Quanex Building Products CORP - Quarter Report: 2022 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2022


☐			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

________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant's Common Stock as of August 31, 2022 was 33,129,250.

QUANEX BUILDING PRODUCTS CORPORATION

INDEX


PART I.	FINANCIAL INFORMATION	1

Item 1:	Financial Statements (Unaudited)	1

	Condensed Consolidated Balance Sheets – July 31, 2022 and October 31, 2021	1

	Condensed Consolidated Statements of Income – Three and Nine Months Ended July 31 , 2022 and 2021	2

	Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended July 31 , 2022 and 2021	3

	Condensed Consolidated Statements of Cash Flows – Nine Months Ended July 31, 2022 and 2021	4

	Condensed Consolidated Statement of Stockholders’ Equity – Nine Months Ended July 31, 2022 and 2021	5

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4:	Controls and Procedures	33

PART II.	OTHER INFORMATION	34

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 6:	Exhibits	34

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

QUANEX BUILDING PRODUCTS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	July 31, 2022		October 31, 2021
	(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	50,030	$	40,061
Accounts receivable, net of allowance for credit losses of $837 and $340	109,467		108,309
Inventories, net	138,237		92,529

Prepaid and other current assets	8,651		8,148

Total current assets	306,385		249,047
Property, plant and equipment, net of accumulated depreciation of $345,111 and $336,493	175,404		178,630
Operating lease right-of-use assets	45,722		52,708
Goodwill	141,249		149,205
Intangible assets, net	69,670		82,410
Other assets	5,177		5,323

Total assets	$	743,607	$	717,323
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	84,527	$	86,765
Accrued liabilities	51,453		56,156
Income taxes payable	13,709		6,038
Current maturities of long-term debt	1,070		846
Current operating lease liabilities	7,972		8,196
Total current liabilities	158,731		158,001
Long-term debt	55,458		52,094
Noncurrent operating lease liabilities	38,768		45,367
Deferred pension and postretirement benefits	4,498		4,737
Deferred income taxes	21,086		21,965

Other liabilities	14,929		15,377

Total liabilities	293,470		297,541
Commitments and contingencies
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 37,211,056 and 37,273,510, respectively; outstanding 33,119,361 and 33,274,785, respectively	373		373
Additional paid-in-capital	251,359		254,162
Retained earnings	315,471		259,718
Accumulated other comprehensive loss	(41,365)		(21,770)
Less: Treasury stock at cost, 4,091,695 and 3,998,725 shares, respectively	(75,701)		(72,701)
Total stockholders’ equity	450,137		419,782
Total liabilities and stockholders' equity	$	743,607	$	717,323

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

Table of Contents

QUANEX BUILDING PRODUCTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2022		2021		2022		2021
	(In thousands, except per share amounts)
Net sales	$	324,037	$	279,877	$	913,970	$	780,381
Cost and expenses:
Cost of sales (excluding depreciation and amortization)	251,446		219,866		712,931		604,723
Selling, general and administrative	28,822		27,766		87,774		88,299
Restructuring charges	—		—		—		39
Depreciation and amortization	9,734		10,683		30,554		32,543

Operating income	34,035		21,562		82,711		54,777
Non-operating (expense) income:
Interest expense	(724)		(597)		(1,849)		(1,988)
Other, net	398		188		905		645
Income before income taxes	33,709		21,153		81,767		53,434
Income tax expense	(7,801)		(7,474)		(18,098)		(17,352)


Net income	$	25,908	$	13,679	$	63,669	$	36,082

Basic earnings per common share	$	0.79	$	0.41	$	1.92	$	1.09

Diluted earnings per common share	$	0.78	$	0.41	$	1.91	$	1.08

Weighted-average common shares outstanding:
Basic	32,999		33,359		33,093		33,194
Diluted	33,173		33,650		33,256		33,518

Cash dividends per share	$	0.08	$	0.08	$	0.24	$	0.24

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

(Unaudited)


	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2022		2021		2022		2021
	(In thousands)
Net income	25,908		13,679		63,669		$	36,082
Other comprehensive (loss)income:
Foreign currency translation (loss) gain	(5,168)		424		(19,595)		10,056


Other comprehensive (loss) income	(5,168)		424		(19,595)		10,056
Comprehensive income	$	20,740	$	14,103	$	44,074	$	46,138

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

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QUANEX BUILDING PRODUCTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	July 31,
	2022		2021
	(In thousands)
Operating activities:
Net income	$	63,669	$	36,082
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	30,554		32,543
Stock-based compensation	1,707		1,470
Deferred income tax	505		5,429



Other, net	2,647		5,485
Changes in assets and liabilities:
Increase in accounts receivable	(5,306)		(8,277)
Increase in inventory	(48,280)		(32,113)
Increase in other current assets	(824)		(2,768)
Increase in accounts payable	2,765		1,600
(Decrease) increase in accrued liabilities	(4,721)		12,521
Increase (decrease) in income taxes payable	7,522		(5,158)
Decrease in deferred pension and postretirement benefits	(239)		(158)
Increase in other long-term liabilities	32		962
Other, net	(177)		(183)
Cash provided by operating activities	49,854		47,435
Investing activities:


Capital expenditures	(19,488)		(16,006)

Proceeds from disposition of capital assets	134		3,138
Cash used for investing activities	(19,354)		(12,868)
Financing activities:
Borrowings under credit facilities	70,500		—
Repayments of credit facility borrowings	(70,500)		(45,000)
Debt issuance costs	(1,210)		—
Repayments of other long-term debt	(1,301)		(502)
Common stock dividends paid	(7,916)		(8,017)
Issuance of common stock	502		16,272

Payroll tax paid to settle shares forfeited upon vesting of stock	(1,412)		(492)
Purchase of treasury stock	(6,600)		(5,741)
Cash used for financing activities	(17,937)		(43,480)
Effect of exchange rate changes on cash and cash equivalents	(2,594)		955
Increase (decrease) in cash and cash equivalents	9,969		(7,958)
Cash and cash equivalents at beginning of period	40,061		51,621
Cash and cash equivalents at end of period	$	50,030	$	43,663

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

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QUANEX BUILDING PRODUCTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


Nine Months Ended July 31, 2022	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, 2021	$	373	$	254,162	$	259,718	$	(21,770)	$	(72,701)	$	419,782
Net income	—		—		11,239		—		—		11,239
Foreign currency translation adjustment	—		—		—		(3,159)		—		(3,159)
Common dividends ($0.08 per share)	—		—		(2,587)		—		—		(2,587)


Stock-based compensation activity:
Expense related to stock-based compensation	—		552		—		—		—		552
Stock options exercised	—		5		—		—		50		55
Restricted stock awards granted	—		(1,534)		—		—		1,534		—
Performance restricted stock units vested	—		(1,598)		—		—		1,598		—
Other	—		(1,383)		—		—		—		(1,383)
Balance at January 31, 2022	$	373	$	250,204	$	268,370	$	(24,929)	$	(69,519)	$	424,499
Net income	—		—		26,522		—		—		26,522
Foreign currency translation adjustment	—		—		—		(11,268)		—		(11,268)
Common dividends ($0.08 per share)	—		—		(2,671)		—		—		(2,671)
Purchase of treasury stock	—		—		—		—		(1,569)		(1,569)
Stock-based compensation activity:
Expense related to stock-based compensation	—		572		—		—		—		572
Stock options exercised	—		9		—		—		109		118


Other	—		(29)		—		—		—		(29)
Balance at April 30, 2022	$	373	$	250,756	$	292,221	$	(36,197)	$	(70,979)	$	436,174
Net income	—		—		25,908		—		—		25,908
Foreign currency translation adjustment	—		—		—		(5,168)		—		(5,168)
Common dividends ($0.08 per share)	—		—		(2,658)		—		—		(2,658)
Purchase of treasury stock	—		—		—		—		(5,031)		(5,031)
Stock-based compensation activity:
Expense related to stock-based compensation	—		583		—		—		—		583
Stock options exercised	—		20		—		—		309		329



Balance at July 31, 2022	$	373	$	251,359	$	315,471	$	(41,365)	$	(75,701)	$	450,137

Table of Contents


Nine Months Ended July 31, 2021	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, 2020	$	373	$	253,458	$	213,517	$	(33,024)	$	(78,565)	$	355,759
Net income	—		—		7,852		—		—		7,852
Foreign currency translation adjustment	—		—		—		8,600		—		8,600
Common dividends ($0.08 per share)	—		—		(2,637)		—		—		(2,637)
Treasury shares purchased, at cost	—		—		—		—		(1,927)		(1,927)

Stock-based compensation activity:
Expense related to stock-based compensation	—		523		—		—		—		523
Stock options exercised	—		635		—		—		9,395		10,030
Restricted stock awards granted	—		(1,282)		—		—		1,282		—
Performance restricted stock units vested	—		(565)		—		—		565		—
Other	—		(492)		—		—		—		(492)
Balance at January 31, 2021	$	373	$	252,277	$	218,732	$	(24,424)	$	(69,250)	$	377,708
Net income	—		—		14,551		—		—		14,551
Foreign currency translation adjustment	—		—		—		1,032		—		1,032
Common dividends ($0.08 per share)	—		—		(2,693)		—		—		(2,693)
Purchase of treasury stock	—		—		—		—		(2,041)		(2,041)
Stock-based compensation activity:
Expense related to stock-based compensation	—		447		—		—		—		447
Stock options exercised	—		423		—		—		5,670		6,093



Balance at April 30, 2021	$	373	$	253,147	$	230,590	$	(23,392)	$	(65,621)	$	395,097
Net income	—		—		13,679		—		—		13,679
Foreign currency translation adjustment	—		—		—		424		—		424
Common dividends ($0.08 per share)	—		—		(2,687)		—		—		(2,687)
Purchase of treasury stock	—		—		—		—		(1,773)		(1,773)
Stock-based compensation activity:
Expense related to stock-based compensation	—		500		—		—		—		500
Stock options exercised	—		15		—		—		134		149



Balance at July 31, 2021	$	373	$	253,662	$	241,582	$	(22,968)	$	(67,260)	$	405,389

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

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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 component supplier to original equipment manufacturers (OEMs) in the building products industry. These components can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of fenestration components include: (1) energy-efficient flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, and (4) precision-formed metal and wood products. We also manufacture cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, vinyl fencing, water retention barriers, and conservatory roof components. We have organized our business into three reportable business segments. For additional discussion of our reportable business segments, see Note 11, “Segment Information.” We use low-cost, short lead-time production processes and engineering expertise to provide our customers with specialized products for their specific window, door, and cabinet applications. We believe these capabilities provide us with unique competitive advantages. We serve a primary customer base in North America and the United Kingdom (U.K.), and also serve customers in international markets through our operating plants in the U.K. and Germany, as well as through sales and marketing efforts in other countries.

Unless the context indicates otherwise, references to “Quanex”, the “Company”, “we”, “us” and “our” refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries.

The accompanying interim unaudited condensed consolidated financial statements include the accounts of Quanex Building Products Corporation. All intercompany accounts and transactions have been eliminated in consolidation. These financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of October 31, 2021 was derived from audited financial information but does not include all disclosures required by U.S. GAAP. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. In our opinion, the accompanying financial statements contain all adjustments (which consist of normal recurring adjustments, except as disclosed herein) necessary to fairly present our financial position, results of operations and cash flows for the interim periods. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year or for any future periods.

In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. We review our estimates on an on-going basis, including those related to impairment of long-lived assets and goodwill, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

Revenue from Contracts with Customers

Revenue recognition

We recognize revenue that reflects the consideration we expect to receive for product sales upon transfer to customers. Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we are entitled to consideration in exchange for such transfer. We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those products, and when collectability of the consideration due is probable.

Performance obligations

A performance obligation is a promise to provide the customer with a good or service. Our performance obligations include product sales, with each product included in a customer contract being recognized as a separate performance obligation. For contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable.

Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to account for product returns related to general returns and product nonconformance.

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QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Pricing and sales incentives

Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts.

Shipping and handling costs

We account for shipping and handling services as fulfillment services; accordingly, freight revenue is combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in cost of sales in the accompanying condensed consolidated statements of income.

Contract assets and liabilities

Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration.

Disaggregation of revenue

We produce a wide variety of products that are used in the fenestration industry, including window spacer systems; extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we produce certain non-fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other products.

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QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes our product sales for the three and nine months ended July 31, 2022 and 2021 into groupings by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. For further details regarding our results by segment, refer to Note 11, “Segment Information”.


	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2022		2021		2022		2021
	(In thousands)
North American Fenestration:
United States - fenestration	$	162,215	$	129,291	$	447,425	$	369,809
International - fenestration	10,722		9,581		30,952		25,756
United States - non-fenestration	8,324		5,853		22,117		17,543
International - non-fenestration	3,483		3,093		8,789		8,969
	$	184,744	$	147,818	$	509,283	$	422,077
European Fenestration:

International - fenestration	$	49,041	$	54,883	$	148,525	147,072
International - non-fenestration	18,572		16,231		51,429		34,790
	$	67,613	$	71,114	$	199,954	$	181,862
North American Cabinet Components:
United States - fenestration	$	4,857	$	3,240	$	13,288	$	9,711
United States - non-fenestration	66,758		57,418		191,908		168,308
International - non-fenestration	865		1,278		2,515		1,473
	$	72,480	$	61,936	$	207,711	$	179,492
Unallocated Corporate & Other
Eliminations	$	(800)	$	(991)	$	(2,978)	$	(3,050)
	$	(800)	$	(991)	$	(2,978)	$	(3,050)
Net sales	$	324,037	$	279,877	$	913,970	$	780,381

Allowance for Credit Losses

We have established an allowance for credit losses to estimate the risk of losses, which represents an estimate of expected losses over the remaining contractual life of our receivables. The allowance is determined using two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, a specific reserve is established for individual accounts where information indicates the customers may have an inability to meet financial obligations. Second, a reserve is determined for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection rates, write-off experience, and forecasts of future economic conditions. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful.

Property, Plant and Equipment and Intangible Assets with Defined Lives

During the three months ended July 31, 2022, our North American vinyl extrusion operations in our NA Fenestration segment experienced lower-than-expected operating results due to the continued impact of inflation and historical customer contracts which prevent us from passing on the full impact of higher costs to our customers. We determined that this condition was an indicator of a triggering event which necessitated an evaluation of certain long-term assets used in this business for potential impairment. We compared the projected undiscounted cash flows we expected to realize associated with these assets over the remaining useful lives of the primary operating assets to the net book value of the long-term assets and determined that these assets were not impaired. Therefore, we did not record an impairment charge related to property, plant and equipment or intangible assets with defined lives during the nine months ended July 31, 2022, however, should we be unable to successfully increase prices to offset inflation, it is possible that we could incur an impairment in the future. There were no indicators of triggering events noted for any period in the year ended October 31, 2021.

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QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Related Parties

Net sales for the nine months ended July 31, 2022 included approximately $1.6 million of transactions with a customer which is a related party with one of our non-employee directors. We performed a review of these transactions, of which no single transaction or series of related transactions exceeded $120,000 in amount, and determined that these transactions were enacted independently of each other in fair transactions. We are not aware of any other related party transactions with any of our current non-employee directors or officers outside of their normal business functions or expected contractual duties.

2. Inventories

Inventories consisted of the following at July 31, 2022 and October 31, 2021 (in thousands):


	July 31, 2022		October 31, 2021
Raw materials	$	81,724	$	49,867
Finished goods and work in process	58,859		43,499
Supplies and other	1,203		2,099
Total	141,786		95,465
Less: Inventory reserves	3,549		2,936
Inventories, net	$	138,237	$	92,529

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

3. Goodwill and Intangible Assets

Goodwill

The change in the carrying amount of goodwill for the nine months ended July 31, 2022 was as follows (in thousands):


	Nine Months Ended
	July 31, 2022
Beginning balance as of November 1, 2021	$	149,205


Foreign currency translation adjustment	(7,956)
Balance as of the end of the period	$	141,249

At our last annual test date, August 31, 2021, we evaluated the recoverability of goodwill at each of our five reporting units with goodwill balances and determined that our goodwill was not impaired. We evaluated for indicators of impairment during the three and nine months ended July 31, 2022 and determined that there were no triggering events. For a summary of the change in the carrying amount of goodwill by segment, see Note 11, “Segment Information.”

Identifiable Intangible Assets

Amortizable intangible assets consisted of the following as of July 31, 2022 and October 31, 2021 (in thousands):


	July 31, 2022				October 31, 2021
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer relationships	$	141,722	$	86,984	$	146,207	$	81,086
Trademarks and trade names	55,046		40,450		56,437		39,589
Patents and other technology	22,436		22,100		22,525		22,084

Total	$	219,204	$	149,534	$	225,169	$	142,759

We had aggregate amortization expense related to intangible assets for the three and nine months ended July 31, 2022 of $3.0 million and $9.0 million, respectively, and $3.0 million and $9.7 million for the comparable prior year periods.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Estimated remaining amortization expense, based on current intangible balances, for each of the fiscal years ending October 31, is as follows (in thousands):


	Estimated Amortization Expense
2022 (remaining three months)	$	2,949
2023	11,060
2024	10,309
2025	9,082
2026	9,007
Thereafter	27,263
Total	$	69,670

4. Debt and Finance Lease Obligations

Long-term debt consisted of the following at July 31, 2022 and October 31, 2021 (in thousands):


	July 31, 2022		October 31, 2021
Revolving Credit Facility	$	38,000	$	38,000


Finance lease obligations and other	20,105		15,537
Unamortized deferred financing fees	(1,577)		(597)
Total debt	$	56,528	$	52,940
Less: Current maturities of long-term debt	1,070		846
Long-term debt	$	55,458	$	52,094

Revolving Credit Facility

On July 6, 2022, we entered into our Second Amended and Restated Credit Agreement (the “Credit Facility”) with Wells Fargo Securities, LLC, as Agent, Swingline Lender and Issuing Lender, and BofA Securities, Inc. serving as Syndication Agent. We capitalized $1.2 million of deferred financing fees related the Credit Facility during the three months ended July 31, 2022. This $325.0 million revolving credit facility has a five-year term, maturing on July 6, 2027, and replaces our previous credit facility. Our previous credit facility is more fully described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

Interest payments for the Credit Facility are calculated, at our election and depending upon the Consolidated Net Leverage Ratio, at a Base Rate plus an applicable margin or at the same rate as Risk-Free Rate (“RFR”) Loans for domestic borrowings or Eurocurrency Rate Loans plus an applicable margin. In addition, we are subject to commitment fees for the unused portion of the Credit Facility.

The applicable margin and commitment fees are outlined in the following table:


Pricing Level	Consolidated Net Leverage Ratio	Commitment Fee	Eurocurrency Rate Loans and RFR Loans	Base Rate Loans
I	Less than or equal to 1.50 to 1.00	0.150%	1.25%	0.25%
II	Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00	0.175%	1.50%	0.50%
III	Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00	0.200%	1.75%	0.75%
IV	Greater than 3.00 to 1.00	0.250%	2.00%	1.00%

In the event of default, outstanding borrowings would accrue interest at the Default Rate, as defined, whereby the obligations will bear interest at a per annum rate equal to 2% above the total per annum rate otherwise applicable.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Credit Facility provides for incremental revolving credit commitments for a minimum principal amount of $10.0 million, up to an aggregate amount of $150.0 million or 100% of Consolidated EBITDA, subject to the lender's discretion to elect or decline the incremental increase. We can also borrow up to the lesser of $15.0 million or the revolving credit commitment, as defined, under a Swingline feature of the Credit Facility.

The Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than 3.00 to 1.00, and (2) Consolidated Net Leverage Ratio requirement, whereby we must not permit the Consolidated Net Leverage Ratio, as defined, to be greater than 3.25 to 1.00.

In addition to maintaining these financial covenants, the Credit Facility also limits our ability to enter into certain business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted payments, pay dividends (limited to $25.0 million per year) and other transactions as further defined in the Credit Facility. Some of these limitations, however, do not take effect so long as Consolidated Net Leverage Ratio is less than or equal to 2.75 to 1.00 and available liquidity exceeds $25.0 million. Substantially all of our domestic assets, with the exception of real property, are used as collateral for the Credit Agreement.

As of July 31, 2022, we had $38.0 million of borrowings outstanding under the Credit Facility (reduced by unamortized debt issuance costs of $1.6 million), $5.1 million of outstanding letters of credit and $20.1 million outstanding primarily under finance leases and other debt. We had $281.9 million available for use under the Credit Facility at July 31, 2022. Outstanding borrowings under the Credit Facility accrue interest at 3.08% per annum. Our weighted average borrowing rate for borrowings outstanding during the nine months ended July 31, 2022 and 2021 was 1.81% and 1.43%, respectively. We were in compliance with our debt covenants as of July 31, 2022.

5. Retirement Plans

Pension Plan

Our non-contributory, single employer defined benefit pension plan covers certain of our employees in the U.S. The net periodic pension cost for this plan for the three and nine months ended July 31, 2022 and 2021 was as follows (in thousands):


	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2022		2021		2022		2021
Service cost	$	215	$	212	$	645	$	637
Interest cost	201		189		604		567
Expected return on plan assets	(498)		(490)		(1,493)		(1,470)
Amortization of net loss	2		36		5		108
Net periodic pension benefit	$	(80)	$	(53)	$	(239)	$	(158)

During September 2021, we contributed $0.5 million to fund our plan. During fiscal 2022, we do not expect to need to make a contribution to the pension plan to maintain targeted funding levels and meet minimum contribution requirements.

Other Plans

We also have a supplemental benefit plan covering certain executive officers and key employees and a non-qualified deferred compensation plan covering members of the Board of Directors and certain key employees. As of July 31, 2022 and October 31, 2021, our liability under the supplemental benefit plan was approximately $2.9 million. As of July 31, 2022 and October 31, 2021, the liability associated with the deferred compensation plan was approximately $3.5 million and $3.4 million, respectively. We record the current portion of liabilities associated with these plans under the caption “Accrued Liabilities,” and the long-term portion under the caption “Other Liabilities” in the accompanying condensed consolidated balance sheets.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. Income Taxes

To determine our income tax expense or benefit for interim periods, consistent with accounting standards, we apply the estimated annual effective income tax rate to year-to-date results, plus any applicable discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitations, tax benefits on equity compensation, and increase or decrease in valuation allowances on deferred tax assets. Our effective tax rates from continuing operations for the nine months ended July 31, 2022 and 2021 were 22.2% and 32.5%, respectively. The difference between our effective income tax rate and the U.S. federal statutory rate of 21% principally results from discrete tax items, U.S. state tax, non-U.S. tax rate differential and other permanent differences. The primary discrete items affecting the 2022 effective rate were a benefit of $0.2 million related to the vesting or exercise of equity-based compensation awards and a benefit of $1.0 million for the true-up of our accruals and related deferred taxes from prior year. The primary discrete items affecting the 2021 effective rate were the $3.1 million remeasurement of our deferred income tax assets and liabilities related to the increase in the corporate tax rate in the U.K. from 19% to 25%, a charge of $0.6 million related to the vesting or exercise of equity-based compensation awards and a benefit of $0.6 million for the true-up of our accruals and related deferred taxes from prior year filings.

As of July 31, 2022, our liability for uncertain tax positions (UTP) of $1.4 million relates to certain U.S. federal and state tax items regarding the interpretation of tax laws and regulations, including a minimal amount of interest and penalties. We include all interest and penalties related to uncertain tax benefits within our income tax provision account. To the extent interest and penalties are not assessed with respect to uncertain tax positions or the uncertainty of deductions in the future, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. Our total unrecognized tax benefits, if recognized, would not materially affect our effective tax rate. We do not believe that the recorded amount of unrecognized tax benefits will decrease significantly within the next twelve months.

We evaluate the likelihood of realization of our deferred tax assets by considering both positive and negative evidence. We maintain a valuation allowance for certain state net operating losses which totaled $1.3 million as of July 31, 2022 and October 31, 2021.

On August 16, 2002 the Inflation Reduction Act of 2022 was signed into law. We are evaluating the regulations but do not believe they will result in a material impact to our consolidated financial statements.

7. Contingencies

Remediation and Environmental Compliance Costs

Under applicable state and federal laws, we may be responsible for, among other things, all or part of the costs required to remove or remediate wastes or hazardous substances at locations we, or our predecessors, have owned or operated. From time to time, we also have been alleged to be liable for all or part of the costs incurred to clean up third-party sites where there might have been an alleged improper disposal of hazardous substances. At present, we are not involved in any such matters.

From time to time, we incur routine expenses and capital expenditures associated with compliance with existing environmental regulations, including control of air emissions and water discharges, and plant decommissioning costs. We have not incurred any material expenses or capital expenditures related to environmental matters during the past three fiscal years, and do not expect to incur a material amount of such costs in fiscal 2022. While we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows.

Litigation

From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal injury, environmental matters, product performance or warranties, product liability, insurance coverage and personnel and employment disputes. We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks to the extent deemed prudent by our management and to the extent such insurance is available. However, there is no assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

We have been and are currently party to multiple claims, some of which are in litigation, relating to alleged defects in a commercial sealant product that was manufactured and sold during the 2000’s. While we believe that our product was not defective and that we would prevail in these commercial sealant product claims if taken to trial, the timing, ultimate resolution and potential impact of these claims is not currently determinable. Nevertheless, after taking into account all currently available information, including our defenses, the advice of our counsel, and the extent and currently-expected availability of our existing insurance coverage, we believe that the eventual outcome of these commercial sealant claims will not have a material adverse effect on our overall financial condition, results of operations or cash flows, and we have not recorded any accrual with regard to these claims.

8. 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 data developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to Level 1 and the lowest priority to Level 3. The three levels of the fair value hierarchy are described below:

•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•Level 3 - Inputs that are both significant to the fair value measurement and unobservable.

As of July 31, 2022, foreign currency derivatives were being measured on a recurring basis. Less than $0.1 million of foreign currency derivatives were included in total liabilities as of July 31, 2022. There were no outstanding foreign currency derivatives as of October 31, 2021. All of our derivative contracts are valued using quoted market prices from brokers or exchanges and are classified within Level 2 of the fair value hierarchy.

Carrying amounts reported on the balance sheet for cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Our outstanding debt is variable rate debt that re-prices frequently, thereby limiting our exposure to significant change in interest rate risk. As a result, the fair value of our debt instrument approximates carrying value at July 31, 2022, and October 31, 2021 (Level 2 measurement).

Our performance share awards are marked-to-market on a quarterly basis during a three-year vesting period based on market data (Level 2 measurement). For further information, refer to Note 9, “Stock-Based Compensation - Performance Share Awards.”

9. Stock-Based Compensation

We have established and maintain an Omnibus Incentive Plan (2020 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards, performance restricted stock units, and other stock-based and cash-based awards. The 2020 Plan is administered by the Compensation and Management Development Committee of the Board of Directors.

The aggregate number of shares of common stock authorized for grant under the 2020 Plan is 3,139,895 as approved by shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 2020 Plan. We grant restricted stock units to non-employee directors on the first business day of each fiscal year. As approved by the Compensation & Management Development Committee of our Board of Directors annually, we grant a mix of restricted stock awards, restricted stock units, performance shares and/or performance restricted stock units to officers, management and key employees. We also historically granted stock options to certain officers, directors and key employees. Occasionally, we may make additional grants to key employees at other times during the year.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Restricted Stock Awards

Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a three-year period with service and continued employment as the only vesting criteria. The recipient of the restricted stock award is entitled to all of the rights of a shareholder, except that the award is nontransferable during the vesting period. The fair value of the restricted stock award is established on the grant date and then expensed over the vesting period resulting in an increase in additional paid-in-capital. Shares are generally issued from treasury stock at the time of grant.

A summary of non-vested restricted stock awards activity during the nine months ended July 31, 2022 is presented below:


	Restricted Stock Awards	Weighted Average Grant Date Fair Value per Share
Non-vested at October 31, 2021	216,400	$	17.28
Granted	84,400	22.54
Forfeited	—	—
Vested	(88,700)	13.74
Non-vested at July 31, 2022	212,100	$	20.86

The total weighted average grant-date fair value of restricted stock awards that vested during each of the nine months ended July 31, 2022 and 2021 was $1.2 million and $0.9 million, respectively. As of July 31, 2022, total unrecognized compensation cost related to unamortized restricted stock awards was $2.3 million. We expect to recognize this expense over the remaining weighted average vesting period of 2.0 years.

Stock Options

Historically, stock options have been awarded to key employees, officers and non-employee directors. In December 2017, the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted stock units and performance shares as further described below. As a result, the final stock options were granted during the fiscal year ended October 31, 2017. Stock options typically vested ratably over a 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 was determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital. For employees who were nearing retirement-eligibility, we recognized stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date.

We use a Black-Scholes pricing model to estimate the fair value of stock options. A description of the methodology for the valuation assumptions was disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

The following table summarizes our stock option activity for the nine months ended July 31, 2022:


	Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (000s)
Outstanding at October 31, 2021	218,304	$	19.37
Granted	—	—
Exercised	(25,711)	19.55
Forfeited/Expired	(1,600)	16.33
Outstanding at July 31, 2022	190,993	$	19.37	3.0	$	1,000
Vested at July 31, 2022	190,993	$	19.37	3.0	$	1,000
Exercisable at July 31, 2022	190,993	$	19.37	3.0	$	1,000

Intrinsic value is the amount by which the market price of the common stock on the date of exercise exceeds the exercise price of the stock option. The total intrinsic value of stock options exercised during the nine months ended July 31, 2022 and 2021 was $0.1 million and $4.2 million, respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Restricted Stock Units

Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee directors. The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date. Restricted stock units awarded to employees and officers typically cliff vest after a 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 criteria is met, each restricted stock unit is payable to the holder in cash based on the market value of one share of our common stock. Accordingly, we record a liability for the restricted stock units on our balance sheet and recognize any changes in the market value during each reporting period as compensation expense.

During the nine months ended July 31, 2022 and 2021, non-employee directors received 36,669 and 28,826 restricted stock units, respectively, at a weighted average grant date fair value of $22.52 per share and $18.79 per share, respectively, which vested immediately. As of July 31, 2022, there were 21,774 non-vested restricted stock units, which were awarded in January 2020 to key employees at a weighted average grant date fair value of $17.08. During the nine months ended July 31, 2022 we paid $1.0 million and $0.8 million for the comparable prior year to settle vested restricted stock units.

Performance Share Awards

We have awarded annual grants of performance shares to key employees and officers. Performance share awards vest with return on net assets (RONA) as the vesting condition and pay out 100% in cash, and are accounted for as liability.

The expected cash settlement of the performance share award is recorded as a liability and is being marked to market over the three-year term of the award and can fluctuate depending on the number of shares ultimately expected to vest. Depending on the achievement of the performance conditions, 0% to 200% of the awarded performance shares may ultimately vest.

The following table summarizes our performance share grants and the grant date fair value for the RONA performance metrics:



Grant Date	Shares Awarded	Grant Date Fair Value		Shares Forfeited


December 5, 2019	55,900	$	19.40	5,300
December 2, 2020	65,300	$	20.68	—
December 9, 2021	80,900	$	22.54	—

In December 2021, 183,000 shares vested pursuant to the December 2018 grant, which were settled with a cash payment of $3.8 million.

Performance share awards are payable in cash based upon the number of performance shares ultimately earned, and are therefore not considered outstanding shares.

Performance Restricted Stock Units

We award performance restricted stock units to key employees and officers. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of shares earned is variable depending on the metric achieved, and the settlement method is 100% in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the shares had been outstanding throughout the performance period.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

To value the performance restricted stock units, we used a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Depending on the achievement of the performance conditions, a minimum of 0% and a maximum of 150% of the awarded performance restricted stock units may vest. Specifically, the awards vest on a continuum with the following Absolute Total Shareholder Return (A-TSR) milestones:

Vesting Level

Vesting Criteria

Percentage of Award Vested

Level 1

A-TSR greater than or equal to 50%

150%

Level 2

A-TSR less than 50% and greater than or equal to 20%

100%

Level 3

A-TSR less than 20% and greater than or equal to -20%

50%

Level 4

A-TSR less than -20%

—%

The following table summarizes our performance restricted stock unit grants and the grant date fair value for the A-TSR performance metric:


Grant Date	Shares Awarded	Grant Date Fair Value		Shares Forfeited


December 5, 2019	35,000	$	19.40	—
December 2, 2020	38,400	$	20.68	—
December 9, 2021	50,900	$	21.06	—

During the nine months ended July 31, 2022, 87,919 performance restricted stock units vested.

The performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares. As of July 31, 2022, we have deemed 41,269 shares related to the December 2019 grant of performance restricted stock units as probable to vest.

The following table summarizes amounts expensed as selling, general and administrative expense related to restricted stock awards, stock options, restricted stock units, performance share awards and performance restricted stock units for the three and nine months ended July 31, 2022 and 2021 (in thousands):


	Three Months Ended				Nine Months Ended
	July 31, 2022				July 31, 2022
	2022		2021		2022		2021
Restricted stock awards	$	371	$	315	$	1,079	$	921
Stock options	—		—		—		—
Restricted stock units	796		(369)		1,512		1,823
Performance share awards	396		719		2,052		4,020
Performance restricted stock units	212		186		628		543
Total compensation expense	$	1,775	$	851	$	5,271	$	7,307

Treasury Shares

We record treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Shares are generally issued from treasury stock at the time of grant of restricted stock awards, upon the exercise of stock options, and upon the vesting of performance shares and performance restricted stock units. On the subsequent issuance of treasury shares, we record proceeds in excess of cost as an increase in additional paid in capital. A deficiency of such proceeds relative to costs would be applied to reduce paid-in-capital associated with prior issuances to the extent available, with the remainder recorded as a charge to retained earnings. There were no charges to retained earnings during the nine months ended July 31, 2022.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes the treasury stock activity during the nine months ended July 31, 2022:


			Nine Months Ended
			July 31, 2022
Beginning Balance as of November 1, 2021			3,998,725
Restricted stock awards granted			(84,400)
Performance restricted stock units vested			(87,919)
Stock options exercised			(25,711)
Treasury stock repurchases			291,000
Balance at July 31, 2022			4,091,695

10. Other, net

Other, net on the condensed consolidated statements of income consisted of the following for the three and nine months ended July 31, 2022 and 2021 (in thousands):


	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2022		2021		2022		2021
Foreign currency transaction gains (losses)	$	82	$	(79)	$	164	$	(161)
Foreign currency derivative gains	2		—		7		—
Pension service benefit	295		265		884		795
Interest income	2		—		17		4
Other	17		2		(167)		7
Other, net	$	398	$	188	$	905	$	645

11. Segment Information

We present three reportable business segments (1) NA Fenestration, comprising three operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens & other fenestration components; (2) EU Fenestration, comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles & conservatories, and the European insulating glass business manufacturing insulating glass spacers; and (3) NA Cabinet Components, comprising our cabinet door and components operations. We maintain an Unallocated Corporate & Other which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance, legal, and other costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. Other general and administrative costs associated with the corporate office are allocated to the reportable segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as those used to prepare the accompanying condensed consolidated financial statements. Corporate general and administrative expense allocated during the three and nine month period ended July 31, 2022 was $5.8 million and $17.1 million, respectively, and $4.9 million and $15.6 million for the comparable prior year periods.

ASC Topic 280-10-50, “Segment Reporting” (ASC 280) permits aggregation of operating segments based on factors including, but not limited to: (1) similar nature of products serving the building products industry, primarily the fenestration business; (2) similar production processes, although there are some differences in the amount of automation amongst operating plants; (3) similar types or classes of customers, namely the primary OEMs; (4) similar distribution methods for product delivery, although the extent of the use of third-party distributors will vary amongst the businesses; (5) similar regulatory environment; and (6) converging long-term economic similarities.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Segment information for the three and nine months ended July 31, 2022 and 2021, and total assets as of July 31, 2022 and October 31, 2021 are summarized in the following table (in thousands):


	NA Fenestration		EU Fenestration		NA Cabinet Comp.		Unallocated Corp. & Other		Total
Three Months Ended July 31, 2022
Net sales	$	184,744	$	67,613	$	72,480	$	(800)	$	324,037
Depreciation and amortization	4,044		2,327		3,273		90		9,734
Operating income (loss)	23,086		9,818		2,329		(1,198)		34,035
Capital expenditures	4,166		621		916		—		5,703
Three Months Ended July 31, 2021
Net sales	$	147,818	$	71,114	$	61,936	$	(991)	$	279,877
Depreciation and amortization	4,571		2,646		3,390		76		10,683
Operating income (loss)	13,302		11,464		(918)		(2,286)		21,562
Capital expenditures	2,651		2,285		1,115		156		6,207
Nine Months Ended July 31, 2022
Net sales	$	509,283	$	199,954	$	207,711	$	(2,978)	$	913,970
Depreciation and amortization	12,221		7,418		10,653		262		30,554
Operating income (loss)	57,458		30,229		1,444		(6,420)		82,711
Capital expenditures	13,103		2,827		3,488		70		19,488
Nine Months Ended July 31, 2021
Net sales	$	422,077	$	181,862	$	179,492	$	(3,050)	$	780,381
Depreciation and amortization	14,528		7,771		9,965		279		32,543
Operating income (loss)	40,288		29,901		(1,215)		(14,197)		54,777
Capital expenditures	7,472		4,025		4,228		281		16,006
As of July 31, 2022
Total assets	$	296,443	$	223,803	$	184,683	$	38,678	$	743,607
As of October 31, 2021
Total assets	$	268,773	$	236,755	$	178,671	$	33,124	$	717,323

The following table summarizes the change in the carrying amount of goodwill by reportable business segment for the nine months ended July 31, 2022 (in thousands):


	NA Fenestration		EU Fenestration		NA Cabinet Comp.		Unallocated Corp. & Other		Total
Balance as of October 31, 2021	$	38,712	$	71,346	$	39,147	$	—	$	149,205


Foreign currency translation adjustment	—		(7,956)		—		—		(7,956)
Balance as of July 31, 2022	$	38,712	$	63,390	$	39,147	$	—	$	141,249

For further details of Goodwill, see Note 3, “Goodwill & Intangible Assets”, located herewith.

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QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

We did not allocate non-operating loss or income tax benefit to the reportable segments. The following table reconciles operating income as reported above to net income for the three and nine months ended July 31, 2022 and 2021 (in thousands):


	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2022		2021		2022		2021
Operating income	$	34,035	$	21,562	$	82,711	$	54,777
Interest expense	(724)		(597)		(1,849)		(1,988)
Other, net	398		188		905		645
Income tax expense	(7,801)		(7,474)		(18,098)		(17,352)
Net income	$	25,908	$	13,679	$	63,669	$	36,082

12. 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.

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QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Basic and diluted earnings per share for the three and nine months ended July 31, 2022 and 2021 were calculated as follows (in thousands, except per share data):


	Net Income		Weighted Average Shares	Per Share
Three Months Ended July 31, 2022
Basic earnings per common share	$	25,908	32,999	$	0.79
Effect of dilutive securities:
Stock options	—		34	—
Restricted stock awards	—		99	—

Performance restricted stock units	—		41	—
Diluted earnings per common share	$	25,908	33,173	$	0.78
Three Months Ended July 31, 2021
Basic earnings per common share	$	13,679	33,359	$	0.41
Effect of dilutive securities:
Stock options	—		59	—
Restricted stock awards	—		140	—

Performance restricted stock units	—		92	—
Diluted earnings per common share	$	13,679	33,650	$	0.41
Nine Months Ended July 31, 2022
Basic earnings per common share	$	63,669	33,093	$	1.92
Effect of dilutive securities:
Stock options	—		27	—
Restricted stock awards	—		95	—

Performance restricted stock units	—		41	—
Diluted earnings per common share	$	63,669	33,256	$	1.91
Nine Months Ended July 31, 2021
Basic earnings per common share	$	36,082	33,194	$	1.09
Effect of dilutive securities:
Stock options	—		103	—
Restricted stock awards	—		129	—

Performance restricted stock units	—		92	—
Diluted earnings per common share	$	36,082	33,518	$	1.08

We do not include equity instruments in our calculation of diluted earnings per share if those instruments would be anti-dilutive. Such dilution is dependent on the excess of the market price of our stock over the exercise price and other components of the treasury stock method. There were no anti-dilutive instruments for the three and nine months ended July 31, 2022 and 2021.

13. New Accounting Guidance

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standards setting bodies that we adopt as of the specified effective date. We did not adopt any new accounting pronouncements during the three and nine months ended July 31, 2022. As of July 31, 2022, we believe the impact of any recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our condensed consolidated financial statements upon adoption.

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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:

•impacts from public health issues (including pandemics, such as the COVID-19 pandemic and quarantines) on the economy, demand for our products or our operations, including the responses of governmental authorities to contain such public health issues;

•changes in market conditions, particularly in the new home construction, and residential remodeling and replacement (R&R) activity markets in the United States, United Kingdom, Germany and elsewhere;

•changes in non-pass-through raw material costs;

•changes in domestic and international economic conditions;

•changes in availability and prices of raw material including inflationary pressures and supply chain challenges, which could be exacerbated by political or global unrest such as the current situation in Ukraine;

•our ability to attract and retain skilled labor;

•changes in purchases by our principal customers;

•fluctuations in foreign currency exchange rates;

•our ability to maintain an effective system of internal controls;

•our ability to successfully implement our internal operating plans and acquisition strategies;

•our ability to successfully implement our plans with respect to information technology (IT) systems and processes;

•our ability to control costs and increase profitability;

•changes in environmental laws and regulations;

•changes in warranty obligations;

•changes in energy costs and the availability of energy;

•changes in tax laws, and interpretations thereof;

•changes in interest rates;

•our ability to service our debt facilities and remain in good standing with our lenders;

•changes in the availability or applicability of our insurance coverage;

•our ability to maintain good relationships with our suppliers, subcontractors, and key customers; and

•the resolution of litigation and other legal proceedings.

For information on additional factors that could cause actual results to differ materially, please refer to the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

About Third-Party Information

In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industry publications, U.S. government sources and other third parties. Although we believe this information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.

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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 July 31, 2022, and for the three and nine months ended July 31, 2022 and 2021, included elsewhere herein. For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

Our Business

We manufacture components for original equipment manufacturers (OEMs) in the building products industry. These components can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of fenestration components include (1) energy-efficient flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, and (4) precision-formed metal and wood products. We also manufacture cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, vinyl fencing, water retention barriers, and conservatory roof components. We use low-cost, short lead-time production processes and engineering expertise to provide our customers with specialized products for their specific window, door, and cabinet applications. We believe these capabilities provide us with unique competitive advantages. We serve a primary customer base in North America and the U.K., and also serve customers in international markets through our operating plants in the U.K. and Germany, as well as through sales and marketing efforts in other countries.

We continue to invest in organic growth initiatives and we intend to continue evaluating business acquisitions that allow us to expand our existing fenestration and cabinet component footprint, enhance our product offerings, provide new complementary technology, enhance our leadership position within the markets we serve and expand into new markets or service lines. We have disposed of non-core businesses in the past, and continue to evaluate our business portfolio to ensure that we are investing in markets where we believe there is potential future growth.

We currently have three reportable business segments: (1) North American Fenestration segment (“NA Fenestration”), comprising three operating segments, manufacturing vinyl profiles, IG spacers, screens and other fenestration components; (2) European Fenestration segment (“EU Fenestration”), comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles and conservatories, and the European insulating glass business manufacturing IG spacers; and (3) North American Cabinet Components segment (“NA Cabinet Components”), comprising our North American cabinet door and components business and two wood-manufacturing plants. We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance, legal, and other costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. Other corporate general and administrative costs have been allocated to the reportable business segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as those used to prepare our accompanying condensed consolidated financial statements.

Recent Transactions and Events

U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market or operational disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. Russia, Europe’s largest provider of natural gas, has significantly reduced the export of natural gas compared to the same time last year resulting in the increase in natural gas prices and the potential for natural gas shortages. If this trend continues, this would not only negatively impact our European manufacturing facilities, this may also impact our customers and their demand for our products. We continue to monitor these situations and their impact on our business.

On March 11, 2020, the WHO declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures. Our first priority with regard to the COVID-19 pandemic is to do everything we can to ensure the safety, health and welfare of our employees, customers, suppliers and other partners. With the implementation of health and safety practices at our facilities, we are continuing to supply the industry during this uncertain time, recognizing the essential role the construction industry plays in providing housing and necessary infrastructure. As federal, state and local governments react to the public health crisis, significant uncertainties have been created in the economy. The COVID-19

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pandemic and its related effects continue to have a significant adverse effect on many sectors of the economy and we may be further impacted.

The war in Ukraine and the impact of COVID-19 on the global economy including inflation and the price of raw materials, supply chain disruptions, and the volatility in interest rates including home mortgage rates are unpredictable and there may be developments outside our control requiring us to adjust our operating plan.

Market Overview and Outlook

We believe the primary drivers of our operating results continue to be North American new home construction and residential remodeling and replacement (R&R) activity. We believe that housing starts and window shipments are indicators of activity levels in the homebuilding and window industries, and we use this data, as published by or derived from third-party sources, to evaluate the market. We have evaluated the market using data from the National Association of Homebuilders (NAHB) with regard to housing starts, and published reports by Ducker Worldwide, LLC (Ducker), a consulting and research firm, with regard to window shipments in the U.S. We obtain market data from Catalina Research, a consulting and research firm, for insight into the U.S. residential wood cabinet demand.

In August 2022, the NAHB forecasted calendar-year housing starts to be 1.5 million in both the 2022 and 2023 calendar-years and 1.6 million in 2024. In August 2022, the Ducker forecast indicated that total window shipments are expected to remain essentially flat for calendar-year 2022 and increase 1.9% in 2023. In August 2022, Catalina Research estimated that residential semi-custom cabinet sales in the U.S. is estimated to increase 8.4% in 2022 and decrease 3.8% in 2023.

Several commodities in our business are subject to pricing fluctuations, including polyvinyl resin (PVC), titanium dioxide (TiO2), petroleum products, aluminum and wood. For the majority of our customers and critical suppliers, we have price adjusters in place which effectively share the base pass-through price changes for our primary commodities with our customers commensurate with the market at large. Our long-term exposure to these price fluctuations is somewhat mitigated due to the contractual component of the adjuster programs. However, these adjusters are not in place with all customers and for all commodities, and there is a level of exposure to such volatility due to the lag associated with the timing of price updates in accordance with our customer agreements, particularly with regard to hardwoods. In addition, some of these commodities are in high demand, particularly in Europe, which can affect the cost of the raw materials, a portion of which we may not be able to fully recover.

The global economy remains uncertain due to currency devaluations, political unrest, terror threats, global pandemics such as COVID-19, and even the political landscape in the U.S. These and other macro-economic factors have impacted the global financial markets, which may have contributed to significant changes in foreign currencies. We continue to monitor our exposure to changes in exchange rates.

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Results of Operations

Three Months Ended July 31, 2022 Compared to Three Months Ended July 31, 2021


	Three Months Ended July 31,
	2022		2021		Change $		% Variance
	(Dollars in millions)
Net sales	$	324.1	$	279.9	$	44.2	16	%
Cost of sales (excluding depreciation and amortization)	251.5		219.8		31.7		(14)	%
Selling, general and administrative	28.8		27.8		1.0		(4)	%

Depreciation and amortization	9.8		10.6		(0.8)		8	%

Operating income	34.0		21.7		12.3		57	%
Interest expense	(0.7)		(0.6)		(0.1)		(17)	%
Other, net	0.4		0.1		0.3		300	%
Income tax expense	(7.8)		(7.5)		(0.3)		(4)	%
Net income	$	25.9	$	13.7	$	12.2	89	%

Our period-over-period results by reportable segment follow.

Changes Related to Operating Income by Reportable Segment:

NA Fenestration


	Three Months Ended July 31,
	2022			2021			$ Change		% Variance
	(Dollars in millions)
Net sales	$	184.8		$	147.7		$	37.1	25%
Cost of sales (excluding depreciation and amortization)	143.0			116.5			26.5		(23)%
Selling, general and administrative	14.6			13.3			1.3		(10)%

Depreciation and amortization	4.0			4.4			(0.4)		9%
Operating income	$	23.2		$	13.5		$	9.7	72%
Operating income margin	13		%	9		%

Net Sales. Net sales increased $37.1 million, or 25%, for the three months ended July 31, 2022 compared to the same period in 2021, which was primarily driven by an increase in price and raw material surcharges of $19.6 million and a $17.5 million increase in volumes.

Cost of Sales. The cost of sales increased $26.5 million, or 23%, for the three months ended July 31, 2022 compared to the same period in 2021. Cost of sales, including labor, increased primarily due to higher volumes during the period as well as the inflation of raw materials.

Selling, General and Administrative. Selling, general and administrative expenses increased $1.3 million, or 10%, for the three months ended July 31, 2022 compared to the same period in 2021, primarily due an increase in compensation expense, professional fees and general expenses year-over-year.

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EU Fenestration


	Three Months Ended July 31,
	2022			2021			$ Change		% Variance
	(Dollars in millions)
Net sales	$	67.7		$	71.2		$	(3.5)	(5)%
Cost of sales (excluding depreciation and amortization)	47.2			49.4			(2.2)		4%
Selling, general and administrative	8.3			7.6			0.7		(9)%
Depreciation and amortization	2.3			2.7			(0.4)		15%
Operating income	$	9.9		$	11.5		$	(1.6)	(14)%
Operating income margin	15		%	16		%

Net Sales. Net sales decreased $3.5 million, or 5%, for the three months ended July 31, 2022 compared to the same period in 2021, which was primarily driven by a $7.9 million decrease in volumes and $8.9 million of foreign currency rate changes partially offset by $13.3 million of base price increases.

Cost of Sales. The cost of sales decreased $2.2 million, or 4%, for the three months ended July 31, 2022 compared to the same period in 2021. Cost of sales decreased primarily due to lower volumes and foreign currency rate changes during the period partially offset by inflation of raw materials.

Selling, General and Administrative. Selling, general and administrative expense increased $0.7 million, or 9%, for the three months ended July 31, 2022 compared to the same period in 2021. The increase is primarily due to higher compensation and general expenses partially offset by a decrease in professional fees and foreign currency impacts year-over-year.

NA Cabinet Components


	Three Months Ended July 31,
	2022			2021			$ Change		Variance %
	(Dollars in millions)
Net sales	$	72.4		$	61.9		$	10.5	17%
Cost of sales (excluding depreciation and amortization)	61.6			54.4			7.2		(13)%
Selling, general and administrative	5.3			5.2			0.1		(2)%

Depreciation and amortization	3.4			3.4			—		—%

Operating income (loss)	$	2.1		$	(1.1)		$	3.2	291%
Operating income (loss) margin	3		%	(2)		%

Net Sales. Net sales increased $10.5 million, or 17%, for the three months ended July 31, 2022 compared to the same period in 2021, which was driven by an increase in price and raw material indexes of $15.0 million partially offset by a $4.5 million decrease in volumes due to labor and material shortages throughout the supply chain.

Cost of Sales. Cost of sales increased $7.2 million, or 13%, for the three months ended July 31, 2022 compared to the same period in 2021. Cost of sales increased primarily due to rising lumber prices, which are recovered on a lag, partially offset by lower volumes during the period.

Selling, General and Administrative. Selling, general and administrative expense was similar to the three months ended July 31, 2022 compared to the same period in 2021.

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Unallocated Corporate & Other


	Three Months Ended July 31,
	2022		2021		$ Change		Variance %
	(Dollars in millions)
Net sales	$	(0.8)	$	(0.9)	$	0.1	11%
Cost of sales (excluding depreciation and amortization)	(0.3)		(0.5)		0.2		(40)%
Selling, general and administrative	0.6		1.7		(1.1)		65%
Depreciation and amortization	0.1		0.1		—		—%
Operating loss	$	(1.2)	$	(2.2)	$	1.0	45%

Net Sales. Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the three months ended July 31, 2022 and 2021.

Cost of Sales. Cost of sales for Unallocated Corporate & Other consists of the elimination of inter-segment sales, profit in inventory, and other costs.

Selling, General and Administrative. Selling, general and administrative expenses decreased $1.1 million, or 65%, for the three months ended July 31, 2022 compared to the same period in 2021. This decrease is primarily attributable to a decrease of $2.6 million related to medical expense claims partially offset by $1.0 million of higher compensation expense including the valuations of our stock based compensation awards and a $0.5 million increase in professional fees during the three months ended July 31, 2022 as compared to the prior year period.

Changes related to Non-Operating Items:

Income Taxes. We recorded income tax expense of $7.8 million on pre-tax income of $33.7 million for the three months ended July 31, 2022, an effective rate of 23.1%, and income tax expense of $7.5 million on pre-tax income of $21.2 million for the three months ended July 31, 2021, an effective rate of 35.3%. The increase in income tax expense year-over-year was primarily driven by the increase in pre-tax book income during the three months ended July 31, 2022, relative to the three months ended July 31, 2021. The decrease in the effective tax rate for the three months ended July 31, 2022, was primarily driven by a non-recurring tax detriment that occurred during the three months ended July 31, 2021, associated with the remeasurement of U.K. deferred taxes from a 19% to 25% tax rate as a result of an enacted tax law change during the period.

Nine Months Ended July 31, 2022 Compared to Nine Months Ended July 31, 2021


	Nine Months Ended July 31,
	2022		2021		Change $		% Variance
	(Dollars in millions)
Net sales	$	914.0	$	780.4	$	133.6	17	%
Cost of sales (excluding depreciation and amortization)	712.9		604.7		108.2		(18)	%
Selling, general and administrative	87.8		88.3		(0.5)		1	%

Depreciation and amortization	30.6		32.5		(1.9)		6	%

Operating income	82.7		54.9		27.8		51	%
Interest expense	(1.8)		(2.0)		0.2		10	%
Other, net	0.9		0.6		0.3		(50)	%
Income tax expense	(18.1)		(17.4)		(0.7)		(4)	%


Net income	$	63.7	$	36.1	$	27.6	76	%

Our period-over-period results by reportable segment follow.

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Changes Related to Operating Income by Reportable Segment:

NA Fenestration


	Nine Months Ended July 31,
	2022			2021			$ Change		% Variance
	(Dollars in millions)
Net sales	$	509.3		$	422.0		$	87.3	21%
Cost of sales (excluding depreciation and amortization)	396.5			328.3			68.2		(21)%
Selling, general and administrative	43.1			38.9			4.2		(11)%

Depreciation and amortization	12.2			14.4			(2.2)		15%
Operating income	$	57.5		$	40.4		$	17.1	42%
Operating income margin	11		%	10		%

Net Sales. Net sales increased $87.3 million, or 21%, for the nine months ended July 31, 2022 compared to the same period in 2021, which was primarily driven by an increase in price and raw material surcharges of $52.6 million and a $34.7 million increase in volumes.

Cost of Sales. The cost of sales increased $68.2 million, or 21%, for the nine months ended July 31, 2022 as compared to the same period in 2021. Cost of sales, including labor, increased primarily due to higher volumes during the period as well as the inflation of raw materials.

Selling, General and Administrative. Selling, general and administrative expenses increased $4.2 million, or 11%, for the nine months ended July 31, 2022 as compared to the same period in 2021. This increase was primarily due to higher compensation expense, professional fees and general expenses year-over-year.

Depreciation and Amortization. Depreciation and amortization expense decreased $2.2 million, or 15%, for the nine months ended July 31, 2022 as compared to the same period in 2021, reflecting the run-off of depreciation expense related to existing assets and disposals during the period.

EU Fenestration


	Nine Months Ended July 31,
	2022			2021			$ Change		Variance %
	(Dollars in millions)
Net sales	$	200.0		$	181.9		$	18.1	10%
Cost of sales (excluding depreciation and amortization)	138.1			122.6			15.5		(13)%
Selling, general and administrative	24.2			21.6			2.6		(12)%
Depreciation and amortization	7.4			7.8			(0.4)		5%
Operating income	$	30.3		$	29.9		$	0.4	1%
Operating income margin	15		%	16		%

Net Sales. Net sales increased $18.1 million, or 10%, comparing the nine months ended July 31, 2022 to the same period in 2021, which was primarily driven by $35.8 million of base price increases partially offset by $11.7 million of foreign currency rate changes and $6.0 million decrease in volumes.

Cost of Sales. The cost of sales increased $15.5 million, or 13%, for the nine months ended July 31, 2022 compared to the same period in 2021. Cost of sales increased primarily due to inflation of raw materials partially offset by a decrease in volumes and foreign currency impacts.

Selling, General and Administrative. Selling, general and administrative expense increased $2.6 million, or 12%, for the nine months ended July 31, 2022 compared to the same period in 2021. The increase is primarily due to higher compensation and general expenses partially offset by foreign currency impacts year-over-year.

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NA Cabinet Components


	Nine Months Ended July 31,
	2022			2021			$ Change		Variance %
	(Dollars in millions)
Net sales	$	207.7		$	179.5		$	28.2	16%
Cost of sales (excluding depreciation and amortization)	179.8			155.4			24.4		(16)%
Selling, general and administrative	15.8			15.4			0.4		(3)%

Depreciation and amortization	10.7			10.0			0.7		(7)%

Operating income (loss)	$	1.4		$	(1.3)		$	2.7	208%
Operating income (loss) margin	1		%	(1)		%

Net Sales. Net sales increased $28.2 million, or 16%, for the nine months ended July 31, 2022 compared to the same period in 2021, which was driven by a $47.7 million increase in price and raw material indexes partially offset by $19.5 million decrease in volumes due to labor and material shortages throughout the supply chain.

Cost of Sales. Cost of sales increased $24.4 million, or 16%, for the nine months ended July 31, 2022 compared with the same period in 2021, primarily as a result of lumber price inflation, which is recovered on a lag, partially offset by lower volumes during the period.

Selling, General and Administrative. Selling, general and administrative expense increased $0.4 million, or 3%, for the nine months ended July 31, 2022 compared to the same period in 2021 due to an increase in general expenses year-over-year.

Unallocated Corporate & Other


	Nine Months Ended July 31,
	2022		2021		$ Change		Variance %
	(Dollars in millions)
Net sales	$	(3.0)	$	(3.0)	$	—	—%
Cost of sales (excluding depreciation and amortization)	(1.5)		(1.6)		0.1		(6)%
Selling, general and administrative	4.7		12.4		(7.7)		62%
Depreciation and amortization	0.3		0.3		—		—%
Operating loss	$	(6.5)	$	(14.1)	$	7.6	54%

Net Sales. Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the nine months ended July 31, 2022 and 2021.

Cost of Sales. Cost of sales for Unallocated Corporate & Other consists of the elimination of inter-segment sales, profit in inventory, and other costs.

Selling, General and Administrative. Selling, general and administrative expenses decreased $7.7 million, or 62%, for the nine months ended July 31, 2022 compared to the same period in 2021. This decrease is primarily attributable to $3.7 million of decreased compensation expense including the valuations of our stock based compensation awards, a decrease of $2.9 million related to medical expense claims and a decrease of $0.5 million related to workers’ compensation claims partially offset by an increase of $0.8 million professional fees during the nine months ended July 31, 2022 as compared to the prior year period. Additionally, we recorded a $1.4 million loss on the sale of a plant during the nine months ended July 31, 2021, for which we did not have a comparable expense in the corresponding nine months ended July 31, 2022.

Changes related to Non-Operating Items:

Income Taxes. We recorded income tax expense of $18.1 million on pre-tax income of $81.8 million for the nine months ended July 31, 2022, an effective rate of 22.2%, and income tax expense of $17.4 million on a pre-tax income of $53.4 million for the nine months ended July 31, 2021, an effective rate of 32.5%. The increase in income tax expense year-over-year was primarily driven by the increase in pre-tax book income during the nine months ended July 31, 2022, relative to the nine months ended July 31, 2021. The decrease in the effective tax rate for the nine months ended July 31, 2022, was primarily driven by a non-recurring tax detriment that occurred during the nine months ended July 31, 2021, associated with the remeasurement of U.K. deferred taxes from a 19% to 25% tax rate as a result of an enacted tax law change during the period as well as a charge related to the vesting or exercise of equity-based compensation awards.

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Liquidity and Capital Resources

Overview

Historically, our principal sources of funds have been cash on hand, cash flow from operations, and borrowings under our credit facilities.

We maintain a $325.0 million revolving credit facility (the Credit Facility) that matures in 2027 (5-year term) and requires interest payments calculated at a variable market rate depending upon our Consolidated Net Leverage Ratio. The applicable rate during the nine months ended July 31, 2022 was RFR Rate + 1.25%. Our cost of capital could increase depending upon the Consolidated Net Leverage Ratio at the end of any given quarter. In addition to the Consolidated Net Leverage Ratio covenant, we are required to meet a Consolidated Interest Coverage Ratio covenant, and there are limitations on certain transactions including our ability to incur indebtedness, incur liens, dispose of material assets, acquire businesses, make restricted payments and pay dividends (limited to $25.0 million per year). We are amortizing deferred financing fees of $1.6 million straight-line over the remaining term of the facility. For further details of the Credit Facility, refer to Note 4, “Debt and Finance Lease Obligations” to the accompanying unaudited condensed consolidated financial statements contained elsewhere herein.

As of July 31, 2022, we had $50.0 million of cash and equivalents, $38.0 million outstanding under the Credit Facility, $5.1 million of outstanding letters of credit and $20.1 million outstanding under finance leases and other debt. We had $281.9 million available for use under the Credit Facility at July 31, 2022.

We repatriated $18.2 million and $17.7 million of foreign cash during the nine months ended July 31, 2022 and 2021, respectively. We expect to repatriate excess cash moving forward and use the funds to retire debt or meet current working capital needs. In the U.K., we insure against a portion of our credit losses. We believe our business model, our current cash reserves and the recent steps we have taken to strengthen our balance sheet leave us well-positioned to manage our business and remain in compliance with our debt covenants.

Analysis of Cash Flow

The following table summarizes our cash flow results for the nine months ended July 31, 2022 and 2021:


	Nine Months Ended
	July 31,
	2022		2021
	(In millions)
Cash provided by operating activities	$	49.9	$	47.4
Cash used for investing activities	$	(19.4)	$	(12.9)
Cash used for financing activities	$	(17.9)	$	(43.5)

Operating Activities. Cash provided by operating activities increased $2.5 million for the nine months ended July 31, 2022 compared to the nine months ended July 31, 2021. The increase in operating cash flows is primarily due to higher net income year-over-year due to increased demand partially offset by unfavorable changes in working capital. The unfavorable changes in working capital were largely driven by an increase in inventory value due to raw material price inflation and a higher payout of accrued incentives.

Investing Activities. Cash used for investing activities increased $6.5 million for the nine months ended July 31, 2022 compared to the same period in 2021, primarily as a result of an increase in capital expenditures and a decrease in proceeds from dispositions.

Financing Activities. Cash provided by financing activities was $17.9 million for the nine months ended July 31, 2022, which included $7.9 million of dividends paid to our shareholders, $6.6 million purchase of treasury stock, $1.4 million of payroll tax paid to settle shares forfeited upon vesting of stock, $1.3 million of net repayment of long-term debt and $1.2 million of debt issuance costs.

Liquidity Requirements

Historically, our strategy for deploying cash has been to invest in organic growth opportunities, develop our infrastructure, and explore strategic acquisitions. Other uses of cash include paying cash dividends to our shareholders and repurchasing our common stock. During the nine months ended July 31, 2022 and 2021, we repatriated $18.2 million and $17.7 million, respectively, of foreign earnings from our foreign locations. We maintain cash balances in foreign countries which total $14.9 million as of July 31, 2022.

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Critical Accounting Policies and Estimates

The preparation of our financial statements in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. Estimates and assumptions about future events and their effects cannot be perceived with certainty. Estimates may change as new events occur, as more experience is acquired, as additional information becomes available and as our operating environment changes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, and that we believe provide a basis for making judgments about the carrying value of assets and liabilities that are not readily available through open market quotes. We must use our judgment with regard to uncertainties in order to make these estimates. Actual results could differ from these estimates.

For a description of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. Our critical accounting policies and estimates have not changed materially during the nine months ended July 31, 2022.

While there have been no changes in the application of principles, methods, and assumptions used to determine our significant estimates, we may be required to revise certain accounting estimates and judgments related to the economic and business impact of the COVID-19 pandemic, such as, but not limited to, those related to the valuation of goodwill, intangibles, long-lived assets, accounts receivable, and inventory, which could have a material adverse effect on our financial position and results of operations.

New Accounting Pronouncements

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following discussion of our exposure to various market risks contains “forward looking statements” regarding our estimates, assumptions and beliefs concerning our exposure. Although we believe these estimates and assumptions are reasonable in light of information currently available to us, we cannot provide assurance that these estimates will not materially differ from actual results due to the inherent unpredictability of interest rates, foreign currency rates and commodity prices as well as other factors. We do not use derivative financial instruments for speculative or trading purposes.

Interest Rate Risk

Our outstanding debt bears interest at variable rates and accordingly is sensitive to changes in interest rates. Based upon the balances of the variable rate debt at July 31, 2022, a hypothetical 1.0% increase or decrease in interest rates could result in approximately $0.4 million of additional pretax charges or credit to our net income per year. This sensitivity is impacted by the amount of borrowings under our credit facilities, and amounts outstanding under finance leases.

Foreign Currency Rate Risk

Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in the Euro, the British Pound Sterling and the Canadian Dollar. From time to time, we enter into foreign exchange contracts associated with our operations to manage a portion of the foreign currency rate risk. Less than $0.1 million of foreign currency derivatives were included in total liabilities as of July 31, 2022. There were no corresponding foreign currency derivatives as of October 31, 2021. These foreign currency derivative contracts hedge cross-border intercompany and commercial activity for our insulating glass spacer business. Although these derivatives hedge our exposure to fluctuations in foreign currency rates, we do not apply hedge accounting and therefore, the change in the fair value of these foreign currency derivatives is recorded directly to other income and expense in the accompanying condensed consolidated statements of income. To the extent the gain or loss on the derivative instrument offsets the gain or loss from the re-measurement of the underlying foreign currency balance, changes in exchange rates should have no effect.

Commodity Price Risk

We purchase PVC as the significant raw material consumed in the manufacture of vinyl extrusions. We have resin adjusters in place with a majority of our customers and our resin supplier that is adjusted based upon published indices for lagging resin prices. These adjusters effectively share the base pass-through price changes of PVC with our customers commensurate with the market at large. Our long-term exposure to changes in PVC prices is somewhat mitigated due to the contractual component of the resin adjuster program. However, there is a level of exposure to short-term volatility due to timing lags.

We adjust the pricing of petroleum-based raw materials for the majority of our customers who purchase products using these materials. This is intended to offset the fluctuating cost of products which are highly correlated to the price of oil including butyl and other oil-based raw materials. This program is adjusted monthly based upon the 90-day average published price for Brent crude. The oil-based raw materials that we purchase are subject to similar pricing schemes. As such, our long-term exposure to increases in oil-based raw material prices is significantly reduced under this program.

Similarly, NA Cabinet Components includes a price index provision in the majority of its customer arrangements to insulate against significant fluctuations in the price for various hardwood products used as the primary raw material for kitchen and bathroom cabinet doors. Like our vinyl extrusion business, we are exposed to short-term volatility in wood prices due to a lag in the timing of price updates which generally could extend for up to three months.

We have begun implementing additional programs for other raw materials to facilitate more accurate pricing and reduce our exposure to changing material costs when necessary, however these are also subject to timing lags. While we maintain surcharges and other adjusters to manage our exposure to changes in the prices of our critical raw materials, we use several commodities in our business that are not covered by contractual surcharges or adjusters for which pricing can fluctuate, including PVC compound micro ingredients, silicone and other inputs. Further discussion of our industry risks is included within our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

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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 July 31, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of July 31, 2022, the disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no changes in internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

During the three months ended July 31, 2022, we repurchased common stock as follows:


Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of a Publicly Announced Plans or Programs (1)	(d) Maximum US Dollars Remaining that May Yet Be Used to Purchase Shares Under the Plans or Programs (1)
May 2022	216,000	$	23.29	216,000	$	68,399,526
June 2022	—	—		—	$	68,399,526
July 2022	—	—		—	$	68,399,526
Total	216,000	$	—	216,000

(1) In December 2021, our Board of Directors approved a stock repurchase program that authorized the repurchase of up to $75.0 million worth of shares of our common stock. Repurchases under the new program are made in open market transactions or privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. The program does not have an expiration date or a limit on the number of shares that may be purchased.

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:	September 2, 2022	/s/ Scott M. Zuehlke
		Scott M. Zuehlke
		Senior Vice President - Chief Financial Officer & Treasurer (Principal Financial Officer)

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EXHIBIT INDEX

Exhibit Number Description of Exhibits


3.1						Restated Certificate of Incorporation of the Registrant dated as of March 4, 2016, filed as Exhibit 3.1 of the Registrant’s Current Report on Form 8-K (Reg. No. 001-33913) as filed with the Securities and Exchange Commission on March 7, 2016, and incorporated herein by reference.

3.2						Fourth Amended and Restated Bylaws of the Registrant dated as of February 27, 2020, filed as Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q (Reg. No. 001-33913) for the quarter ended January 31, 2020, 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						Second Amended and Restated Credit Agreement dated as of July 6 , 2022 , by and among the Company; the lenders party thereto; and Wells Fargo Bank, National Association, as Agent; 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 July 6, 202 2 , 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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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

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.