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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, 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: (713961-4600
  ________________________________________________
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 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 September 3, 2019 was 33,162,058.
 



QUANEX BUILDING PRODUCTS CORPORATION

INDEX
 
PART I.
 
 
 
Item 1:
Financial Statements (Unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets – July 31, 2019 and October 31, 2018
 
 
 
 
Condensed Consolidated Statements of Income (Loss) – Three and Nine Months Ended July 31, 2019 and 2018
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and Nine Months Ended July 31, 2019 and 2018
 
 
 
 
Condensed Consolidated Statements of Cash Flows – Nine Months Ended July 31, 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) 
 
July 31,
2019
 
October 31,
2018
 
(In thousands, except share 
amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,651

 
$
29,003

Accounts receivable, net of allowance for doubtful accounts of $502 and $325
82,302

 
84,014

Inventories, net
84,762

 
70,730

Prepaid and other current assets
8,270

 
7,296

Total current assets
185,985

 
191,043

Property, plant and equipment, net of accumulated depreciation of $310,983 and $288,607
190,447

 
201,370

Goodwill
186,829

 
219,627

Intangible assets, net
108,620

 
121,919

Other assets
8,183

 
9,255

Total assets
$
680,064

 
$
743,214

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
52,602

 
$
52,389

Accrued liabilities
30,056

 
45,968

Income taxes payable
3,101

 
2,780

Current maturities of long-term debt
871

 
1,224

Total current liabilities
86,630

 
102,361

Long-term debt
191,109

 
209,332

Deferred pension and postretirement benefits
6,580

 
4,218

Deferred income taxes
19,051

 
17,510

Other liabilities
15,344

 
14,571

Total liabilities
318,714

 
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 37,370,402 and 37,433,817, respectively; outstanding 33,162,058 and 33,339,032, respectively
374

 
374

Additional paid-in-capital
254,053

 
254,678

Retained earnings
219,340

 
243,904

Accumulated other comprehensive loss
(38,274
)
 
(30,705
)
Less: Treasury stock at cost, 4,208,344 and 4,094,785 shares, respectively
(74,143
)
 
(73,029
)
Total stockholders’ equity
361,350

 
395,222

Total liabilities and stockholders' equity
$
680,064

 
$
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 INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
July 31,
 
July 31,
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share amounts)
Net sales
$
238,461


$
239,821

 
$
653,472

 
$
645,699

Cost and expenses:
 
 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization)
181,357


185,811

 
511,292

 
509,357

Selling, general and administrative
25,718


24,246

 
77,466

 
72,217

Restructuring charges
94

 
243

 
281

 
851

Depreciation and amortization
12,182


12,691

 
37,158

 
39,274

Asset impairment charges

 

 
29,978

 

Operating income (loss)
19,110

 
16,830

 
(2,703
)
 
24,000

Non-operating (expense) income:
 
 
 
 
 
 
 
Interest expense
(2,570
)

(2,641
)
 
(7,614
)
 
(7,584
)
Other, net
259


195

 
461

 
884

Income (loss) before income taxes
16,799

 
14,384

 
(9,856
)
 
17,300

Income tax (expense) benefit
(4,958
)

(3,631
)
 
(5,926
)
 
2,536

Net income (loss)
$
11,841

 
$
10,753

 
$
(15,782
)
 
$
19,836

 
 
 
 
 
 
 
 
Basic income (loss) per common share
$
0.36

 
$
0.31

 
$
(0.48
)
 
$
0.57

 
 
 
 
 
 
 
 
Diluted income (loss) per common share:
$
0.36

 
$
0.31

 
$
(0.48
)
 
$
0.56

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
32,899

 
34,840

 
32,984

 
34,766

Diluted
33,162

 
35,120

 
32,984

 
35,125

 
 
 
 
 
 
 
 
Cash dividends per share
$
0.08

 
$
0.04

 
$
0.24

 
$
0.12


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


2

Table of Contents

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

 
Three Months Ended
 
Nine Months Ended
 
July 31,
 
July 31,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Net income (loss)
$
11,841

 
$
10,753

 
$
(15,782
)
 
$
19,836

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation loss
(10,147
)
 
(7,650
)
 
(7,565
)
 
(1,828
)
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
(10,147
)
 
(7,650
)
 
(7,569
)
 
(2,525
)
Comprehensive income (loss)
$
1,694

 
$
3,103

 
$
(23,351
)
 
$
17,311


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


3

Table of Contents

QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended
 
July 31,
 
2019
 
2018
 
(In thousands)
Operating activities:
 
 
 
Net (loss) income
$
(15,782
)
 
$
19,836

Adjustments to reconcile net (loss) income to cash provided by operating activities:
 
 
 
Depreciation and amortization
37,158

 
39,274

Stock-based compensation
1,424

 
1,002

Deferred income tax
1,930

 
(5,788
)
Asset impairment charges
29,978

 

Other, net
1,724

 
404

Changes in assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable
323

 
(1,247
)
(Increase) decrease in inventory
(14,747
)
 
310

Increase in other current assets
(1,022
)
 
(1,242
)
Increase in accounts payable
1,562

 
1,161

Decrease in accrued liabilities
(15,366
)
 
(7,565
)
Increase in income taxes payable
396

 
231

Increase in deferred pension and postretirement benefits
2,351

 
2,179

(Decrease) increase in other long-term liabilities
(143
)
 
210

Other, net
250

 
(312
)
Cash provided by operating activities
30,036

 
48,453

Investing activities:
 
 
 
Capital expenditures
(16,984
)
 
(21,098
)
Proceeds from disposition of capital assets
315

 
260

Cash used for investing activities
(16,669
)
 
(20,838
)
Financing activities:
 
 
 
Borrowings under credit facilities
66,500

 
33,500

Repayments of credit facility borrowings
(84,000
)
 
(62,750
)
Repayments of other long-term debt
(1,102
)
 
(1,394
)
Common stock dividends paid
(7,990
)
 
(4,202
)
Issuance of common stock
2,710

 
3,767

Payroll tax paid to settle shares forfeited upon vesting of stock
(330
)
 
(960
)
Purchase of treasury stock
(6,336
)
 

Cash used for financing activities
(30,548
)
 
(32,039
)
Effect of exchange rate changes on cash and cash equivalents
(1,171
)
 
(631
)
Decrease in cash and cash equivalents
(18,352
)
 
(5,055
)
Cash and cash equivalents at beginning of period
29,003

 
17,455

Cash and cash equivalents at end of period
$
10,651

 
$
12,400

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

4

Table of Contents

QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Nine Months Ended July 31, 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

Restricted stock awards granted

 
(71
)
 
(9
)
 

 
80

 

Balance at April 30, 2019
$
374

 
$
253,679


$
210,406

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

Net income

 

 
11,841

 

 

 
11,841

Foreign currency translation adjustment

 

 

 
(10,147
)
 

 
(10,147
)
Common dividends ($0.08 per share)

 

 
(2,655
)
 

 

 
(2,655
)
Purchase of treasury stock

 

 

 

 
(1,634
)
 
(1,634
)
Stock-based compensation activity:
 
 
 
 
 
 
 
 
 
 
 
Expense related to stock-based compensation

 
381

 

 

 

 
381

Stock options exercised
1

 

 
(252
)
 

 
2,935

 
2,684

Other
(1
)
 
(7
)
 

 

 

 
(8
)
Balance at July 31, 2019
$
374

 
$
254,053

 
$
219,340

 
$
(38,274
)
 
$
(74,143
)
 
$
361,350



5

Table of Contents

Nine Months Ended July 31, 2018
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, 2017
$
375

 
$
255,719

 
$
225,704

 
$
(25,076
)
 
$
(49,875
)
 
$
406,847

Net income

 

 
4,947

 

 

 
4,947

Foreign currency translation adjustment

 

 

 
11,150

 

 
11,150

Common dividends ($0.04 per share)

 

 
(1,397
)
 

 

 
(1,397
)
Change in pension from net unamortized gain tax (expense)

 

 

 
(697
)
 

 
(697
)
Stock-based compensation activity:
 
 
 
 
 
 
 
 
 
 
 
Expense related to stock-based compensation

 
580

 

 

 

 
580

Stock options exercised

 
(149
)
 
(924
)
 

 
3,304

 
2,231

Restricted stock awards granted

 
(1,371
)
 

 

 
1,371

 

Performance share awards vested

 
(473
)
 

 

 
473

 

Other

 
(668
)
 
(37
)
 

 
1

 
(704
)
Balance at January 31, 2018
$
375

 
$
253,638

 
$
228,293

 
$
(14,623
)
 
$
(44,726
)
 
$
422,957

Net income

 

 
4,136

 

 

 
4,136

Foreign currency translation adjustment

 

 

 
(5,328
)
 

 
(5,328
)
Common dividends ($0.04 per share)

 

 
(1,403
)
 

 

 
(1,403
)
Stock-based compensation activity:
 
 
 
 
 
 
 
 
 
 
 
Expense related to stock-based compensation

 
(369
)
 

 

 

 
(369
)
Stock options exercised

 

 
(81
)
 

 
414

 
333

Balance at April 30, 2018
$
375

 
$
253,269

 
$
230,945

 
$
(19,951
)
 
$
(44,312
)
 
$
420,326

Net income

 

 
10,753

 

 

 
10,753

Foreign currency translation adjustment

 

 

 
(7,650
)
 

 
(7,650
)
Common dividends ($0.04 per share)

 

 
(1,402
)
 

 

 
(1,402
)
Stock-based compensation activity:
 
 
 
 
 
 
 
 
 
 
 
Expense related to stock-based compensation

 
791

 

 

 

 
791

Stock options exercised

 

 
(269
)
 

 
1,472

 
1,203

Other
(1
)
 
(254
)
 
(2
)
 

 
(1
)
 
(258
)
Balance at July 31, 2018
$
374

 
$
253,806

 
$
240,025

 
$
(27,601
)
 
$
(42,841
)
 
$
423,763



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


6

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


1. Nature of Operations and Basis of Presentation
Quanex Building Products Corporation is a 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 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 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.

7

Table of Contents
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 July 31, 2019, accounts receivables were $82.3 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 nine months ended July 31, 2019 and July 31, 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”.

8

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

 
Three months ended
 
Nine Months Ended
 
July 31,
 
July 31,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
North American Fenestration:
 
 
 
 
 
 
 
United States - fenestration
$
119,481

 
$
112,914

 
$
312,509

 
$
297,700

International - fenestration
7,172

 
11,851

 
23,474

 
27,758

United States - non-fenestration
3,982

 
4,675

 
12,290

 
13,518

International - non-fenestration
5,624

 
3,957

 
12,381

 
11,304

 
$
136,259

 
$
133,397

 
$
360,654

 
$
350,280

European Fenestration:
 
 
 
 
 
 
 
International - fenestration
$
36,342

 
$
34,881

 
$
102,038

 
$
97,597

International - non-fenestration
7,984

 
7,780

 
19,165

 
17,884

 
$
44,326

 
$
42,661

 
$
121,203

 
$
115,481

North American Cabinet Components:
 
 
 
 
 
 
 
United States - fenestration
$
3,561

 
$
3,650

 
$
9,909

 
$
10,500

United States - non-fenestration
54,512

 
60,843

 
163,694

 
171,547

International - non-fenestration
616

 
621

 
1,774

 
1,658

 
$
58,689

 
$
65,114

 
$
175,377

 
$
183,705

Unallocated Corporate & Other
 
 
 
 
 
 
 
Eliminations
$
(813
)
 
$
(1,351
)
 
$
(3,762
)
 
$
(3,767
)
 
$
(813
)
 
$
(1,351
)
 
$
(3,762
)
 
$
(3,767
)
Net sales
$
238,461

 
$
239,821

 
$
653,472

 
$
645,699


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 $0.3 million during the three and nine months ended July 31, 2019, respectively, and $0.2 million and $0.9 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 one 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.”

9

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

2. Inventories
Inventories consisted of the following at July 31, 2019 and October 31, 2018:
 
July 31,
2019
 
October 31,
2018
 
(In thousands)
Raw materials
$
42,415

 
$
41,584

Finished goods and work in process
43,823

 
31,727

Supplies and other
2,975

 
1,794

Total
89,213

 
75,105

Less: Inventory reserves
4,451

 
4,375

Inventories, net
$
84,762

 
$
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

During the third quarter of 2019, we updated our assessment of the impact of the change in method of inventory costing and noted the impact would have remained the same.
3. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the nine months ended July 31, 2019 was as follows:
 
Nine Months Ended
 
July 31, 2019
 
(In thousands)
Beginning balance as of November 1, 2018
$
219,627

Goodwill impairment charge
(29,978
)
Foreign currency translation adjustment
(2,820
)
Balance as of the end of the period
$
186,829


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 would more likely than not indicate that the carrying value of a reporting unit was greater than its fair value.

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

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 nine months ended July 31, 2019, we adopted a new accounting standard which 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 July 31, 2019 and October 31, 2018:
 
July 31, 2019
 
October 31, 2018
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
(In thousands)
Customer relationships
$
151,616

 
$
66,879

 
$
153,704

 
$
59,332

Trademarks and trade names
55,024

 
34,486

 
55,583

 
32,668

Patents and other technology
22,344

 
18,999

 
22,278

 
17,646

Total
$
228,984

 
$
120,364

 
$
231,565

 
$
109,646


During the nine months ended July 31, 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 nine months ended July 31, 2019 of $3.7 million and $11.6 million, respectively, and $4.0 million and $12.2 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 three months)
$
3,689

2020
14,116

2021
12,396

2022
11,776

2023
11,028

Thereafter
55,615

Total
$
108,620




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

4. Debt and Capital Lease Obligations
Debt consisted of the following at July 31, 2019 and October 31, 2018:
 
July 31,
2019
 
October 31,
2018
 
(In thousands)
Revolving Credit Facility
$
177,500

 
$
195,000

Capital lease obligations and other
15,742

 
17,043

Unamortized deferred financing fees
(1,262
)
 
(1,487
)
Total debt
$
191,980

 
$
210,556

Less: Current maturities of long-term debt
871

 
1,224

Long-term debt
$
191,109

 
$
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 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 July 31, 2019, we had $177.5 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 $15.7 million outstanding primarily under capital leases. We had $142.7 million available for use under the Credit Agreement at July 31, 2019. Outstanding borrowings under the Credit Agreement accrue interest at 3.99% per annum. Our weighted average borrowing rate for borrowings outstanding during the nine months ended July 31, 2019 and 2018 was 4.16% and 3.70%, respectively. We were in compliance with our debt covenants as of July 31, 2019.

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

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 July 31, 2019 was $21.2 million and $4.2 million, respectively, including $16.6 million and $2.5 million, respectively, related to warehouse space. Our total obligations under capital leases and other total $15.6 million at July 31, 2019, of which $1.0 million is classified in the current portion of long-term debt and $14.6 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.
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 nine months ended July 31, 2019 and 2018 was as follows:
 
Three Months Ended
 
Nine Months Ended
 
July 31,
 
July 31,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Service cost
$
907

 
$
960

 
$
2,722

 
$
2,932

Interest cost
364

 
279

 
1,092

 
847

Expected return on plan assets
(494
)
 
(543
)
 
(1,483
)
 
(1,630
)
Amortization of net loss
31

 
7

 
94

 
49

Net periodic pension cost
$
808

 
$
703

 
$
2,425

 
$
2,198


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 $0.7 million.
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, 2019 and October 31, 2018, our liability under the supplemental benefit plan was approximately $3.5 million and $3.4 million, respectively. As of July 31, 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:

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

 
Nine Months Ended
 
July 31, 2019
 
(In thousands)
Beginning balance as of November 1, 2018
$
295

Change in accrual for preexisting warranties
(10
)
Warranty costs paid
(15
)
Total accrued warranty as of July 31, 2019
$
270

Less: Current portion of accrued warranty