this document and in documents incorporated by reference herein, including those made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking” statements as defined under the Private Securities Litigation Reform Act of 1995. Generally, the words “expect,” “believe,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. Forward looking statements are (1) all statements which address future operating performance, (2)events or developments that we expect or anticipate will occur in the future, including statements relating to volume, sales, operating income and earnings per share, and (3) statements expressing general outlook about future operating results. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our current projections or expectations. As and when made, we believe that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made and there can be no assurance that such forward-looking statements will occur. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to the following:
changes in market conditions, particularly in the new home construction, and residential remodeling and replacement (R&R) activity markets;
changes in prevailing prices of resin and other raw material costs;
changes in domestic and international economic conditions;
changes in purchases by our principal customers;
fluctuations in foreign currency exchange rates;
changes in estimates of costs for known environmental remediation projects and situations;
our ability to maintain an effective system of internal controls;
our ability to successfully implement our internal operating plans and acquisition strategies;
our ability to successfully implement our plans with respect to information technology (IT) systems and processes;
our ability to control costs and increase profitability;
changes in environmental laws and regulations;
changes in warranty obligations;
changes in energy costs;
changes in tax laws, and interpretations thereof;
changes in interest rates;
our ability to maintain a good relationship with our suppliers, subcontractors, and key customers; and
the resolution of litigation and other legal proceedings.
For information on additional factors that could cause actual results to differ materially, please refer to the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2013.
About Third-Party Information
In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industry publications, U.S. government sources and other third parties. Although we believe this information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of April 30, 2014, and for the three- and six-month periods ended April 30, 2014 and 2013, included elsewhere herein. For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year ended October 31, 2013.
Our Business
We are a leading component supplier of engineered products in the residential building products markets. We manufacture (1) energy efficient window components that include flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, (4) solar panel sealants and (5) precision-formed metal and wood products for original equipment manufacturers (OEMs) in residential window and door industry. We use low-cost production processes and engineering expertise to provide our customers with specialized products for their specific window and door applications. We believe these capabilities provide us with unique competitive advantages. We serve a primary customer base in North America, and also serve customers in international markets through our operating plants in the United Kingdom and Germany, as well as through sales and marketing efforts in other countries.
We continue to invest in organic growth initiatives and to pursue targeted business acquisitions, which may include vertically integrated vinyl extrusion businesses or screen manufacturers that allow us to expand our existing fenestration footprint, enhance our existing product offerings, acquire complementary technology, enhance our leadership position within the markets we serve, and expand into new markets or service lines.
We have four operating segments which we aggregate into one reportable business segment.
On April 1, 2014, we sold our interest in a limited liability company which held the net assets of our Nichols Aluminum business (Nichols), the sole operating segment included in our Aluminum Sheet Products reportable segment, to Aleris International, Inc. (Aleris), a privately held, Delaware corporation which provides aluminum rolled products and extrusions, aluminum recycling and specification aluminum alloy production. We received proceeds of $110.0 million, subject to a working capital adjustment, resulting in a gain on the transaction of $24.6 million, net of related taxes of $15.1 million. We entered into a transition services agreement (TSA) to provide certain administrative services to Nichols for the period from April 1, 2014 through May 31, 2014. These services include certain information technology support, employee benefit administration and payroll services. In addition, we expect to continue to purchase aluminum product from Nichols, which has historically totaled approximately $12.0 million annually. Our purchases of aluminum product from Nichols for the three- and six-month periods ended April 30, 2014 and 2013 were $3.3 million and $6.8 million, respectively, and $2.4 million and $7.4 million, respectively.
In November 2013, Nichols experienced a fire at its Decatur, Alabama facility, which damaged a cold mill used to press aluminum sheeting to a desired thickness. The loss was insured, subject to a $0.5 million deductible. We capitalized $6.5 million to rebuild the asset, which was returned to service as of March 31, 2014. We incurred an additional $2.3 million associated with this loss, including an impairment of $0.5 million to retire the asset, moving costs, outside service costs, clean-up and the deductible. To date, we have received insurance proceeds of $1.4 million. We expect to receive total proceeds of approximately $8.1 million, resulting in an expected gain on involuntary conversion of $5.7 million. We have recorded a receivable of $0.9 million as of April 30, 2014, equal to the loss incurred to date (difference between the expense incurred of $2.3 million and the proceeds received of $1.4 million), as we believe it is probable and estimable that we will receive proceeds at least equal to our loss incurred. We estimate the remaining gain on involuntary conversion at $4.8 million. We expect to recognize this gain during the third quarter of 2014, when and to the extent that insurance proceeds are received, which will result in an increase in income from discontinued operations, net of tax.
Recent Transactions and Events
In December 2013, we acquired certain vinyl extrusion assets of Atrium Windows and Doors, Inc. (Atrium) at a facility in Greenville, Texas, for $5.2 million in cash (Greenville). We accounted for this transaction as a business combination resulting in an insignificant gain on the purchase. We entered into a supply agreement with Atrium related to the products produced at Greenville. We believe this acquisition expands our vinyl extrusion capacity and positions us with a platform from which to better serve our customers in the southern United States.
In August 2013, we ceased all activities associated with our enterprise resource planning (ERP) implementation and migrated several operating units which were utilizing the ERP prior to August 2013 back to legacy systems as of October 31, 2013, although we continue to use certain elements of the ERP at the corporate office. We recorded a change in accounting estimate during the

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fourth quarter of 2013 and accelerated depreciation associated with certain ERP assets. We incurred certain charges related to one-time termination benefits and contract termination costs which were not deemed significant.
Our former Chairman, President and Chief Executive Officer, Mr. David Petratis, retired from his position effective July 8, 2013. Mr. Petratis participated in a number of our stock-based and deferred compensation plans. In January 2014, we paid approximately $3.3 million to Mr. Petratis, which represented his vested balances under our deferred compensation plan, and, in February 2014, we paid $1.7 million to Mr. Petratis pursuant to our supplemental employee retirement plan.
In December 2012, we acquired substantially all of the assets of Alumco Inc. and its subsidiaries (Alumco) for $22.1 million which included a working capital adjustment received of $0.4 million, and subject to an earn-out provision for which we determined the criteria would not be met as of October 31, 2013. The purchase of Alumco allowed us to expand the scope of our fenestration business to include screens for vinyl windows and door manufacturers, and to expand our geographic reach throughout the United States. We believe this acquisition allowed us to build upon our national and regional original equipment manufacturer (OEM) customer base and to enhance our distribution capabilities. We recorded goodwill of $2.8 million in conjunction with this transaction.
Market Overview and Outlook
We believe the primary drivers of our operating results are residential remodeling and replacement (R&R) activity and new home construction. We believe that housing starts and window shipments are indicators of activity levels in the home building industry, and we use this data, as published by or derived from third-party sources, to evaluate the market.
The following trends were identified at October 31, 2013 and have continued through the second quarter of 2014.
Housing starts and window shipments in the United States have increased in recent years and continued to increase through the second quarter of 2014. The National Association of Homebuilders (NAHB) has forecasted calendar-year housing starts to increase from 0.9 million units in 2013 to 1.1 million units in 2014 and 1.5 million units in 2015. Ducker Worldwide, a consulting and research firm, indicated that window shipments in the R&R market are expected to increase from 26.3 million units in 2013 to 27.4 million units in 2014 and 28.7 million units in 2015, and new construction window shipments are forecasted to increase at a higher pace. Derived from reports published by Ducker Worldwide, the overall growth in window shipments for the trailing twelve-month period ended March 31, 2014 was 7.4%. During this period, growth in R&R activity increased 3.7% and growth in new construction increased 13.3%. Growth in new construction continues to outpace the growth in R&R, with a greater portion of the new construction associated with multi-family homes. The current growth trend in single-family home construction is toward large tract builders, with a smaller portion of this construction associated with smaller custom builders.
The United States government has been reluctant to enforce stricter energy standards, but higher energy efficiency standards in Europe are impacting the industry. For instance, industry governing bodies in Europe recently approved standards that resulted in us having to switch to a new vapor barrier for our European insulating glass spacer products. We continue to be optimistic about our growth prospects in Europe, particularly in the United Kingdom, Germany and Scandinavian countries, where the push for higher energy efficiency standards has been the greatest. Older technology cold-edge spacers are still a dominant force in these regions and garner a larger portion of the total market share in Europe relative to the United States. We operate warm-edge spacer plants in the United Kingdom and in Germany, where we added a third production line during the fourth quarter of 2013. We believe we can become the provider of choice as demand for more energy-efficient warm edge spacers grows and eventually displaces cold edge spacers.
The housing recovery continues to improve in the United States, but there remain challenges to growth prospects of the fenestration market that we serve including the Canadian market.
The fenestration business is impacted by seasonality. Activity levels generally increase during the summer months, which favorably impacts our operating results for the second half of our fiscal year.

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Results of Operations
Three Months Ended April 30, 2014 Compared to Three Months Ended April 30, 2013
 
Three Months Ended April 30,
 
2014
 
2013
 
Change $
 
Change %
 
(Dollars in millions)
Net sales
$
135.2

 
$
125.1

 
$
10.1

 
8
 %
Cost of sales (excluding depreciation and amortization)
108.6

 
95.7

 
12.9

 
13
 %
Selling, general and administrative
20.4

 
28.2

 
(7.8
)
 
(28
)%
Depreciation and amortization
8.5

 
9.8

 
(1.3
)
 
(13
)%
Asset impairment charges
0.5

 

 
0.5

 
100
 %
Operating loss
$
(2.8
)
 
$
(8.6
)
 
$
5.8

 
(67
)%
Interest expense
(0.2
)
 
(0.2
)
 

 
 %
Other, net

 

 

 
 %
Income tax benefit
1.0

 
1.9

 
(0.9
)
 
(47
)%
Loss from continuing operations
$
(2.0
)
 
$
(6.9
)
 
$
4.9

 
(71
)%
Income (loss) from discontinued operations, net of taxes
$
22.1

 
$
(0.5
)
 
$
22.6

 
(4,520
)%
Net income (loss)
$
20.1

 
$
(7.4
)
 
$
27.5

 
(372
)%
Net Sales. Net sales increased $10.1 million, or 8%, for the three months ended April 30, 2014 compared to the same period in 2013, due primarily to: (1) an increase in demand for our core insulating glass spacer in the United States and a year-over-year improvement in our European sales, partially due to higher capacity at our German plant where we added a third operating line in late 2013; (2) higher sales of vinyl window and door profiles, due in part to the contribution of the Greenville acquisition in December 2013 and certain resin surcharges which were implemented in January 2014 following price increases from our suppliers, partially offset by pricing pressure, concessions to OEMs and an inability to fully recoup the majority of the resin cost increase due to contract limitations; (3) higher-than-expected sales for our engineered components products to date in 2014 driven in part by an increase in activity levels for certain national OEMs, higher demand for fireplace screens and certain price increases related to wood components and flooring; and (4) a slight increase in contribution from our screen products on a year-over-year basis. We expect demand for our warm-edge spacers to remain high in Europe, and to improve, as new vapor barrier technology is adopted by our European customers in response to new regulatory standards. Overall, the current trend in the United States is toward new construction of multi-family homes which generally contain lower-cost, less energy-efficient windows. Window shipments, derived from data provided by Ducker Worldwide for the year-over-year calendar quarters ended March 31, 2014 and 2013, reflects an overall growth rate of 2.1%, compared to a growth rate of 4.7% for our year-over-year fiscal quarters ended April 30, 2014 and 2013, excluding the Alumco acquisition and certain foreign operations. This improvement relative to the broader market is consistent with the improvement noted during our first quarter of 2014, and is to some extent attributable to our sales mix and breadth of fenestration component offerings.
Cost of Sales. The increase in cost of sales of $12.9 million, or 13%, for the three months ended April 30, 2014 compared to the same period in 2013 was consistent with an increase in net sales as discussed above, however, margins were negatively impacted by a series of price increases for resin, a critical supply of our vinyl products, which we were unable to recoup from some customers through surcharges due to contractual limitations. In addition, we experienced some labor inefficiencies, higher insurance and employee benefit costs, significant repair and maintenance costs, and higher freight costs. These increases in cost were partially offset by favorable material price variances for our insulating glass spacers.
Selling, General and Administrative. The decrease in our selling, general and administrative expenses of $7.8 million, or 28%, for the three months ended April 30, 2014 compared to the same period in 2013 was due primarily to the cessation of our ERP implementation in August 2013, which contributed expense of $3.7 million during the three months ended April 30, 2013; a decrease in information technology costs attributable to support of the ERP system which had contributed to higher cost in fiscal 2013; reduced headcount primarily due to attrition, with some selective restructuring efforts to better align our cost structure; and a decrease in stock-based compensation and compensation associated with long-term incentive arrangements tied to the performance of our common stock. These cost reductions were partially offset by higher incentive accruals based on earnings and higher insurance costs.
Depreciation and Amortization. Depreciation and amortization expense decreased $1.3 million, or 13%, for the three months ended April 30, 2014 compared to the same period in 2013 primarily due to the cessation of the ERP implementation in August

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2013 and the related accelerated depreciation write-off. For the three months ended April 30, 2013, we incurred $1.6 million of depreciation expense associated with the implementation compared to $0.8 million for the respective period in 2014 (attributable to the remaining assets which are currently in service). The remainder of the decrease in depreciation expense relates to the run-off of depreciation and intangible asset amortization associated with the Alumco acquisition in December 2012 (incremental increase in 2013 compared to 2014), partially offset by the incremental effect of depreciation and amortization expense associated with fixed and intangible assets which were placed into service during the trailing twelve months ended April 30, 2014.
Asset Impairment Charges. We recorded an impairment loss of $0.5 million in April 2014 associated with a facility in Barbourville, Kentucky. This facility was subsequently sold in May 2014, resulting in an insignificant realized loss on the sale.
Interest Expense. Interest expense was consistent for the three-month periods ended April 30, 2014 and 2013.
Other, Net. Other, net expense for the three months ended April 30, 2014 was insignificant and was primarily related to realized gains and losses of foreign currency exchange transactions.
Income Taxes. Our estimated annual effective tax rates for the three months ended April 30, 2014 and 2013 were 32.2% and 21.7%, respectively. The difference in the effective rates is primarily due to the effect of permanent book-to-tax differences.
Income (Loss) from Discontinued Operations, Net of Tax. We recorded a gain on the sale of Nichols of $24.6 million, net of tax of $15.1 million during the three months ended April 30, 2014. Excluding this gain, the loss from discontinued operations would have been a loss of $2.4 million compared to a loss of $0.5 million for the three months ended April 30, 2013. The loss in 2014 is due primarily to the effect of aluminum commodity prices, which resulted in lower throughput and lower volume.
Six Months Ended April 30, 2014 Compared to Six Months Ended April 30, 2013
 
Six Months Ended April 30,
 
2014
 
2013
 
Change $
 
Change %
 
(Dollars in millions)
Net sales
$
261.6

 
$
231.3

 
$
30.3

 
13
 %
Cost of sales (excluding depreciation and amortization)
204.8

 
179.0

 
25.8

 
14
 %
Selling, general and administrative
43.0

 
52.1

 
(9.1
)
 
(17
)%
Depreciation and amortization
17.0

 
17.8

 
(0.8
)
 
(4
)%
Asset impairment charges
0.5

 

 
0.5

 
100
 %
Operating loss
$
(3.7
)
 
$
(17.6
)
 
$
13.9

 
(79
)%
Interest expense
(0.3
)
 
(0.3
)
 

 
 %
Other, net
0.1

 
(0.1
)
 
0.2

 
(200
)%
Income tax benefit
0.7

 
6.0

 
(5.3
)
 
(88
)%
Loss from continuing operations
$
(3.2
)
 
$
(12.0
)
 
$
8.8

 
(73
)%
Income (loss) from discontinued operations, net of taxes
$
19.4

 
$
(3.5
)
 
$
22.9

 
(654
)%
Net income (loss)
$
16.2

 
$
(15.5
)
 
$
31.7

 
(205
)%
Net Sales. Net sales increased $30.3 million, or 13%, for the six months ended April 30, 2014 compared to the same period in 2013, due primarily to: (1) the Alumco acquisition on December 31, 2012 which contributed $9.5 million of incremental revenue for the six months ended April 30, 2014; (2) an increase in demand for our core insulating glass spacer in the United States, as well as a $4.6 million year-over-year improvement in our European operations, partially due to higher capacity at our German plant where we added a third operating line in late 2013, and favorable results for the U.K. operations; (3) higher sales of vinyl window and door profiles, due in part to the contribution of the Greenville acquisition in December 2013 and certain resin surcharges which were implemented in January 2014 following price increases from our suppliers, partially offset by pricing pressure, concessions to OEMs, an inability to fully recoup the majority of the resin cost increase due to contract limitations and an increase in sales returns and allowances; and (4) higher-than-expected sales for our engineered components products to date in 2014 driven in part by an increase in activity levels for certain national OEMs, higher demand for fireplace screens and certain price increases related to wood components and flooring. We expect demand for our warm-edge spacers to remain high in Europe, and to improve, as new vapor barrier technology is adopted by our European customers in response to new regulatory standards. Improvement in the housing market in the United States is trending toward new construction of multi-family homes which generally contain lower-cost, less energy-efficient windows. Window shipments, derived from data provided by Ducker Worldwide for the year-over-year six-month periods ended March 31, 2014 and 2013, reflects an overall growth rate of 4.4% compared to a growth rate of 8.1% for

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our year-over-year results during the same period, excluding the Alumco acquisition and certain foreign operations.
Cost of Sales. The increase in cost of sales of $25.8 million, or 14%, for the six months ended April 30, 2014 compared to the same period in 2013 was consistent with an increase in net sales of 13%. Margins were unfavorably impacted by a series of price increases for resin, a critical supply of our vinyl products, for which we were unable to recoup from some customers through surcharges due to contractual limitations. In addition, we experienced some labor inefficiencies, higher insurance and employee benefit costs, significant repair and maintenance costs, and higher freight costs. These increases in cost were partially offset by favorable material price variances for our insulating glass spacers, as well as a $2.8 million benefit associated with the reversal of a warranty accrual which was settled in December 2013.
Selling, General and Administrative. The decrease in our selling, general and administrative expenses of $9.1 million, or 17%, for the six months ended April 30, 2014 compared to the same period in 2013 was due primarily to the cessation of our ERP implementation in August 2013, which contributed expense of $5.3 million during the six months ended April 30, 2013; a decrease in information technology costs attributable to support of the ERP system which had unfavorably impacted 2013 results; reduced headcount primarily due to attrition, with some selective restructuring efforts to better align our cost structure; a $1.0 million decrease in transaction fees (primarily associated with the Alumco acquisition in 2013) and a decrease in stock-based compensation and compensation associated with long-term incentive arrangements tied to the performance of our common stock. These cost reductions were partially offset by higher incentive accruals based on earnings and higher insurance costs.
Depreciation and Amortization. Depreciation and amortization expense decreased $0.8 million, or 4%, for the six months ended April 30, 2014 compared to the same period in 2013 primarily due to the cessation of the ERP implementation in August 2013 and the related accelerated depreciation write-off. For the six months ended April 30, 2013, we incurred $2.0 million of depreciation expense associated with the assets placed in service in conjunction with the implementation compared to $1.5 million for the same period in 2014 (attributable to the remaining assets which are currently in service). In addition, we incurred higher depreciation and amortization expense in 2013 associated with the Alumco acquisition, as the assets acquired had a relatively short useful life, along with the normal run-off of fixed assets and intangible assets which have become fully depreciated during these periods. These decreases in expense were partially offset by depreciation and amortization associated with new fixed assets and intangibles placed in service during the trailing twelve months ended April 30, 2014, including assets acquired as part of the Greenville transaction.
Asset Impairment Charges. We recorded an impairment loss of $0.5 million in April 2014 associated with a facility in Barbourville, Kentucky. This facility was subsequently sold in May 2014, resulting in an insignificant realized loss on the sale.
Interest Expense. Interest expense of $0.3 million was consistent for the six-month periods ended April 30, 2014 and 2013.
Other, Net. Other, net expense for the six-month period ended April 30, 2014 was relatively insignificant and was primarily related to realized gains and losses of foreign currency exchange transactions.
Income Taxes. Our estimated annual effective tax rates for the six months ended April 30, 2014 and 2013 were 16.9% and 33.2%, respectively. The difference in the effective rates is primarily due to the effect of a discrete charge incurred in January 2014 associated with the incorporation of our U.K. branch as a subsidiary. Excluding this discrete item, the effective rate for the six months ended April 30, 2014 would have approximated 34%.
Income (Loss) from Discontinued Operations, Net of Tax. We recorded a gain on the sale of Nichols of $24.6 million, net of tax of $15.1 million as of April 1, 2014. Excluding this gain, the loss from discontinued operations would have been a loss of $5.1 million for the six months ended April 30, 2014 compared to a loss of $3.4 million for the six months ended April 30, 2013. The loss in 2014 is due primarily to the effect of aluminum commodity prices, which resulted in lower throughput and lower volume.
Liquidity and Capital Resources
Our principal sources of funds are cash on hand, cash flow from operations, and borrowings under our $150 million Senior Unsecured Revolving Credit Facility (the Credit Facility).  As of April 30, 2014, we had $127.0 million of cash and cash equivalents, $143.0 million of availability under the Credit Facility and outstanding debt of $0.8 million, of which no amounts were outstanding under our Credit Facility.
Cash and cash equivalents increased by $77.3 million during the six months ended April 30, 2014 due primarily to the sale of Nichols which provided $110.0 million, partially offset by funds used for the Greenville acquisition, capital investments in our manufacturing facilities, dividends paid and on-going operational activities.

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The following table summarizes our cash flow results for the six months ended April 30, 2014 and 2013:
 
Six Months Ended
 
April 30,
 
2014
 
2013
 
(In millions)
Cash flows used for operating activities
$
(11.0
)
 
$
(20.8
)
Cash flows provided by (used in) investing activities
$
87.9

 
$
(47.1
)
Cash flows provided by financing activities
$
0.4

 
$
6.6

Operating Activities
Cash used for operating activities for the six-month period ended April 30, 2014 decreased by $9.8 million compared to the six-month period ended April 30, 2013. The increase in our sales revenue and the timing of receivable collections contributed to higher gross cash inflows this year, partially offset by an increase in inventory associated with the seasonal build. Working capital was $185.3 million, $114.4 million and $87.2 million as of April 30, 2014, October 31, 2013 and April 30, 2013, respectively.
Investing Activities
Cash provided by investing activities for the six months ended April 30, 2014 was $87.9 million compared to cash flow used for investing activities of $47.1 million for the six months ended April 30, 2013, a change of $135.0 million. The primary driver of this increase was proceeds of $110.0 million from the sale of Nichols, an incremental decrease in cash used for acquisitions of $16.9 million and an incremental decrease in cash used for capital expenditures of $6.4 million.
Financing Activities
Cash provided by financing activities was $0.4 million for the six-month period ended April 30, 2014, of which, $2.9 million represented proceeds from the issuance of common stock associated with exercises of employee stock options and $0.6 million associated with stock option-related tax benefits, partially offset by $3.0 million used to pay dividends.
Our strategy for deploying cash is to invest in organic growth opportunities, develop our infrastructure and make strategic acquisitions. Other uses of cash include paying cash dividends to our shareholders and opportunistically repurchasing our common stock. Any excess cash and cash equivalents are invested in commercial paper with terms of three months or less. Prior to April 2014, we invested in overnight money market funds. The funds were diversified by security type across Treasuries, Government Agencies and Prime Corporate. These funds were all AAA-rated, approved by the National Association of Insurance Commissioners and compliant with Rule 2A-7 of the Investment Company Act of 1940. Our investments are diversified across multiple institutions that we believe are financially sound. We intend to remain in commercial paper, highly rated money market funds, financial institutions and treasuries following a prudent investment philosophy. From time to time, to prepare for potential disruption in the money markets, we may temporarily move funds into operating bank accounts of highly-rated financial institutions to meet on-going operational liquidity requirements. We did not experience any material losses on our cash and marketable securities investments during the six-month periods ended April 30, 2014 and 2013. We maintain cash balances in foreign countries which total $5.8 million as of April 30, 2014. We consider these funds to be permanently reinvested in these countries.
Prior to January 28, 2013, we maintained a $270.0 million senior unsecured revolving credit facility (the Retired Facility) which had been executed on April 23, 2008 and was scheduled to mature on April 23, 2013. The Retired Facility provided for up to $50.0 million of standby letters of credit, limited based on availability, as defined. Amounts borrowed under the facility were to bear interest at a spread above the London Interbank Borrowing Rate (LIBOR) based on a combined leverage and ratings grid. In addition, the Retired Facility contained restrictive debt covenants, as defined in the indenture, and contained certain limits on additional indebtedness, asset or equity sales and acquisitions. For the period from November 1, 2012 through January 28, 2013, we were in compliance with our debt covenants and did not borrow funds pursuant to the Retired Facility.
On January 28, 2013, we replaced the Retired Facility by entering into a new $150 million senior unsecured revolving credit facility that has a five-year term, maturing on January 28, 2018, and which permits aggregate borrowings at any time of up to $150 million, with a letter of credit sub-facility, a swing line sub-facility and a multi-currency sub-facility. Borrowings denominated in U.S dollars bear interest at a spread above LIBOR or a base rate derived from the prime rate. Foreign denominated borrowings bear interest at a spread above LIBOR applicable to such currencies. Subject to customary conditions, we may request that the aggregate commitments under the Credit Facility be increased by up to $100 million, with total commitments not to exceed $250 million.

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The Credit Facility requires us to comply with certain financial covenants, the terms of which are defined therein. Specifically, we must not permit, on a quarterly basis, our ratio of consolidated EBITDA to consolidated interest expense as defined (Minimum Interest Coverage Ratio), to fall below 3.00:1 or our ratio of consolidated funded debt to consolidated EBITDA, as defined (Maximum Consolidated Leverage Ratio), to exceed 3.25:1. The Maximum Consolidated Leverage Ratio is the ratio of consolidated EBITDA to consolidated interest expense, in each case for the previous four consecutive fiscal quarters. EBITDA is defined by the indenture to include pro forma EBITDA of acquisitions and to exclude certain items such as goodwill and intangible asset impairments and certain other non-cash charges and non-recurring items. Subject to our compliance with the covenant requirements, the amount available under the Credit Facility is a function of: (1) our trailing twelve month EBITDA; (2) the Minimum Interest Coverage Ratio and Maximum Consolidated Leverage Ratio allowed under the Credit Facility; and (3) the aggregate amount of our outstanding debt and letters of credit. As of April 30, 2014, we were in compliance with the financial covenants set forth in the Credit Facility, as indicated in the table below:
 
Required
 
Actual
Minimum Interest Coverage Ratio
No less than
3.00:1
 
89.50:1
Maximum Consolidated Leverage Ratio
No greater than
3.25:1
 
0.12:1
The Credit Facility also contains certain limitations on additional indebtedness, asset or equity sales and acquisitions. The payment of dividends and other distributions is permitted, provided there is no event of default after giving effect to such transactions. If the counterparties to the Credit Facility were unable to fulfill their commitments, the funds available to us could be reduced. However, we have no reason to believe that such liquidity will be unavailable or reduced.
We believe that we have sufficient funds and adequate financial resources available to meet our anticipated liquidity needs. We also believe our cash balances and cash flow from operations will be sufficient in the next twelve months and foreseeable future to finance our anticipated working capital requirements, capital expenditures, debt service requirements, and dividends.
As of April 30, 2014, the amount available to us for use under the Credit Facility was limited to $143.0 million and we had outstanding letters of credit of $6.2 million. For the six-month period ended April 30, 2014, we did not borrow any amount under the Credit Facility, and thus had no outstanding borrowings at April 30, 2014. Our current borrowing rate under the Credit Facility was 3.25% and 1.20% for the swing-line sub facility and the revolver, respectively, at April 30, 2014.
Critical Accounting Polices and Estimates
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. Estimates and assumptions about future events and their effects cannot be perceived with certainty. Estimates may change as new events occur, as more experience is acquired, as additional information becomes available and as our operating environment changes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, and that we believe provide a basis for making judgments about the carrying value of assets and liabilities that are not readily available through open market quotes. We must use our judgment with regard to uncertainties in order to make these estimates. Actual results could differ from these estimates.
For a description of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the fiscal year ended October 31, 2013. Our critical accounting policies and estimates have not changed materially during the six months ended April 30, 2014, except, with regard to our critical accounting policy associated with income taxes, see additional disclosures in our Quarterly Report on Form 10-Q for the quarter ended January 31, 2014.

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New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have material impact on our consolidated financial statements upon adoption. See Note 16, "New Accounting Pronouncements", contained elsewhere herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion of our exposure to various market risks contains “forward looking statements” regarding our estimates, assumptions and beliefs concerning our exposure. Although we believe these estimates and assumptions are reasonable in light of information currently available to us, we cannot provide assurance that these estimates will not materially differ from actual results due to the inherent unpredictability of interest rates, foreign currency rates and metal commodity prices as well as other factors. We do not use derivative financial instruments for speculative or trading purposes.
Interest Rate Risk
Our outstanding debt bears interest at variable rates and accordingly is sensitive to changes in interest rates. Interest rate changes would result in gains or losses in the market value of our debt portfolio due to differences in market interest rates and the rates at the inception of the debt agreements. Based upon the balances of the variable rate debt at April 30, 2014, a hypothetical 1.0% increase or decrease in interest rates would have the effect of causing a $0.01 million additional pre-tax charge or credit to our statement of income (loss).
Foreign Currency Rate Risk
Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in the Euro, the British Pound and the Canadian dollar. From time to time, we enter into foreign exchange contracts associated with our operations to manage a portion of the foreign currency rate risk.
The notional and fair market values of these positions at April 30, 2014 and October 31, 2013, were as follows:
 
 
Notional as indicated
 
Fair Value in $
 
 
April 30,
2014
 
October 31,
2013
 
April 30,
2014
 
October 31,
2013
Foreign currency derivatives:
 
(In thousands)
Sell EUR, buy USD
EUR
4,136

 
7,258

 
$
(15
)
 
$
150

Sell CAD, buy USD
CAD
344

 
615

 
(3
)
 
(2
)
Sell GBP, Buy USD
GBP
100

 

 
(1
)
 

Buy EUR, sell GBP
EUR
43

 
967

 

 
(12
)
Buy GBP, sell USD
GBP

 
2,435

 

 
(25
)
Sell EUR, buy GBP
EUR

 
880

 
$

 
$
14

At April 30, 2014 and October 31, 2013, we held foreign currency derivative contracts hedging cross-border intercompany and commercial activity for our insulating glass business. Although these derivatives hedge our exposure to fluctuations in foreign currency rates, we do not apply hedge accounting and therefore, the change in the fair value of these foreign currency derivatives is recorded directly to other income and expense in the accompanying consolidated statements of income (loss). To the extent the gain or loss on the derivative instrument offsets the gain or loss from the remeasurement of the underlying foreign currency balance, changes in exchange rates should have no effect. See Note 10, "Derivative Instruments", contained elsewhere herein.

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Commodity Price Risk
Historically, we have entered into swap contracts to minimize our exposure to aluminum commodity prices. Through the use of swap contracts, we attempt to protect ourselves from the effects of changing prices of aluminum on our cost of sales. To the extent that the raw material costs factored into the firm price sales commitments are matched with firm price raw material purchase commitments, changes in aluminum prices should have no effect.
The following table indicates the notional volume as well as the fair value of the open swap contracts as of October 31, 2013.
 
Notional in LBS
 
Fair Value in $
 
April 30,
2014
 
October 31,
2013
 
April 30,
2014
 
October 31,
2013
Aluminum derivatives:
(In thousands)
Aluminum swap contracts

 
187

 
$

 
$
(64
)
While we consider derivative contracts to provide an economic hedge against changes in aluminum prices, the derivatives were not designated as hedges in accordance with ASC 815 for accounting purposes. As such, any mark-to-market net gain or loss was recorded in cost of sales, with the offsetting asset or liability reflected on the balance sheet. See Note 10, "Derivative Instruments", contained elsewhere herein.

We purchase polyvinyl resin (PVC) as the significant raw material consumed in the manufacture of vinyl extrusions. We have a monthly resin adjuster in place with a majority of our customers and resin supplier that is adjusted based upon published industry resin prices for the prior month. This adjuster effectively shares the base pass-through price changes of PVC with our customers commensurate with the market at large. Our long-term exposure to changes in PVC prices is thus reduced due to the contractual component of the resin adjuster program; however, there is a level of exposure to short-term volatility due to a one month lag and not all of our customer contracts contain such cost adjusters. From time to time, we may lock in customer pricing for less than one year which results in us becoming exposed to fluctuations in resin pricing.
We maintain an oil-based materials surcharge on one of our major product lines. The surcharge is intended to offset the rising cost of products which are highly correlated to the price of oil, including butyl and other oil-based raw materials. The surcharge is in place with the majority of our customers who purchase these products and is adjusted monthly based upon the 90 day average published price for Brent crude. The oil-based raw materials purchased by us are subject to similar pricing schemes. Therefore, our long-term exposure to changes in oil-based raw material prices is significantly reduced under this surcharge program.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (1934 Act) as of April 30, 2014. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of April 30, 2014, the disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There have been no changes in internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 27, 2010, our Board of Directors approved a stock repurchase program that authorized the repurchase of 1,000,000 shares of our common stock. On August 25, 2011, our Board of Directors authorized an additional 1,000,000 shares under this repurchase program. The program does not have a dollar limit or an expiration date. There were no repurchases of shares during the six months ended April 30, 2014. As of April 30, 2014, there were 905,663 authorized shares remaining available for purchase pursuant to the program.
 
Item 6. Exhibits
The exhibits required to be furnished pursuant to Item 6 are listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated herein by reference.
 

 



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
QUANEX BUILDING PRODUCTS CORPORATION
 
 
 
 
Date:
June 5, 2014
 
/s/ Brent L. Korb
 
 
 
Brent L. Korb
 
 
 
Senior Vice President – Finance and Chief Financial Officer
(Principal Financial Officer)

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EXHIBIT INDEX

Exhibit Number                Description of Exhibits

2.1
 
Limited Liability Company Interest Purchase Agreement dated February 7, 2014, by and among Quanex Building Products Corporation, Nichols Aluminum, LLC and Aleris International Inc., filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on February 10, 2014.
 
 
 
3.1
 
Certificate of Incorporation of the Registrant dated as of December 12, 2007, filed as Exhibit 3.1 of the Registrant’s Registration Statement on Form 10 (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on January 11, 2008, and incorporated herein by reference.
 
 
3.2
 
Amended and Restated Bylaws of the Registrant dated as of August 25, 2011, filed as Exhibit 3.1 of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913) filed with the Securities and Exchange Commission on August 29, 2011, and incorporated herein by reference.
 
 
4.1
 
Form of Registrant’s Common Stock certificate, filed as Exhibit 4.1 of Amendment No. 1 to the Registrant’s Registration Statement on Form 10 (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on February 14, 2008, and incorporated herein by reference.
 
 
4.2
 
Credit Agreement dated as of January 28, 2013, among the Company; certain of its subsidiaries as guarantors; Wells Fargo Bank, National Association, as administrative agent; Wells Fargo Securities, LLC, as lead arranger and syndication agent; and the lenders parties thereto, filed as Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913)as filed with the Securities and Exchange Commission on January 30, 2013, and incorporated herein by reference.
 
 
 
†10.1
 
Quanex Building Products Corporation Amended and Restated 2008 Omnibus Incentive Plan, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on February 28, 2014, and incorporated herein by reference.
 
 
 
†10.2
 
Form of Stock Option Agreement for Employees under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.3
 
Form of Stock Option Agreement for Section 16 Officers under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.4
 
Form of Stock Option Agreement for Key Leaders under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.5
 
Form of Stock Option Agreement for Non-Employee Directors under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.6
 
Form of Restricted Stock Award Agreement for Employees under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.7
 
Form of Restricted Stock Award Agreement for Section 16 Officers under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.8
 
Form of Restricted Stock Award Agreement for Key Leaders under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.7 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.9
 
Form of Restricted Stock Award Agreement for Non-Employee Directors under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.8 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 

35

Table of Contents                    
EXHIBIT INDEX

Exhibit Number                Description of Exhibits

†10.10
 
Form of Restricted Stock Unit Award Agreement for Employees under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.9 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.11
 
Form of Restricted Stock Unit Award Agreement for Section 16 Officers under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.10 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.12
 
Form of Restricted Stock Unit Award Agreement for Key Leaders under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.11 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.13
 
Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.12 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.14
 
Form of Performance Share Award Agreement for Employees under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.13 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.15
 
Form of Performance Share Award Agreement for Section 16 Officers under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.14 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.16
 
Form of Performance Share Award Agreement for Key Leaders under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.15 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.17
 
Form of Performance Share Award Agreement for Non-Employee Directors under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.16 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.18
 
Form of Performance Unit Award Agreement for Employees under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.17 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.19
 
Form of Performance Unit Award Agreement for Section 16 Officers under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.18 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.20
 
Form of Performance Unit Award Agreement for Key Leaders under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.19 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.21
 
Form of Performance Unit Award Agreement for Non-Employee Directors under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.20 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.22
 
Form of Stock Appreciation Right Agreement for Employees under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.21 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.

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Table of Contents                    
EXHIBIT INDEX

Exhibit Number                Description of Exhibits

†10.23
 
Form of Stock Appreciation Right Agreement for Section 16 Officers under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.22 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.24
 
Form of Stock Appreciation Right Agreement for Key Leaders under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.23 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.25
 
Form of Stock Appreciation Right Agreement for Non-Employee Directors under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.24 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.26
 
Form of Other Stock Based Award Agreement under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.25 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
†10.27
 
Form of Annual Incentive Award Agreement under the Quanex Building Products Corporation 2008 Omnibus Incentive Plan, as amended, filed as Exhibit 10.26 to the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913), as filed with the Securities and Exchange Commission on April 29, 2014, and incorporated herein by reference.
 
 
 
*31.1
 
Certification by chief executive officer pursuant to Rule 13a-14(a)/15d-14(a).
 
 
 
*31.2
 
Certification by chief financial officer pursuant to Rule 13a-14(a)/15d-14(a).
 
 
*32.1
 
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
*101.INS
 
XBRL Instance Document
 
 
*101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
*101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
*101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
*101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
*101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
* Filed herewith
† Management Compensation or Incentive Plan
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has not filed with this Quarterly Report on Form 10-Q certain instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries because the total amount of securities authorized under any of such instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.


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