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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 January 31, 2020
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 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 March 3, 2020 was 32,947,975.
 



QUANEX BUILDING PRODUCTS CORPORATION

INDEX
 
PART I.
 
 
 
Item 1:
Financial Statements (Unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets – January 31, 2020 and October 31, 2019
 
 
 
 
Condensed Consolidated Statements of Income (Loss) – Three Months Ended January 31, 2020 and 2019
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) - Three Months Ended January 31, 2020 and 2019
 
 
 
 
Condensed Consolidated Statements of Cash Flows – Three Months Ended January 31, 2020 and 2019
 
 
 
 
Condensed Consolidated Statement of Stockholders’ Equity – Three Months Ended January 31, 2020 and 2019
 
 
 
 
 
 
 
Item 2:
 
 
 
Item 3:
 
 
 
Item 4:
 
 
 
PART II.
 
 
 
Item 1A:
Risk Factors
 
 
 
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 5:
Other Information
 
 
 
Item 6:



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) 
 
January 31,
2020
 
October 31,
2019
 
(In thousands, except share 
amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
23,114

 
$
30,868

Accounts receivable, net of allowance for doubtful accounts of $549 and $393
64,036

 
82,946

Inventories, net
78,117

 
67,159

Prepaid and other current assets
7,931

 
9,353

Total current assets
173,198

 
190,326

Property, plant and equipment, net of accumulated depreciation of $322,403 and $317,568
192,148

 
193,600

Operating lease right-of-use assets
41,661

 

Goodwill
146,590

 
145,563

Intangible assets, net
104,338

 
107,297

Other assets
9,265

 
8,324

Total assets
$
667,200

 
$
645,110

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
49,092

 
$
63,604

Accrued liabilities
28,982

 
39,221

Income taxes payable
5,265

 
6,183

Current maturities of long-term debt
707

 
746

Current operating lease liabilities
6,532

 

Total current liabilities
90,578

 
109,754

Long-term debt
166,711

 
156,414

Noncurrent operating lease liabilities
35,505

 

Deferred pension and postretirement benefits
11,251

 
13,322

Deferred income taxes
19,741

 
19,363

Other liabilities
13,481

 
16,070

Total liabilities
337,267

 
314,923

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 37,319,866 and 37,370,402, respectively; outstanding 32,963,475 and 33,021,789, respectively
373

 
374

Additional paid-in-capital
252,495

 
254,673

Retained earnings
182,989

 
185,703

Accumulated other comprehensive loss
(29,164
)
 
(33,817
)
Less: Treasury stock at cost, 4,356,391 and 4,348,613 shares, respectively
(76,760
)
 
(76,746
)
Total stockholders’ equity
329,933

 
330,187

Total liabilities and stockholders' equity
$
667,200

 
$
645,110

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

1


QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
January 31,
 
2020
 
2019
 
(In thousands, except per share amounts)
Net sales
$
196,597

 
$
196,808

Cost and expenses:
 
 
 
Cost of sales (excluding depreciation and amortization)
157,427

 
158,557

Selling, general and administrative
24,132

 
28,026

Restructuring charges
153

 
103

Depreciation and amortization
12,905

 
12,572

Operating income (loss)
1,980

 
(2,450
)
Non-operating (expense) income:
 
 
 
Interest expense
(1,582
)
 
(2,442
)
Other, net
36

 
256

Income (loss) before income taxes
434

 
(4,636
)
Income tax (expense) benefit
(424
)
 
987

Net income (loss)
$
10

 
$
(3,649
)
 
 
 
 
Basic earnings (loss) per common share
$

 
$
(0.11
)
 
 
 
 
Diluted earnings (loss) per common share:
$

 
$
(0.11
)
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
Basic
32,861

 
33,098

Diluted
33,078

 
33,098

 
 
 
 
Cash dividends per share
$
0.08

 
$
0.08


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


2


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

 
Three Months Ended
 
January 31,
 
2020
 
2019
 
(In thousands)
Net income (loss)
$
10

 
$
(3,649
)
Other comprehensive income:
 
 
 
Foreign currency translation gain
2,743

 
4,066

Change in pension from net unamortized gain (loss) adjustment (pretax)
2,519

 
(11
)
Change in pension from net unamortized gain (loss) adjustment tax (expense) benefit
(609
)
 
7

Other comprehensive gain
4,653

 
4,062

Comprehensive income
$
4,663

 
$
413


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


3


QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended
 
January 31,
 
2020
 
2019
 
(In thousands)
Operating activities:
 
 
 
Net income (loss)
$
10

 
$
(3,649
)
Adjustments to reconcile net income (loss) to cash used for operating activities:
 
 
 
Depreciation and amortization
12,905

 
12,572

Stock-based compensation
(239
)
 
224

Deferred income tax
(413
)
 
(1,877
)
Other, net
1,096

 
785

Changes in assets and liabilities:
 
 
 
Decrease in accounts receivable
18,641

 
12,679

Increase in inventory
(10,657
)
 
(11,601
)
Decrease in other current assets
1,200

 
15

Decrease in accounts payable
(12,063
)
 
(11,738
)
Decrease in accrued liabilities
(12,519
)
 
(18,850
)
(Decrease) increase in income taxes payable
(936
)
 
422

Increase in deferred pension and postretirement benefits
448

 
684

Decrease in other long-term liabilities
(405
)
 
(27
)
Other, net
(725
)
 
118

Cash used for operating activities
(3,657
)
 
(20,243
)
Investing activities:
 
 
 
Capital expenditures
(9,312
)
 
(6,271
)
Proceeds from disposition of capital assets

 
74

Cash used for investing activities
(9,312
)
 
(6,197
)
Financing activities:
 
 
 
Borrowings under credit facilities
34,500

 
43,000

Repayments of credit facility borrowings
(24,500
)
 
(23,000
)
Repayments of other long-term debt
(285
)
 
(454
)
Common stock dividends paid
(2,659
)
 
(2,675
)
Issuance of common stock
3,075

 
27

Payroll tax paid to settle shares forfeited upon vesting of stock
(454
)
 
(322
)
Purchase of treasury stock
(4,639
)
 
(2,016
)
Cash provided by financing activities
5,038

 
14,560

Effect of exchange rate changes on cash and cash equivalents
177

 
333

Decrease in cash and cash equivalents
(7,754
)
 
(11,547
)
Cash and cash equivalents at beginning of period
30,868

 
29,003

Cash and cash equivalents at end of period
$
23,114

 
$
17,456

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

4


QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Three Months Ended January 31, 2020
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, 2019
$
374

 
$
254,673

 
$
185,703

 
$
(33,817
)
 
$
(76,746
)
 
$
330,187

Net income

 

 
10

 

 

 
10

Foreign currency translation adjustment

 

 

 
2,743

 

 
2,743

Common dividends ($0.08 per share)

 

 
(2,659
)
 

 

 
(2,659
)
Purchase of treasury stock

 

 

 

 
(4,639
)
 
(4,639
)
Change in pension from net unamortized gain (net of tax expense of $609)

 

 

 
1,910

 

 
1,910

Stock-based compensation activity:
 
 
 
 
 
 
 
 
 
 

Stock-based compensation benefit

 
(239
)
 

 

 

 
(239
)
Stock options exercised

 
92

 
(159
)
 

 
3,142

 
3,075

Restricted stock awards granted

 
(1,082
)
 
94

 

 
988

 

Performance share awards vested

 
(495
)
 

 

 
495

 

Other
(1
)
 
(454
)
 

 

 

 
(455
)
Balance at January 31, 2020
$
373

 
$
252,495

 
$
182,989

 
$
(29,164
)
 
$
(76,760
)
 
$
329,933


Three Months Ended January 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



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


5

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, 2019 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, 2019. In our opinion, the accompanying financial statements contain all adjustments (which consist of normal recurring adjustments, except as disclosed herein) necessary to fairly present our financial position, results of operations and cash flows for the interim periods. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year or for any future periods.
In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. We review our estimates on an on-going basis, including those related to impairment of long lived assets and goodwill, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.
Revenue from Contracts with Customers
Revenue recognition
We recognize revenue that reflects only the consideration we expect to receive for product sales upon transfer to customers. Revenue for product sales is recognized when control of the promised products is actually transferred to our customers, and we expect to be entitled to consideration in exchange for such transfer. We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those 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.
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

6

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

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 account for shipping and handling services as fulfillment services; accordingly, freight revenue is combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in Cost of sales in the accompanying Condensed Consolidated Statements of Income.
Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration.
Disaggregation of revenue
We produce a wide variety of products that are used in the fenestration industry, including window spacer systems; extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we produce certain non-fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other products.
The following table summarizes our product sales for the three months ended January 31, 2020 and 2019 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”.

7

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

 
Three Months Ended
 
January 31,
 
2020
 
2019
 
(In thousands)
North American Fenestration:
 
 
 
United States - fenestration
$
96,847

 
$
93,884

International - fenestration
6,434

 
8,207

United States - non-fenestration
4,563

 
3,505

International - non-fenestration
2,608

 
3,453

 
$
110,452

 
$
109,049

European Fenestration:
 
 
 
International - fenestration
$
30,964

 
$
30,724

International - non-fenestration
5,802

 
4,530

 
$
36,766

 
$
35,254

North American Cabinet Components:
 
 
 
United States - fenestration
$
3,147

 
$
3,352

United States - non-fenestration
46,450

 
49,962

International - non-fenestration
447

 
539

 
$
50,044

 
$
53,853

Unallocated Corporate & Other
 
 
 
Eliminations
$
(665
)
 
$
(1,348
)
 
$
(665
)
 
$
(1,348
)
Net sales
$
196,597

 
$
196,808


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 during the three months ended January 31, 2020 and 2019. 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 2020 until we are able to sublet or otherwise exit the lease.
During the year ended October 31, 2019, our North American Cabinet Components segment experienced declines in current and forecasted demand as a result of an industry-wide shift from semi-custom cabinets to stock cabinets, and received notice about a change in strategy at one of our large customers that may result in lower sales volumes in the future. As a result, during the first quarter of fiscal 2020, we began to restructure our operations within that segment by announcing the closure of one of our plants. We incurred severance expense of less than $0.1 million related to this plant closure during the three months ended January 31, 2020 and we expect to incur costs related to additional restructuring activities in future periods.



8

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

2. Leases
Effective November 1, 2019, we adopted Accounting Standards Codification Topic 842, "Leases" (ASC Topic 842), which requires leases to be recognized on the balance sheet. We recognize a right-of-use (ROU) asset and lease liability for each operating and finance lease with a contractual term greater than 12 months at the time of lease inception. We include ROU assets and lease liabilities for leases that exist within other contracts. Leases with an original term of 12 months or less are not recognized on the balance sheet, and the rent expense related to those short-term leases is recognized over the lease term. We do not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class.
We lease certain manufacturing plants, warehouses, office space, vehicles and equipment under finance and operating leases. Lease commencement occurs on the date we take possession or control of the property or equipment. Original terms for our real estate-related leases are generally between five and twenty years. Original terms for equipment-related leases, primarily manufacturing equipment and vehicles, are generally between one and ten years. Some of our leases also include rental escalation clauses. Renewal options are included in the determination of lease payments when management determines the options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital.
If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of our leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable, our estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on information available at lease commencement.
Total lease costs recorded include fixed operating lease costs and variable lease costs. Most of our real estate leases require we pay certain expenses, such as CAM costs, of which the fixed portion is included in operating lease costs. We recognize operating lease costs on a straight-line basis over the lease term. In addition to the above costs, variable lease costs are recognized when probable and are not included in determining the present value of our lease liability.
The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date and initial direct costs. For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each finance lease liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as long-lived assets. Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required.
The table below presents the lease-related assets and liabilities recorded on the balance sheet at January 31, 2020 (in thousands):
Leases
 
Classification
 
January 31, 2020
Assets
 
 
 
 
Operating lease assets
 
Operating lease right-of-use assets
 
$
41,661

Finance lease assets
 
Property, plant and equipment (less accumulated depreciation of $308)
 
16,317

Total lease assets
 
 
 
$
57,978

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Current operating lease liabilities
 
$
6,532

Finance
 
Current maturities of long-term debt
 
975

Noncurrent
 
 
 
 
Operating
 
Noncurrent operating lease liabilities
 
35,505

Finance
 
Long-term debt
 
14,921

Total lease liabilities
 
 
 
$
57,933


The table below presents the components of the lease costs for the three months ended January 31, 2020 (in thousands):

9

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

 
 
Three months ended
 
 
January 31, 2020
Components of lease costs
 
 
Operating lease cost
 
$
2,058

Finance lease cost
 
 
Amortization of leased assets
 
316

Interest on lease liabilities
 
144

Variable lease costs
 
125

Total lease cost
 
$
2,643

The table below presents supplemental cash flow information related to leases for the three months ended January 31, 2020 (in thousands):
 
 
Three months ended
 
 
January 31, 2020
Supplemental Cash Flow Information
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Finance leases - financing cash flows
 
$
322

Finance leases - operating cash flows
 
$
144

Operating leases - operating cash flows
 
$
2,071

 
 
 
Right-of-use assets obtained in exchange for lease liabilities
 
 
Operating leases
 
$
3,082

Finance Leases
 
$


The table below presents the weighted average remaining lease terms and weighted average discount rates for the Company's leases as of January 31, 2020:
 
 
January 31, 2020
Weighted average remaining lease term (in years)
 
 
Operating leases
 
8.2

Financing leases
 
16.4

 
 
 
Weighted average discount rate
 
 
Operating leases
 
4.08
%
Financing leases
 
3.64
%

The table below presents the maturity of the lease liabilities as of January 31, 2020 (in thousands):

10

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

 
 
Operating Leases
 
Finance Leases
 
 
(in thousands)
2020 (remaining nine months)
 
$
6,141

 
$
1,177

2021
 
7,195

 
1,425

2022
 
6,531

 
1,391

2023
 
6,220

 
1,294

2024
 
5,516

 
1,190

Thereafter
 
17,730

 
14,208

Total lease payments
 
49,333

 
20,685

Less: present value discount
 
7,296

 
4,789

Total lease liabilities
 
$
42,037

 
$
15,896


As a result of the adoption of ASC Topic 842, we are required to present future minimum lease payments for operating and financing obligations having initial or remaining non-cancelable lease terms in excess of one year. These future minimum lease payments were previously disclosed in our 2019 Annual Report on Form 10-K and accounted for under previous lease guidance. Commitments as of October 31, 2019 were as follows:
 
 
Operating Leases
 
Capital Leases
 
 
(in thousands)
2020
 
$
9,121

 
$
1,020

2021
 
6,981

 
810

2022
 
6,012

 
815

2023
 
5,506

 
973

2024
 
4,699

 
713

Thereafter
 
15,220

 
11,392

Total
 
47,539

 
15,723

Less: amount representing interest
 
 
 
5,064

Present value of minimum lease payments
 
 
 
10,659



3. Inventories
Inventories consisted of the following at January 31, 2020 and October 31, 2019:
 
January 31,
2020
 
October 31,
2019
 
(In thousands)
Raw materials
$
40,423

 
$
32,818

Finished goods and work in process
39,461

 
35,538

Supplies and other
2,644

 
2,593

Total
82,528

 
70,949

Less: Inventory reserves
4,411

 
3,790

Inventories, net
$
78,117

 
$
67,159


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.
4. Goodwill and Intangible Assets
Goodwill

11

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

The change in the carrying amount of goodwill for the three months ended January 31, 2020 was as follows:
 
Three Months Ended
 
January 31, 2020
 
(In thousands)
Beginning balance as of November 1, 2019
$
145,563

Foreign currency translation adjustment
1,027

Balance as of the end of the period
$
146,590


During the year ended October 31, 2019, we recorded impairment charges of $74.6 million associated with our NA Cabinet Components segment, which reduced the goodwill balance applicable to this reporting unit from $113.7 million to $39.1 million. Our other reporting units were not deemed to be impaired at our annual goodwill impairment testing date, August 31, 2019. As of January 31, 2020, there were no further indicators of impairment. Should our actual results for our NA Cabinet Components operating segment be lower than expected in the future, the corresponding goodwill could become impaired and the impairment could be material. 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 January 31, 2020 and October 31, 2019:
 
January 31, 2020
 
October 31, 2019
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
(In thousands)
Customer relationships
$
154,727

 
$
73,029

 
$
153,950

 
$
70,103

Trademarks and trade names
55,988

 
35,811

 
55,745

 
35,210

Patents and other technology
22,397

 
19,934

 
22,386

 
19,471

Total
$
233,112

 
$
128,774

 
$
232,081

 
$
124,784


We had aggregate amortization expense related to intangible assets for the three months ended January 31, 2020 of $3.7 million and $4.0 million for the comparable prior year period.
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
2020 (remaining nine months)
$
10,594

2021
12,619

2022
11,998

2023
11,251

2024
10,520

Thereafter
47,356

Total
$
104,338




12

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

5. Debt and Capital Lease Obligations
Debt consisted of the following at January 31, 2020 and October 31, 2019:
 
January 31,
2020
 
October 31,
2019
 
(In thousands)
Revolving Credit Facility
$
152,500

 
$
142,500

Finance lease obligations and other
16,047

 
15,865

Unamortized deferred financing fees
(1,129
)
 
(1,205
)
Total debt
$
167,418

 
$
157,160

Less: Current maturities of long-term debt
707

 
746

Long-term debt
$
166,711

 
$
156,414


As more fully described in our Annual Report on Form 10-K for the year ended October 31, 2019, 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. The Credit Facility contains appropriate provisions to substitute LIBOR with a replacement rate if necessary. 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 January 31, 2020, we had $152.5 million of borrowings outstanding under the Credit Agreement (reduced by unamortized debt issuance costs of $1.1 million), $4.8 million of outstanding letters of credit and $16.0 million outstanding primarily under finance leases and other debt. We had $167.7 million available for use under the Credit Agreement at January 31, 2020. Outstanding borrowings under the Credit Agreement accrue interest at 3.15% per annum. Our weighted average borrowing rate for borrowings outstanding during the three months ended January 31, 2020 and 2019 was 3.27% and 4.03%, respectively. We were in compliance with our debt covenants as of January 31, 2020.
Other Debt Instruments
We maintain certain finance lease obligations related to equipment purchases, vehicles, and warehouse space. Refer to Note 2, "Leases" for further information regarding our finance leases.

13

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

6. 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 months ended January 31, 2020 and 2019 was as follows:
 
Three Months Ended
 
January 31,
 
2020
 
2019
 
(In thousands)
Service cost
$
538

 
$
977

Interest cost
293

 
283

Expected return on plan assets
(491
)
 
(543
)
Amortization of net loss
108

 
16

Net periodic pension cost
$
448

 
$
733


On January 1, 2020, we enacted changes to our pension plan whereby the benefits for all participants were frozen and thereafter those participants will receive increased benefits in the company sponsored defined contribution plan in lieu of participation in a defined benefit plan. As a result of this action, we have remeasured the pension assets and obligations for the pension plan as of December 31, 2019. This resulted in a decrease in our projected benefit obligation and recognition of a net actuarial gain of approximately $2.5 million that was recorded in accumulated other comprehensive income. The decrease in the projected benefit obligation was impacted by our asset performance through December 31, 2019, the impact of the pension plan freeze and an increase in the discount rate since October 31, 2019.
The remeasurement described above is in addition to our annual year-end measurement of the funded status of our benefit plans that we will record as of October 31, 2020. As a result, the change in our pension benefit obligation and net actuarial loss will differ from the $2.5 million discussed above primarily as a result of any changes in interest rates and actual asset performance different from our expected return on assets during the year.
During September 2019, we contributed $0.7 million to fund our plan, and we expect to make a contribution to our plan in September 2020 of approximately $3.7 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 January 31, 2020 and October 31, 2019, our liability under the supplemental benefit plan was approximately $4.3 million and $4.2 million, respectively. As of January 31, 2020 and October 31, 2019, the liability associated with the deferred compensation plan was approximately $3.7 million and $3.8 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.
7. Warranty Obligations
We accrue warranty obligations as we recognize revenue associated with certain products. We make provisions for our warranty obligations based upon historical experience of costs incurred for such obligations adjusted, as necessary, for current conditions and factors. 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:

14

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

 
Three Months Ended
 
January 31, 2020
 
(In thousands)
Beginning balance as of November 1, 2019
$
260

Warranty costs paid
(20
)
Total accrued warranty as of January 31, 2020
$
240

Less: Current portion of accrued warranty
136

Long-term portion of accrued warranty
$
104


8. 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 three months ended January 31, 2020 and 2019 was 20.5% and 24.0%, respectively, excluding discrete items. The 2020 effective rate was impacted by an additional discrete charge of $0.4 million related to the vesting or exercise of equity-based compensation awards.
The 2019 effective rate was primarily impacted by a net charge of $1.4 million related to global intangible low-taxed income and foreign-derived intangible income, as well as discrete charges of $0.6 million for the adjustment of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings and $0.3 million related to the vesting or exercise of equity-based compensation awards.
As of January 31, 2020, 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 disallowance of the UTP would not materially affect the annual effective tax rate. We do not believe any of the UTP at January 31, 2020 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 maintain a valuation allowance for certain state net operating losses which totaled $1.6 million at January 31, 2020 and October 31, 2019.
Final regulations were published by the Internal Revenue Service and U.S. Department of the Treasury regarding Uniform Capitalization (UNICAP) that became effective during fiscal 2020. We are evaluating the regulations but do not believe there will be a material impact on our consolidated financial statements.
10. 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 2020. While we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows.


Litigation

15

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

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. 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.
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.
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
As of January 31, 2020 and October 31, 2019, foreign currency derivatives were being measured on a recurring basis. Less than $0.1 million of foreign currency derivatives were included in total assets as of January 31, 2020 and October 31, 2019. 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 January 31, 2020, and October 31, 2019 (Level 2 measurement).
The liability portion of our performance share awards are marked-to-market on a quarterly basis during a three-year vesting period based on market data (Level 2 measurement). For further information, refer to Note 11, "Stock-Based Compensation -Performance Share Awards."
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

16

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

shareholders. In February 2020, shareholders authorized an increase of 1,300,000 shares for grant under a new 2020 plan, which became effective at that time. 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 restricted stock awards, restricted stock units, performance shares and/or performance restricted stock units to officers, management and key employees. We also historically granted stock options to certain officers, directors and key employees. Occasionally, we may make additional grants to key employees at other times during the year.
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 three months ended January 31, 2020 is presented below:
 
Restricted Stock Awards
 
Weighted Average
Grant Date Fair Value per Share
Non-vested at October 31, 2019
230,100

 
$
17.02

Granted
56,000

 
$
19.40

Forfeited
(27,300
)
 
$
17.31

Vested
(55,000
)
 
$
19.45

Non-vested at January 31, 2020
203,800

 
$
16.98

The total weighted average grant-date fair value of restricted stock awards that vested during each of the three month periods ended January 31, 2020 and 2019 was $1.1 million and $1.3 million, respectively. As of January 31, 2020, total unrecognized compensation cost related to unamortized restricted stock awards was $2.2 million. We expect to recognize this expense over the remaining weighted average vesting period of 2.2 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 years ended October 31, 2018, 2019 or during the three months ended January 31, 2020. Employee stock options typically vest ratably over a three-year period with service and continued employment as the vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of the stock options is determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital. For employees who are nearing retirement-eligibility, we recognize stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date.
We use 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, 2019.

17

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

The following table summarizes our stock option activity for the three months ended January 31, 2020:
 
Stock Options
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining Contractual
Term (in years)
 
Aggregate
Intrinsic
Value (000s)
Outstanding at October 31, 2019
1,416,186

 
$
18.71

 
 
 
 
Granted

 
$

 
 
 
 
Exercised
(178,033
)
 
$
16.93

 
 
 
 
Forfeited/Expired
(58,734
)
 
$
20.61

 
 
 
 
Outstanding at January 31, 2020
1,179,419

 
$
18.89

 
4.2
 
$
395

Vested or expected to vest at January 31, 2020
1,179,419

 
$
18.89

 
4.2
 
$
395

Exercisable at January 31, 2020
1,179,419

 
$
18.89

 
4.2
 
$
395


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 three months ended January 31, 2020 and 2019 was $0.5 million and less than $0.1 million, respectively. The weighted-average grant date fair value of stock options that vested during the three months ended January 31, 2020 and 2019 was $0.4 million and $1.1 million, respectively. As of January 31, 2020, all compensation cost related to stock options has been recognized.
Restricted Stock Units
Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee directors. The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date. Restricted stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued employment as the vesting conditions. Restricted stock units are not considered outstanding shares and do not have voting rights, although the holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares. Once the criteria is met, each restricted stock unit is payable to the holder in cash based on the market value of one share of our common stock. Accordingly, we record a liability for the restricted stock units on our balance sheet and recognize any changes in the market value during each reporting period as compensation expense.
During the three months ended January 31, 2020 and 2019, non-employee directors received 25,326 and 25,920 restricted stock units, respectively, at a grant date fair value of $19.02 per share and $15.31 per share, respectively, which vested immediately. As of January 31, 2020, there were 26,390 non-vested restricted stock units, which were awarded in June 2019 and January 2020 to key employees at a weighted average grant date fair value of $17.01. During the three months ended January 31, 2019, we paid approximately $0.1 million to settle previously vested restricted stock units; there were no corresponding payments to settle vested restricted stock units during the three months ended January 31, 2020.
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 and 2020 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).
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

18

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

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
December 7, 2017
 
146,500

 
$
20.70

 
$
21.81

 
$

 
46,608

December 5, 2018
 
131,500

 
$

 
$

 
$
13.63

 
33,500

December 5, 2019
 
55,900

 
$

 
$

 
$
19.40

 


On November 30, 2019, a total of 56,103 shares vested pursuant to the November 2016 grant, which were settled with 28,051 shares of common stock and a cash payment of $0.6 million. We recorded a decrease in compensation expense of $0.5 million for the three months ended January 31, 2020 related to the expected payout of our performance share awards that are outstanding as of January 31, 2020. During the three months ended January 31, 2019, we recorded a decrease in compensation expense of $0.3 million related to the expected payouts of performance share awards that were outstanding as of January 31, 2019.
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 January 31, 2020, we have deemed 18,730 shares related to the December 2017 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 0% and a maximum of 150% of the awarded performance restricted stock units may vest. Specifically, the awards vest on a continuum with the following Absolute Total Shareholder Return (A-TSR) milestones:
Vesting Level
 
Vesting Criteria
 
Percentage of Award Vested
Level 1
 
A-TSR greater than or equal to 50%
 
150%
Level 2
 
A-TSR less than 50% and greater than or equal to 20%
 
100%
Level 3
 
A-TSR less than 20% and greater than or equal to -20%
 
50%
Level 4
 
A-TSR less than -20%
 
%

The following table summarizes our performance restricted stock unit grants and the grant date fair value for the A-TSR performance metric:
Grant Date
 
Shares Awarded
 
Grand Date Fair Value
 
Shares Forfeited
December 7, 2017
 
78,200

 
$
17.76

 
24,854

December 5, 2018
 
89,200

 
$
13.63

 
25,500

December 5, 2019
 
35,000

 
$
19.40

 



19

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

During the three months ended January 31, 2020, we recorded compensation expense of approximately $0.1 million and $0.2 million, respectively, for the comparable prior year period related to our performance share restricted units.
Similar to performance shares, the performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares. As of January 31, 2020, we have deemed 28,449 shares related to the December 2017 grants of performance restricted stock units as probable to vest.
Treasury Shares
We record treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Shares are generally issued from treasury stock at the time of grant of restricted stock awards, upon the exercise of stock options, and upon the vesting of performance shares and performance restricted stock units. On the subsequent issuance of treasury shares, we record proceeds in excess of cost as an increase in additional paid in capital. A deficiency of such proceeds relative to costs would be applied to reduce paid-in-capital associated with prior issuances to the extent available, with the remainder recorded as a charge to retained earnings. We recorded a charge to retained earnings of $0.1 million during the three months ended January 31, 2020.
The following table summarizes the treasury stock activity during the three months ended January 31, 2020:
 
Three Months Ended
 
January 31, 2020
Beginning balance as of November 1, 2019
4,348,613

Restricted stock awards granted
(56,000
)
Performance share awards vested
(28,051
)
Stock options exercised
(178,033
)
Treasury stock repurchases
269,862

Balance at January 31, 2020
4,356,391


12. Other Income
Other income, included under the caption "Other, net" on the accompanying condensed consolidated statements of income (loss), consisted of the following for the three months ended January 31, 2020 and 2019:
 
Three Months Ended
 
January 31,
 
2020
 
2019
 
(In thousands)
Foreign currency transaction losses
$
(49
)
 
$
(32
)
Foreign currency derivative (losses) gains
(11
)
 
11

Pension service benefit
90

 
244

Interest income
5

 
30

Other
1

 
3

Other, net
$
36

 
$
256



20

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

13. Segment Information
We present three reportable business segments in accordance with ASC Topic 280-10-50, "Segment Reporting" (ASC 280): (1) North American Fenestration segment (NA Fenestration), comprising three operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens & other fenestration components; (2) European Fenestration segment (EU Fenestration), comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles & conservatories, and the European insulating glass business manufacturing insulating glass spacers; and (3) North American Cabinet Components segment (NA Cabinet Components), comprising our cabinet door and components operations. We maintain an Unallocated Corporate & Other grouping which includes corporate office charges, and inter-segment eliminations, less an allocation of a portion of the general and administrative costs associated with the corporate office which have been allocated to the reportable business segments, based upon relative share of revenue, in order to more accurately reflect each reportable business segment's administrative cost. Certain costs are not allocated to the reportable operating segments, but remain in Unallocated Corporate & Other, including transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance and legal costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes, inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. The accounting policies of our operating segments are the same as those used to prepare the accompanying condensed consolidated financial statements. Corporate general and administrative expense allocated during the three month period ended January 31, 2020 was $5.5 million and $4.8 million for the prior year comparable period.
ASC 280 permits aggregation of operating segments based on factors including, but not limited to: (1) similar nature of products serving the building products industry, primarily the fenestration business; (2) similar production processes, although there are some differences in the amount of automation amongst operating plants; (3) similar types or classes of customers, namely the primary OEMs; (4) similar distribution methods for product delivery, although the extent of the use of third-party distributors will vary amongst the businesses; (5) similar regulatory environment; and (6) converging long-term economic similarities.
Segment information for the three months ended January 31, 2020 and 2019, and total assets as of January 31, 2020 and October 31, 2019 are summarized in the following table (in thousands):
 
NA Fenestration
 
EU Fenestration
 
NA Cabinet Comp.
 
Unallocated Corp. & Other
 
Total
Three Months Ended January 31, 2020
 
 
 
 
 
 
 
 
 
Net sales
$
110,452

 
$
36,766

 
$
50,044

 
$
(665
)
 
$
196,597

Depreciation and amortization
6,979

 
2,408

 
3,402

 
116

 
12,905

Operating income (loss)
1,631

 
3,164

 
(2,115
)
 
(700
)
 
1,980

Capital expenditures
6,928

 
1,219

 
1,075

 
90

 
9,312

Three Months Ended January 31, 2019
 
 
 
 
 
 
 
 
 
Net sales
$
109,049

 
$
35,254

 
$
53,853

 
$
(1,348
)
 
$
196,808

Depreciation and amortization
6,873

 
2,236

 
3,339

 
124

 
12,572