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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 ________________________________________________
FORM 10-Q
 ________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2019
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number 1-33913
  ________________________________________________
 QUANEX BUILDING PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
  ________________________________________________ 
DELAWARE
 
26-1561397
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1800 West Loop South, Suite 1500, Houston, Texas 77027
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (713) 961-4600
  ________________________________________________
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
 
NX
 
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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
o  (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 x
The number of shares outstanding of the registrant's Common Stock as of June 3, 2019 was 33,121,513.
 



QUANEX BUILDING PRODUCTS CORPORATION

INDEX
 
PART I.
 
 
 
Item 1:
Financial Statements (Unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets – April 30, 2019 and October 31, 2018
 
 
 
 
Condensed Consolidated Statements of (Loss) Income – Three and Six Months Ended April 30, 2019 and 2018
 
 
 
 
Condensed Consolidated Statements of Comprehensive (Loss) Income - Three and Six Months Ended April 30, 2019 and 2018
 
 
 
 
Condensed Consolidated Statements of Cash Flows – Six Months Ended April 30, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
 
Item 2:
 
 
 
Item 3:
 
 
 
Item 4:
 
 
PART II.
 
 
 
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6:


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) 
 
April 30,
2019
 
October 31,
2018
 
(In thousands, except share 
amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,262

 
$
29,003

Accounts receivable, net of allowance for doubtful accounts of $425 and $325
80,646

 
84,014

Inventories, net
86,581

 
70,730

Prepaid and other current assets
8,458

 
7,296

Total current assets
195,947

 
191,043

Property, plant and equipment, net of accumulated depreciation of $304,366 and $288,607
197,182

 
201,370

Goodwill
190,638

 
219,627

Intangible assets, net
114,921

 
121,919

Other assets
8,354

 
9,255

Total assets
$
707,042

 
$
743,214

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
48,743

 
$
52,389

Accrued liabilities
31,554

 
45,968

Income taxes payable
2,971

 
2,780

Current maturities of long-term debt
1,082

 
1,224

Total current liabilities
84,350

 
102,361

Long-term debt
224,743

 
209,332

Deferred pension and postretirement benefits
5,797

 
4,218

Deferred income taxes
16,417

 
17,510

Other liabilities
14,847

 
14,571

Total liabilities
346,154

 
347,992

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 37,403,044 and 37,433,817, respectively; outstanding 33,121,513 and 33,339,032, respectively
374

 
374

Additional paid-in-capital
253,679

 
254,678

Retained earnings
210,406

 
243,904

Accumulated other comprehensive loss
(28,127
)
 
(30,705
)
Less: Treasury stock at cost, 4,281,531 and 4,094,785 shares, respectively
(75,444
)
 
(73,029
)
Total stockholders’ equity
360,888

 
395,222

Total liabilities and stockholders' equity
$
707,042

 
$
743,214

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

1

Table of Contents

QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share amounts)
Net sales
$
218,203


$
214,212

 
$
415,011

 
$
405,878

Cost and expenses:
 
 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization)
171,378


169,030

 
329,935

 
323,546

Selling, general and administrative
23,722


23,863

 
51,748

 
47,971

Restructuring charges
84

 
242

 
187

 
608

Depreciation and amortization
12,404


13,310

 
24,976

 
26,583

Asset impairment charges
29,978

 

 
29,978

 

Operating (loss) income
(19,363
)
 
7,767

 
(21,813
)
 
7,170

Non-operating (expense) income:
 
 
 
 
 
 
 
Interest expense
(2,602
)

(2,502
)
 
(5,044
)
 
(4,943
)
Other, net
(54
)

264

 
202

 
689

(Loss) income before income taxes
(22,019
)
 
5,529

 
(26,655
)
 
2,916

Income tax (expense) benefit
(1,955
)

(1,393
)
 
(968
)
 
6,167

Net (loss) income
$
(23,974
)
 
$
4,136

 
$
(27,623
)
 
$
9,083

 
 
 
 
 
 
 
 
Basic (loss) income per common share
$
(0.73
)
 
$
0.12

 
$
(0.84
)
 
$
0.26

 
 
 
 
 
 
 
 
Diluted (loss) income per common share:
$
(0.73
)
 
$
0.12

 
$
(0.84
)
 
$
0.26

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
32,951

 
34,796

 
33,026

 
34,731

Diluted
32,951

 
35,115

 
33,026

 
35,166

 
 
 
 
 
 
 
 
Cash dividends per share
$
0.08

 
$
0.04

 
$
0.16

 
$
0.08


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


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

 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Net (loss) income
$
(23,974
)
 
$
4,136

 
$
(27,623
)
 
$
9,083

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation (loss) gain
(1,484
)
 
(5,328
)
 
2,582

 
5,822

Change in pension from net unamortized loss adjustment (pretax)

 

 
(11
)
 

Change in pension from net unamortized loss adjustment tax benefit (expense)

 

 
7

 
(697
)
Other comprehensive (loss) income
(1,484
)
 
(5,328
)
 
2,578

 
5,125

Comprehensive (loss) income
$
(25,458
)
 
$
(1,192
)
 
$
(25,045
)
 
$
14,208


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)
 
 
Six Months Ended
 
April 30,
 
2019
 
2018
 
(In thousands)
Operating activities:
 
 
 
Net (loss) income
$
(27,623
)
 
$
9,083

Adjustments to reconcile net (loss) income to cash provided by operating activities:
 
 
 
Depreciation and amortization
24,976

 
26,583

Stock-based compensation
1,043

 
211

Deferred income tax
(1,256
)
 
(8,087
)
Asset impairment charges
29,978

 

Other, net
1,078

 
(321
)
Changes in assets and liabilities:
 
 
 
Decrease in accounts receivable
3,479

 
3,357

Increase in inventory
(15,522
)
 
(4,623
)
Increase in other current assets
(681
)
 
(1,047
)
(Decrease) increase in accounts payable
(2,617
)
 
378

Decrease in accrued liabilities
(14,716
)
 
(5,220
)
Increase in income taxes payable
183

 
25

Increase in deferred pension and postretirement benefits
1,567

 
1,457

Decrease in other long-term liabilities
(131
)
 
(38
)
Other, net
385

 
(143
)
Cash provided by operating activities
143

 
21,615

Investing activities:
 
 
 
Capital expenditures
(13,022
)
 
(15,213
)
Proceeds from disposition of capital assets
298

 
180

Cash used for investing activities
(12,724
)
 
(15,033
)
Financing activities:
 
 
 
Borrowings under credit facilities
57,500

 
21,500

Repayments of credit facility borrowings
(42,500
)
 
(34,000
)
Repayments of other long-term debt
(784
)
 
(442
)
Common stock dividends paid
(5,335
)
 
(2,800
)
Issuance of common stock
27

 
2,564

Payroll tax paid to settle shares forfeited upon vesting of stock
(322
)
 
(706
)
Purchase of treasury stock
(4,702
)
 

Cash provided by (used for) financing activities
3,884

 
(13,884
)
Effect of exchange rate changes on cash and cash equivalents
(44
)
 
(55
)
Decrease in cash and cash equivalents
(8,741
)
 
(7,357
)
Cash and cash equivalents at beginning of period
29,003

 
17,455

Cash and cash equivalents at end of period
$
20,262

 
$
10,098

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

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QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Six Months Ended April 30, 2019
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, 2018
$
374

 
$
254,678

 
$
243,904

 
$
(30,705
)
 
$
(73,029
)
 
$
395,222

Net loss

 

 
(3,649
)
 

 

 
(3,649
)
Foreign currency translation adjustment

 

 

 
4,066

 

 
4,066

Common dividends ($0.08 per share)

 

 
(2,675
)
 

 

 
(2,675
)
Purchase of treasury stock

 

 

 

 
(2,016
)
 
(2,016
)
Stock-based compensation activity:
 
 
 
 
 
 
 
 
 
 

Expense related to stock-based compensation

 
224

 

 

 

 
224

Stock options exercised

 

 
(35
)
 

 
62

 
27

Restricted stock awards granted

 
(1,649
)
 
(496
)
 

 
2,145

 

Other

 
(322
)
 

 
(4
)
 

 
(326
)
Balance at January 31, 2019
$
374

 
$
252,931

 
$
237,049

 
$
(26,643
)
 
$
(72,838
)
 
$
390,873

Net loss

 

 
(23,974
)
 

 

 
(23,974
)
Foreign currency translation adjustment

 

 

 
(1,484
)
 

 
(1,484
)
Common dividends ($0.08 per share)

 

 
(2,660
)
 

 

 
(2,660
)
Purchase of treasury stock

 

 

 

 
(2,686
)
 
(2,686
)
Stock-based compensation activity:
 
 
 
 
 
 
 
 
 
 


Expense related to stock-based compensation

 
819

 

 

 

 
819

Stock options exercised

 

 

 

 

 

Restricted stock awards granted

 
(71
)
 
(9
)
 

 
80

 

Balance at April 30, 2019
$
374

 
$
253,679


$
210,406

 
$
(28,127
)
 
$
(75,444
)
 
$
360,888


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, 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 13, "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 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 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, 2018 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, 2018. 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
On November 1, 2018, we adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (ASC Topic 606) using the modified retrospective method and applying ASC Topic 606 to all revenue contracts with customers. Results for reporting periods beginning on or after November 1, 2018 are presented under ASC Topic 606. In accordance with the modified retrospective approach, prior period amounts were not adjusted and are reported under ASC Topic 605, “Revenue Recognition.” As a result of adoption, there was not a material impact on our consolidated financial statements. We expect the impact of the adoption of ASC Topic 606 to continue to be immaterial to our net income on an ongoing basis.
Revenue recognition
The core principle of ASC Topic 606 is to recognize revenue that reflects the consideration we expect to receive for product sales when the promised items are transferred to customers. Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we expect to be entitled to consideration in exchange for transferring those products. We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those services, and when collectability of the consideration due is probable.
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.

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

Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to account for product returns related to general returns and product nonconformance.
Pricing and sales incentives
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts.
Practical expedients and exemptions
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Shipping and handling costs
We have elected to account for shipping and handling services as fulfillment services in accordance ASC Topic 606 guidance; accordingly, freight revenue will be combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in Cost of sales in the accompanying Condensed Consolidated Statements of Income.
Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration. As of April 30, 2019, accounts receivables were $80.6 million.
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.
The following table summarizes our product sales for the three and six months ended April 30, 2019 and April 30, 2018 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 13, “Segment Information”.

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

 
Three months ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
North American Fenestration:
 
 
 
 
 
 
 
United States - fenestration
$
99,144

 
$
97,005

 
$
193,029

 
$
184,787

International - fenestration
8,096

 
8,897

 
16,302

 
15,906

United States - non-fenestration
4,803

 
4,697

 
8,308

 
8,843

International - non-fenestration
3,303

 
3,558

 
6,756

 
7,347

 
$
115,346

 
$
114,157

 
$
224,395

 
$
216,883

European Fenestration:
 
 
 
 
 
 
 
International - fenestration
$
34,973

 
$
32,847

 
$
65,696

 
$
62,716

International - non-fenestration
6,650

 
5,977

 
11,181

 
10,104

 
$
41,623

 
$
38,824

 
$
76,877

 
$
72,820

North American Cabinet Components:
 
 
 
 
 
 
 
United States - fenestration
$
2,997

 
$
3,403

 
$
6,349

 
$
6,850

United States - non-fenestration
59,220

 
58,698

 
109,181

 
110,703

International - non-fenestration
619

 
567

 
1,158

 
1,037

 
$
62,836

 
$
62,668

 
$
116,688

 
$
118,590

Unallocated Corporate & Other
 
 
 
 
 
 
 
Eliminations
$
(1,602
)
 
$
(1,437
)
 
$
(2,949
)
 
$
(2,415
)
 
$
(1,602
)
 
$
(1,437
)
 
$
(2,949
)
 
$
(2,415
)
Net sales
$
218,203

 
$
214,212

 
$
415,011

 
$
405,878


Restructuring
We accrue one-time severance costs pursuant to an approved plan of restructuring at the communication date, when affected employees have been notified of the potential severance and sufficient information has been provided for the employee to calculate severance benefits, in the event the employee is involuntarily terminated. In addition, we accrue costs associated with the termination of contractual commitments including operating leases at the time the lease is terminated pursuant to the lease provisions or in accordance with another agreement with the landlord. Otherwise, we continue to recognize operating lease expense through the cease-use date. After the cease-use date, we determine if our operating lease payments are at market. We assume sublet of the facility at the market rate. To the extent our lease obligations exceed the fair value rentals, we discount to arrive at the present value and record a liability. If the facility is not sublet, we expense the amount of the rental in the current period. For other costs directly related to the restructuring effort, such as equipment moving costs, we expense in the period incurred.
We closed a kitchen and bathroom cabinet door business in Mexico in October 2016 and another plant in Lansing, Kansas in September 2017. We closed two U.S. vinyl operations plants in November 2016 and January 2017. Pursuant to these restructuring efforts, we expensed $0.1 million and $0.2 million during the three and six months ended April 30, 2019, respectively, and $0.2 million and $0.6 million, respectively, for the comparable prior year periods. We have not negotiated an exit from our lease obligation, which is deemed to be at fair market value, at our remaining closed plant location. We expect to continue to incur costs related to this operating lease during fiscal 2019 until we are able to sublet or otherwise exit the lease.
Accounting Change - Inventories
We record inventory at the lower of cost or market value. Inventories are valued using the first-in first-out (FIFO) method. In the second quarter of 2019, we changed the method of inventory costing for certain inventory in two plants included in our North American Fenestration reportable business segment to the FIFO method from the last-in first-out (LIFO) method. We utilize the FIFO method to determine costs at all of our other operating locations. We believe that the FIFO method is preferable as it provides uniformity of inventory valuation across our global operations, aligns with a majority of our peers which use FIFO as their only inventory valuation method, and provides better matching of revenues and expenses. The impact of this change in accounting principle on the financial statements for each period presented is further explained in Note 2, “Inventories.”

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

2. Inventories
Inventories consisted of the following at April 30, 2019 and October 31, 2018:
 
April 30,
2019
 
October 31,
2018
 
(In thousands)
Raw materials
$
42,886

 
$
41,584

Finished goods and work in process
44,772

 
31,727

Supplies and other
3,075

 
1,794

Total
90,733

 
75,105

Less: Inventory reserves
4,152

 
4,375

Inventories, net
$
86,581

 
$
70,730


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.
As described in Note 1, “Nature of Operations and Basis of Presentation - Accounting Change - Inventories,” in the second quarter of 2019, we elected to change our method of accounting for certain inventory in our North American Fenestration reportable business segment from LIFO to FIFO. We applied this change in method of inventory costing by retrospectively adjusting the prior period financial statements. As a result of the retrospective application of the change in accounting principle, certain amounts in our condensed consolidated balance sheet as of October 31, 2018 were adjusted as follows:
 
As reported
 
Impact of change to FIFO
 
As adjusted
 
(In thousands)
Inventories
$
69,365

 
$
1,365

 
$
70,730

Deferred income taxes
17,215

 
295

 
17,510

Retained earnings
242,834

 
$
1,070

 
243,904


3. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the six months ended April 30, 2019 was as follows:
 
Six Months Ended
 
April 30, 2019
 
(In thousands)
Beginning balance as of November 1, 2018
$
219,627

Goodwill impairment charge
(29,978
)
Foreign currency translation adjustment
989

Balance as of the end of the period
$
190,638


At our last annual test date, August 31, 2018, we evaluated the recoverability of goodwill at each of our five reportable units with goodwill balances and determined that our goodwill was not impaired.  For the reportable unit included in our NA Cabinet Components operating segment, we experienced financial performance for the year to date period ending March 31, 2019 that was below our annual budget. As a result, we developed a new long-range forecast for this reporting unit that was below its previous long-range forecast as a result of an industry-wide shift from semi-custom cabinets to stock cabinets. We determined that the combination of i) actual financial results below planned performance, ii) a downward revision of the long-range forecast, and iii) the historical narrow margin of fair value over carrying value in previous annual and interim goodwill assessments represented a triggering event that that would more likely than not indicate that the carrying value of a reporting unit was greater than its fair value. Therefore, we performed a quantitative assessment (previously referred to as step one) of the goodwill impairment test at March 31, 2019.  The step one test was conducted using multiple valuation techniques, including a discounted cash flow analysis, which utilize Level 3 fair value inputs. During the six months ended April 30, 2019, we adopted a new accounting standard which

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

removed the requirement to perform any further testing beyond the quantitative assessment, as further described in Note 15, "New Accounting Guidance." As a result of the step one test, we recorded an impairment charge of $30.0 million, reducing the goodwill balance applicable to the reporting unit included in our NA Cabinet Components operating segment from $113.7 million to $83.7 million. For a summary of the change in the carrying amount of goodwill by segment, see Note 13, "Segment Information."
Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of April 30, 2019 and October 31, 2018:
 
April 30, 2019
 
October 31, 2018
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
(In thousands)
Customer relationships
$
154,206

 
$
64,663

 
$
153,704

 
$
59,332

Trademarks and trade names
55,828

 
34,179

 
55,583

 
32,668

Patents and other technology
22,286

 
18,557

 
22,278

 
17,646

Total
$
232,320

 
$
117,399

 
$
231,565

 
$
109,646


During the six months ended April 30, 2019, we retired identifiable intangible assets of $0.3 million related to customer relationships.
We had aggregate amortization expense related to intangible assets for the three and six months ended April 30, 2019 of $3.9 million and $7.9 million, respectively, and $4.1 million and $8.2 million, respectively, for the comparable prior year periods.
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
2019 (remaining six months)
$
7,462

2020
14,282

2021
12,562

2022
11,939

2023
11,193

Thereafter
57,483

Total
$
114,921



4. Debt and Capital Lease Obligations
Debt consisted of the following at April 30, 2019 and October 31, 2018:
 
April 30,
2019
 
October 31,
2018
 
(In thousands)
Revolving Credit Facility
$
210,000

 
$
195,000

Capital lease obligations and other
17,162

 
17,043

Unamortized deferred financing fees
(1,337
)
 
(1,487
)
Total debt
$
225,825

 
$
210,556

Less: Current maturities of long-term debt
1,082

 
1,224

Long-term debt
$
224,743

 
$
209,332


As more fully described in our Annual Report on Form 10-K for the year ended October 31, 2018, on October 18, 2018, we amended and extended our prior credit facility by entering into a $325.0 million revolving credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A. serving

10

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

as Syndication Agent. The Credit Facility has a five-year term, maturing on October 18, 2023, and requires interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin or the LIBOR Rate plus an applicable margin. 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 Leverage Ratio
  
Commitment Fee
 
LIBOR Rate Loans
  
Base Rate Loans
I
  
Less than or equal to 1.50 to 1.00
  
0.200%
 
1.25%
  
0.25%
II
  
Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00
  
0.225%
 
1.50%
  
0.50%
III
  
Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00
  
0.250%
 
1.75%
  
0.75%
IV
 
Greater than 3.00 to 1.00
 
0.300%
 
2.00%
 
1.00%

In the event of default, outstanding borrowings would accrue interest at the Default Rate, as defined, whereby the obligations will bear interest at a per annum rate equal to 2% above the total per annum rate otherwise applicable.
The Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than 2.25 to 1.00, and (2) Consolidated Leverage Ratio requirement, whereby we must not permit the Consolidated Leverage Ratio, as defined, 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 $20.0 million per year) and other transactions as further defined in the Credit Facility. Substantially all of our domestic assets, with the exception of real property, are utilized as collateral for the Credit Facility.
As of April 30, 2019, we had $210.0 million of borrowings outstanding under the Credit Agreement (reduced by unamortized debt issuance costs of $1.3 million), $4.8 million of outstanding letters of credit and $17.2 million outstanding primarily under capital leases. We had $110.2 million available for use under the Credit Agreement at April 30, 2019. Outstanding borrowings under the Credit Agreement accrue interest at 4.23% per annum. Our weighted average borrowing rate for borrowings outstanding during the six months ended April 30, 2019 and 2018 was 4.14% and 3.55%, respectively. We were in compliance with our debt covenants as of April 30, 2019.
Other Debt Instruments
We maintain certain capital lease obligations related to equipment purchases, vehicles, and warehouse space. The cost and accumulated depreciation of property, plant and equipment under all outstanding capital leases at April 30, 2019 was $22.6 million and $4.1 million, respectively, including $17.6 million and $2.4 million, respectively, related to warehouse space. Our total obligations under capital leases and other total $17.2 million at April 30, 2019, of which $1.3 million is classified in the current portion of long-term debt and $15.9 million is classified as long-term debt on the accompanying unaudited condensed consolidated balance sheets. These obligations accrue interest at an average rate of 3.60%, and extend through the year 2036.

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5. Retirement Plans
Pension Plan
Our non-contributory, single employer defined benefit pension plan covers a majority of our employees in the U.S. The net periodic pension cost for this plan for the three and six months ended April 30, 2019 and 2018 was as follows:
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Service cost
$
837

 
$
1,023

 
$
1,814

 
$
1,972

Interest cost
445

 
354

 
728

 
568

Expected return on plan assets
(445
)
 
(621
)
 
(988
)
 
(1,087
)
Amortization of net loss
46

 
(102
)
 
62

 
42

Net periodic pension cost
$
883

 
$
654

 
$
1,616

 
$
1,495


During September 2018, we contributed $0.8 million to fund our plan, and we expect to make a contribution to our plan in September 2019 of approximately $5.4 million, which is in line with our policy to make the minimum annual contributions required while maintaining 100% percent funding.
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 April 30, 2019 and October 31, 2018, our liability under the supplemental benefit plan was approximately $3.4 million. As of April 30, 2019 and October 31, 2018, the liability associated with the deferred compensation plan was approximately $3.7 million and $3.5 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.
6. Warranty Obligations
We accrue warranty obligations as we recognize revenue associated with certain products. We make provisions for our warranty obligations based upon historical experience of costs incurred for such obligations adjusted, as necessary, for current conditions and factors. There are significant uncertainties and judgments involved in estimating our warranty obligations, including changing product designs, differences in customer installation processes and future claims experience which may vary from historical claims experience. Therefore, the ultimate amount we incur as warranty costs in the near and long-term may not be consistent with our current estimate.
A reconciliation of the activity related to our accrued warranty, including both the current and long-term portions (reported in accrued liabilities and other liabilities, respectively, on the accompanying condensed consolidated balance sheets) follows:
 
Six Months Ended
 
April 30, 2019
 
(In thousands)
Beginning balance as of November 1, 2018
$
295

Provision for warranty expense
11

Warranty costs paid
(16
)
Total accrued warranty as of April 30, 2019
$
290

Less: Current portion of accrued warranty
142

Long-term portion of accrued warranty
$
148





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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. 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. Our estimated annual effective tax rates for the each of the six months ended April 30, 2019 and 2018 was 24.3% and 24.0%, respectively, excluding discrete items. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the Act), which significantly changed U.S. tax law. The Act reduced our federal income tax statutory rate from 35.0% to 23.3% for the fiscal year ended October 31, 2018.
The 2019 effective rate was impacted by a discrete charge of $0.1 million related to the vesting or exercise of equity-based compensation awards and a benefit of $0.2 million for the adjustment of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings. Additionally, during the three months ended April 30, 2019, we recorded a non-deductible $30.0 million asset impairment charge in the North American Cabinet Components segment, which is further explained in Note 3, "Goodwill and Intangible Assets." Discrete items contributing to the income tax benefit for the six months ended April 30, 2018 included $7.7 million for the re-measurement of our deferred income tax assets and liabilities due to the decrease in the federal corporate income tax rate, a benefit of $0.3 million for the true up of our accruals and related deferred taxes from prior year filings and settled tax audits, and a benefit of $0.1 million related to the vesting or exercise of equity-based compensation awards, partially offset by a tax expense of $1.2 million for the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings.
The following table reconciles our effective income tax rate to the federal statutory rate of 21.0% and 23.3% for the six months ended April 30, 2019 and 2018, respectively:
 
Six months ended April 30,
 
2019
 
2018
U.S. tax at statutory rate
21.0
 %
 
23.3
 %
State and local income tax
2.5

 
2.7

Non-U.S. income tax
0.3

 
(1.0
)
Other permanent differences
0.5

 
(1.0
)
Deferred rate impact of enactment of tax reform

 
(266.5
)
Tax impact of stock based compensation
(0.4
)
 
(1.4
)
Impact of deemed repatriation
0.7

 
42.0

Return to actual adjustments
(0.8
)
 
(9.6
)
Asset impairment charges
(27.4
)
 

Effective tax rate
(3.6
)%
 
(211.5
)%

The U.S. statutory rate of 23.3% reflects the period November 1, 2017 to December 31, 2017 at the previous 35.0% rate and the period January 1, 2018 to October 31, 2018 at the new 21.0% rate.
We continued our analysis of the Act during the first quarter of fiscal 2019. This resulted in a benefit of $0.2 million to the provisional amount recorded in fiscal 2018 related to the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings. As of January 31, 2019, the Company completed the accounting for the income tax effects of the Act within the one-year measurement period as allowed by the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118.
In light of the Act, we repatriated $5.3 million of excess cash from our foreign operations during the three months ended April 30, 2019. This repatriation of excess cash was a portion of the one-time mandatory transition tax discussed above. We will continue to evaluate our foreign cash position and may repatriate additional foreign earnings in the future. With the exception of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings, we do not anticipate any material tax impact from any potential repatriation of previously unremitted foreign earnings.
As of April 30, 2019, our liability for uncertain tax positions (UTP) of $0.6 million relates to certain state tax items regarding the interpretation of tax laws and regulations. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. The final outcome of the future tax consequences of legal proceedings, if any, as well as the outcome of competent authority proceedings, changes in regulatory tax laws, or interpretation of those tax laws could impact our financial statements. We are subject to the effect of these matters occurring in various jurisdictions. The

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disallowance of the UTP would not materially affect the annual effective tax rate. We do not believe any of the UTP at April 30, 2019 will be recognized within the next twelve months.
We evaluate the likelihood of realization of our deferred tax assets by considering both positive and negative evidence. We believe there is no need for a valuation allowance of the federal net operating losses. We will continue to evaluate our position throughout the year. We maintain a valuation allowance for certain state net operating losses which totaled $1.3 million at April 30, 2019.
Our federal income tax return for the fiscal year ended October 31, 2017 is currently under audit by the Internal Revenue Service.
8. 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 2019. While we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows.
Litigation
From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal injury, environmental matters, product performance or warranties, product liability, insurance coverage and personnel and employment disputes.
We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks to the extent deemed prudent by our management and to the extent such insurance is available. However, there is no assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations.
We have been and are currently party to multiple claims, some of which are in litigation, relating to alleged defects in a commercial sealant product that was manufactured and sold during the 2000's. During the six months ended April 30, 2018, our insurance carrier reimbursed fees and expenses originally incurred as part of our defense of these various commercial sealant claims totaling $0.5 million. There were no corresponding reimbursements received during the six months ended April 30, 2019. While we believe that our product was not defective and that we would prevail in these commercial sealant product claims if taken to trial, the timing, ultimate resolution and potential impact of these claims is not currently determinable. Nevertheless, after taking into account all currently available information, including our defenses, the advice of our counsel, and the extent and currently-expected availability of our existing insurance coverage, we believe that the eventual outcome of these commercial sealant claims will not have a material adverse effect on our overall financial condition, results of operations or cash flows, and we have not recorded any accrual with regard to these claims.
9. Derivative Instruments
Our derivative activities are subject to the management, direction, and control of the Chief Financial Officer and Chief Executive Officer. Certain transactions in excess of specified levels require further approval from the Board of Directors.
The nature of our business activities requires the management of various financial and market risks, including those related to changes in foreign currency exchange rates. We have historically used foreign currency forwards and options to mitigate or eliminate certain of those risks at our subsidiaries. We use foreign currency contracts to offset fluctuations in the value of accounts

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receivable and accounts payable balances that are denominated in currencies other than the United States Dollar, including the Euro, British Pound and Canadian Dollar. Currently, we do not enter into derivative transactions for speculative or trading purposes. We are exposed to credit loss in the event of nonperformance by the counterparties to our derivative transactions. We attempt to mitigate this risk by monitoring the creditworthiness of our counterparties and limiting our exposure to individual counterparties. In addition, we have established master netting agreements in certain cases to facilitate the settlement of gains and losses on specific derivative contracts.
We have not designated any of our derivative contracts as hedges for accounting purposes in accordance with the provisions under the Accounting Standards Codification Topic 815 "Derivatives and Hedging" (ASC 815). Therefore, changes in the fair value of these contracts and the realized gains and losses are recorded in the unaudited condensed consolidated statements of (loss) income for the three and six months ended April 30, 2019 and 2018 as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
April 30,
 
April 30,
Location of (losses) gains:
 
2019
 
2018
 
2019
 
2018
Other, net
Foreign currency derivatives
$
(30
)
 
$
26

 
$
(19
)
 
$
(29
)

We have chosen not to offset any of our derivative instruments in accordance with the provisions of ASC 815. Therefore, the assets and liabilities are presented on a gross basis on the accompanying condensed consolidated balance sheets. Less than $0.1 million of fair value related to foreign currency derivatives was included in prepaid and other current assets as of October 31, 2018. Less than $0.1 million of fair value related to foreign currency derivatives was included in accrued liabilities as of April 30, 2019.
The following table summarizes the notional amounts and fair value of outstanding derivative contracts at April 30, 2019 and October 31, 2018 (in thousands):
 
 
Notional as indicated
 
Fair Value in $
 
 
April 30,
2019
 
October 31,
2018
 
April 30,
2019
 
October 31,
2018
Foreign currency derivatives:
 
 
 
 
 
 
 
 
Sell EUR, buy USD
EUR
1,644

 
455

 
$
(1
)
 
$
1

Sell CAD, buy USD
CAD
201

 
229

 
(1
)
 

Sell GBP, buy USD
GBP
250

 
22

 
(2
)
 

Buy EUR, sell GBP
EUR
67

 
34

 
(1
)
 

Buy USD, sell EUR
USD
3

 
12

 

 


For the classification in the fair value hierarchy, see Note 10, "Fair Value Measurement of Assets and Liabilities", included herewith.

10. 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.

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Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
As of April 30, 2019 and October 31, 2018, foreign currency derivatives were the only instruments being measured on a recurring basis. Less than $0.1 million of foreign currency derivatives were included in total liabilities as of April 30, 2019 and less than $0.1 million of foreign currency derivatives were included in total assets as of October 31, 2018. All of our derivative contracts are valued using quoted market prices from brokers or exchanges and are classified within Level 2 of the fair value hierarchy.
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 April 30, 2019, and October 31, 2018 (Level 3 measurement).
11. Stock-Based Compensation
We have established and maintain an Omnibus Incentive Plan (2008 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards, performance restricted stock units, and other stock-based and cash-based awards. The 2008 Plan is administered by the Compensation and Management Development Committee of the Board of Directors.
The aggregate number of shares of common stock authorized for grant under the 2008 Plan is 7,650,000 as approved by shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 2008 Plan. We grant restricted stock units to non-employee directors on the first business day of each fiscal year. As approved by the Compensation & Management Development Committee of our Board of Directors annually, we grant a mix of stock options, restricted stock awards, performance shares and/or performance restricted stock units to officers, management and key employees. Occasionally, we may make additional grants to key employees at other times during the year.
Restricted Stock Awards
Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a three year period with service and continued employment as the only vesting criteria. The recipient of the restricted stock 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 six months ended April 30, 2019 is presented below:
 
Restricted Stock Awards
 
Weighted Average
Grant Date Fair Value per Share
Non-vested at October 31, 2018
217,200

 
$
19.76

Granted
124,800

 
$
13.78

Forfeited
(10,300
)
 
$
19.98

Vested
(67,900
)
 
$
19.18

Non-vested at April 30, 2019
263,800

 
$
17.06

The total weighted average grant-date fair value of restricted stock awards that vested during each of the three and six month periods ended April 30, 2019 and 2018 was $1.3 million. As of April 30, 2019, total unrecognized compensation cost related to unamortized restricted stock awards was $2.5 million. We expect to recognize this expense over the remaining weighted average vesting period of 2.1 years.
Stock Options
Historically, stock options have been awarded to key employees, officers and non-employee directors. Effective May 2015, the director compensation structure was revised to eliminate the annual grant of stock options to non-employee directors. During December 2017, the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted stock units as further described below. As a result, stock options were not granted during the year ended October 31, 2018 or during the six months ended April 30, 2019. Employee stock options typically vest ratably over a three-year period with

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service and continued employment as the vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of the stock options is determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital. For employees who are nearing retirement-eligibility, we recognize stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date.
We use 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, 2018.
The following table summarizes our stock option activity for the six months ended April 30, 2019:
 
Stock Options
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining Contractual
Term (in years)
 
Aggregate
Intrinsic
Value (000s)
Outstanding at October 31, 2018
1,753,656

 
$
18.47

 
 
 
 
Granted

 
$

 
 
 
 
Exercised
(3,500
)
 
$
7.83

 
 
 
 
Forfeited/Expired
(11,900
)
 
$
18.80

 
 
 
 
Outstanding at April 30, 2019
1,738,256

 
$
18.49

 
4.5
 
$
422

Vested or expected to vest at April 30, 2019
1,748,256

 
$
18.49

 
4.5
 
$
422

Exercisable at April 30, 2019
1,644,517

 
$
18.43

 
4.3
 
$
422


Intrinsic value is the amount by which the market price of the common stock on the date of exercise exceeds the exercise price of the stock option. The total intrinsic value of stock options exercised during the six months ended April 30, 2019 and 2018 was less than $0.1 million and $1.9 million, respectively. The weighted-average grant date fair value of stock options that vested during the six months ended April 30, 2019 and 2018 was $1.1 million and $1.5 million, respectively. As of April 30, 2019, total unrecognized compensation cost related to stock options was $0.1 million. We expect to recognize this expense over the remaining weighted average vesting period of 0.6 years.
Restricted Stock Units
Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee directors. The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date. Restricted stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued employment as the vesting conditions. Restricted stock units are not considered outstanding shares and do not have voting rights, although the holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares. Once the 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.
As of April 30, 2019, there were no non-vested restricted stock units. During the six month periods ended April 30, 2019 and 2018, non-employee directors received 29,065 and 18,050 restricted stock units, respectively, at a grant date fair value of $15.29 per share and $21.85 per share, respectively, which vested immediately. During the six month period ended April 30, 2019, we paid less than $0.4 million to settle previously vested restricted stock units; there were no corresponding payments to settled vested restricted stock units during the comparable prior year period.
Performance Share Awards
We have awarded annual grants of performance shares to key employees and officers. These awards cliff vest after a three-year period. Performance share awards issued prior to fiscal 2019 vest with service and performance measures (relative total shareholder return (R-TSR) and earnings per share (EPS) growth), as vesting conditions. The number of shares earned is variable depending on the metrics achieved, and the settlement method is 50% in cash and 50% in our common stock. Performance share awards issued during fiscal 2019 vest with return on net assets (RONA) as the vesting condition and pay out 100% in cash.
To account for these awards, we have bifurcated the portion subject to a market condition (R-TSR) and the portion subject to an internal performance measure (EPS or RONA). We have further bifurcated these awards based on the settlement method, as the portion expected to settle in stock (equity component) and the portion expected to settle in cash (liability component).

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To value the shares subject to the market condition, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be expensed over the three-year term of the award with a credit to additional paid-in-capital. To value the shares subject to the EPS and RONA performance measures, we used the value of our common stock on the date of grant as the grant-date fair value per share. This amount is being expensed over the three-year term of the award, with a credit to additional paid-in-capital, and could fluctuate depending on the number of shares ultimately expected to vest based on our assessment of the probability that the performance conditions will be achieved. The portion of the awards expected to settle in cash is recorded as a liability and is 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 EPS, R-TSR and RONA performance metrics:
 
 
 
 
Grant Date Fair Value
 
 
Grant Date
 
Shares Awarded
 
EPS
 
R-TSR
 
RONA
 
Shares Forfeited
November 30, 2016
 
186,500

 
$
19.45

 
$
26.61

 
$

 
20,730

December 7, 2017
 
146,500

 
$
20.70

 
$
21.81

 
$

 
17,408

December 5, 2018
 
131,500

 
$

 
$

 
$
13.63

 


On December 3, 2018 and January 25, 2019, a total of 139,164 shares vested pursuant to the December 2015 grant and a total of 4,300 shares vested pursuant to the January 2016 grant, however performance conditions resulted in no share issuances or cash payments for either of these awards. The November 2016 and December 2017 grants include a return on invested capital (ROIC) metric which, if achieved, could enhance the number of shares that are ultimately issued but cannot exceed the maximum (200%). Due to the uncertainty with regard to achieving this metric, no value has been assigned. In the event and at such time the metric is deemed achievable, compensation expense will begin to be recognized through the remaining vesting period. During the three and six months ended April 30, 2019, we recorded compensation expense of $0.4 million and less than $0.1 million related to the expected payout of our performance share awards that are outstanding as of April 30, 2019. During the three and six months ended April 30, 2018, we recorded a decrease in compensation expense of $1.0 million and $1.6 million related to the expected payouts of performance share awards that were outstanding as of April 30, 2018.
Performance share awards are not considered outstanding shares and do not have voting rights, although dividends are accrued over the performance period and will be payable in cash based upon the number of performance shares ultimately earned.
The performance shares are excluded from the diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares. As of April 30, 2019, we have deemed 31,470 shares related to the November 2016 grants of performance shares as probable to vest.
Performance Restricted Stock Units
We awarded performance restricted stock units to key employees and officers beginning in December 2017. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of 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.
To value the performance restricted stock units, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Depending on the achievement of the performance conditions, a minimum of