What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-12-11 compared with 2019-12-12 · 214 added, 203 removed, 342 unchanged (55% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis contains forward-looking statements based on our current assumptions, expectations, estimates and projections about our business and the homebuilding industry, and therefore, it should be read in conjunction with our consolidated financial statements and related notes thereto, as well as "Cautionary Note Regarding Forward-Looking Statements" discussed elsewhere within this Annual Report on Form 10-K.

The following discussion and analysis contains forward-looking statements based on our current assumptions, expectations, estimates and projections about our business and the homebuilding industry, and therefore, it should be read in conjunction with our consolidated financial statements and related notes thereto, as well as the "Cautionary Note Regarding Forward-Looking Statements" discussed elsewhere within this Annual Report on Form 10-K.

For a listing of potential risks and uncertainties which impact our business and industry, see "Item 1A.

Risk Factors." Actual results could differ from our expectations due to several factors which include, but are not limited to:

market price and demand for our products, economic and competitive conditions, capital expenditures, new technology, regulatory changes and other uncertainties.

the impact of the ongoing COVID-19 pandemic, market price and demand for our products, economic and competitive conditions, capital expenditures, new technology, regulatory changes and other uncertainties.

Unless otherwise required by law, we undertake no obligation to publicly update any forward-looking statements, even if new information becomes available or other events occur in the future.

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We currently have three reportable business segments:

(1) North American Fenestration segment (“NA Fenestration”), comprising four operating segments primarily focused on the fenestration market in North America manufacturing vinyl profiles, IG spacers, screens & other fenestration components;

(1) North American Fenestration segment (“NA Fenestration”), comprising three operating segments, manufacturing vinyl profiles, IG spacers, screens and other fenestration components;

(2) European Fenestration segment (“EU Fenestration”), comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles and conservatories, and the European insulating glass business manufacturing IG spacers;

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Notable Items

During 2017, we rationalized capacity and closed two U.S.

vinyl plants and two cabinet door plants, relocating assets to improve overall operational efficiency.

We have incurred $0.4 million, $1.5 million and $4.6 million of expense associated with these restructuring efforts during fiscal 2019, 2018 and 2017, respectively, and recognized $6.2 million of accelerated depreciation and amortization associated with related assets during fiscal 2017.

COVID-19 Impacts

On March 11, 2020, the World Health Organization,(WHO), declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures.

Our first priority with regard to the COVID-19 pandemic is to do everything we can to ensure the safety, health and welfare of our employees, customers, suppliers and other partners.

With the implementation of health and safety practices at our facilities, we are continuing to supply the industry during this uncertain time, recognizing the essential role the construction industry plays in providing housing and necessary infrastructure.

As federal, state and local governments react to the public health crisis, significant uncertainties have been created in the economy.

The COVID-19 pandemic and its related effects continue to have a significant adverse effect on many sectors of the economy and we may be further impacted.

As part of our response to the COVID-19 pandemic, we have taken the following measures:

• We are continuing to provide our products to support critical infrastructure needs while following national, state, and local guidelines required to continue operations during the existence of the pandemic and related local declarations of emergency.

All manufacturing facilities in the United States and Germany remained operational for the duration of the pandemic while both U.K.

plants shut down in late March 2020 and became operational again during May 2020.

However, local or regional hotspots of the pandemic could result in other locations being temporarily idled due to the need to deep clean areas where an employee who has tested positive for COVID-19 worked.

• While we currently expect any negative impact on sales to be temporary and minimal, the duration of the COVID-19 pandemic, the actions to contain the pandemic and treat its impacts, and the effects on our operations are highly uncertain and cannot be predicted at this time.

• We reassessed and adjusted our operational needs, including reducing our 2020 capital expenditure plans by approximately 25% to 30%.

• We have taken precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring some employees to work remotely.

• We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations.

In these circumstances, there may be developments outside our control requiring us to adjust our operating plan.

Tax Cuts and Job Act

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the Act) that included sweeping tax reform which affected U.S.

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We completed the accounting for the income tax effects of the Act and recorded a charge of $0.4 million for the re-measurement of the one-time mandatory transition tax during the year ended October 31, 2019.

also imposed additional tax law changes that became effective during fiscal 2019, which include new requirements for a global intangible low-taxed income provision (GILTI) and a deduction for foreign-derived intangible income (FDII), which resulted in a net charge of $1.2 million during the year ended October 31, 2019.

The Act also imposed additional tax law changes that became effective during fiscal 2019, which include new requirements for a global intangible low-taxed income provision (GILTI) and a deduction for foreign-derived intangible income (FDII), which resulted in a net charge of $1.2 million during the year ended October 31, 2019.

Market Overview and Outlook

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We believe that housing starts and window shipments are indicators of activity levels in the homebuilding and window industries, and we use this data, as published by or derived from third-party sources, to evaluate the market.

We have historically evaluated the market using data from the National Association of Homebuilders (NAHB) with regard to housing starts, and published reports by Ducker Worldwide, LLC (Ducker), a consulting and research firm, with regard to window shipments.

These sources generally provide information about activity levels in the U.S.

The NAHB has forecasted calendar-year housing starts (excluding manufactured units) to increase slightly through 2021.

Ducker indicated that window shipments in the R&R market are expected to decline slightly during the calendar year ended 2019, increase 2% during 2020 and increase 3% during 2021.

Derived from reports published by Ducker, the overall decline in window shipments for the trailing twelve months ended September 30, 2019 was 1.6%.

During this period, R&R activity and new construction decreased 0.9% and 2.5%, respectively.

vinyl business (commonly referred to as "HLP") is largely focused on the sale of vinyl house systems under the trade name “Liniar” to smaller window manufacturers in the U.K.

HLP is one of the larger providers of vinyl extruded products in the U.K.

We obtain market data from Catalina research, a consulting and research firm, for insight into the U.S.

residential wood cabinet demand.

In November 2020, the NAHB forecasted calendar-year housing starts (excluding manufactured units) to be 1.4 million in 2020, 1.3 million in 2021, and 1.4 million in 2022.

The November 2020 Ducker forecast indicated that window shipments in the R&R market are expected to decrease approximately 1% for calendar year 2020 and increase 2% and 3% in 2021 and 2022, respectively.

Derived from reports published by Ducker, the overall decrease in window shipments for the trailing twelve months ended September 30, 2020 was 0.3%.

During this period, new construction activities increased 1.1% and R&R decreased 1.4%.

In November 2020, Catalina Research estimated that residential semi-custom cabinet demand in the U.S.

will decline approximately 6% in 2020, however, 2021 is estimated to grow 3.7%.

In line with market forecasts, we expect that some sales originally planned for the year ended October 31, 2020 may be realized during the years ended October 31, 2021 and 2022.

vinyl business (commonly referred to as "Liniar") is largely focused on the sale of vinyl house systems under the trade name “Liniar” to smaller window manufacturers in the U.K.

Liniar is one of the larger providers of vinyl extruded products in the U.K.

in terms of volume shipped.

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is experiencing a shortage in affordable housing, with rising demand due in part to a growing immigrant population.

HLP’s current primary customers are smaller window fabricators, as opposed to the larger OEMs that comprise a large portion of the North American market.

Liniar’s current primary customers are smaller window fabricators, as opposed to the larger OEMs that comprise a large portion of the North American market.

These manufacturers seek the quality and technology of the specific products identified by the Liniar trade name.

In addition, HLP services non-fenestration markets including the manufacture of roofing for conservatories, vinyl decking and vinyl water retention barriers used for landscaping.

In addition, Liniar services non-fenestration markets including the manufacture of roofing for conservatories, vinyl decking and vinyl water retention barriers

used for landscaping.

We believe there are growth opportunities within these markets in the U.K.

and potential synergies which may enable us to sell complementary products.

Woodcraft manufactures kitchen and bathroom cabinet doors and components, amongst other products, using a variety of woods from traditional hardwoods to engineered wood products.

Currently, Woodcraft sells all of its products in the U.S., so domestic housing starts and R&R activity constitute the primary drivers of this business as well.

We also utilize industry publications to evaluate the wood markets and commodity trends.

Although NAHB forecasts indicate expected continued growth in the U.S.

housing market, much of this anticipated growth is in new construction for multi-family dwellings, or rental properties, which is not the primary market for Woodcraft’s products.

In recent years, forecasts project increased growth in single family homes.

NA Cabinet Components manufactures kitchen and bathroom cabinet doors and components, amongst other products, using a variety of woods from traditional hardwoods to engineered wood products.

Currently, most of the revenue in the NA Cabinet Components is earned in the U.S., so domestic housing starts and R&R activity constitute the primary drivers of this business as well.

The cabinet door market is stratified as follows:

stock (low-cost, low-variations), semi-custom (more customized, just-in-time manufacturing, higher price point) and custom (precise customer specifications, just-in-time manufacturing, high-end price point).

Woodcraft's primary market is semi-custom.

NA Cabinet Component's primary market is semi-custom.

Our business is seasonal, particularly our fenestration business, as inclement weather during the winter months tends to slow down construction, particularly as related to “outside of the house” construction.

To some extent, we believe our kitchen and bathroom cabinet door business lessens the impact of seasonality on our operating results, as the cabinet business is “inside of the house” and less susceptible to weather.

However, significant weather events do disrupt the construction industry.

The Southern U.S.

was impacted by Hurricane Michael in October 2018 and Hurricanes Harvey and Irma in August and September of 2017.

Although our operating plants were not directly impacted, several of our customers were impacted directly, as well as indirectly, as some skilled laborers relocated to the region for construction jobs.

From a longer-term perspective, the rebuilding efforts from these storms spur additional growth in construction beyond the year in which they make landfall.

We are impacted by regulation of energy standards.

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government has been less aggressively pursuing higher energy efficiency standards in recent years, other countries have implemented higher energy efficiency standards which should bode well for our fenestration-related business in these markets, particularly our warm-edge spacer products.

We utilize several commodities in our business for which pricing can fluctuate, including polyvinyl resin (PVC), petroleum products, aluminum, titanium dioxide (TIO2), silicone and wood.

For the majority of our customers and critical suppliers, we have price adjusters in place which effectively share the base pass-through price changes for these commodities with our customers commensurate with the market at large.

Several commodities in our business are subject to pricing fluctuations, including polyvinyl resin (PVC), titanium dioxide (TiO2), petroleum products, aluminum and wood.

For the majority of our customers and critical suppliers, we have price adjusters in place which effectively share the base pass-through price changes for our primary commodities with our customers commensurate with the market at large.

Our long-term exposure to these price fluctuations is somewhat mitigated due to the contractual component of the adjuster program.

However, these adjusters are not in place with all customers, and there is a level of exposure to such volatility due to the lag associated with the timing of price updates in accordance with our customer agreements.

In July 2016, the U.K.

voted to exit the European Union (commonly referred to as “Brexit”), which has impacted the valuation of the British Pound Sterling relative to other currencies used in our business, including our reporting currency, the United States Dollar.

The Pound remains well below the pre-Brexit level, and some general market uncertainty remains in the U.K.

Although we do not know the long-term effects of this change, there has been some impact on our results of operations to date (primarily foreign currency translation).

The global economy remains uncertain due to currency devaluations, political unrest, terror threats, and even the political landscape in the U.S.

However, these adjusters are not in place with all customers and for all commodities, and there is a level of exposure to such volatility due to the lag associated with the timing of price updates in accordance with our customer agreements, particularly with regard to hardwoods.

In addition, some of these commodities, such as silicone, are in high demand, particularly in Europe, which can affect the cost of the raw materials, a portion of which we may not be able to fully recover.

Thus far we have not experienced any supply or logistics disruptions as lower demand has not required us to source the same level of supply.

On June 23, 2016, citizens of the U.K.

voted to exit the European Union (E.U.) (referred to as Brexit).

In October 2019, the U.K.

ratified a withdrawal agreement, and subsequently the U.K.

left the E.U.

on January 31, 2020.

A transition period is in place until December 31, 2020 while the U.K.

negotiate additional arrangements.

The current E.U.

rules for trade, travel, and business for the U.K.

will lapse on December 31, 2020 with any new rules taking effect January 1, 2021.

Given the lack of comparable precedent, it is difficult for us to predict the future impacts on our U.K.

based operations, which accounted for approximately 15% of our total sales for the year ended October 31, 2020.

Due to the fact that we manufacture and sell a majority of our U.K.

products within the U.K., there is minimal risk to our ability to physically deliver goods and complete sales.

As such, we believe we are well positioned within the U.K.

to respond to potential changes to underlying demand as a result of the final Brexit outcome.

The primary risk mitigation focus for our U.K.

operations centers on the availability and pricing of raw materials.

While we source the majority of our raw materials from within the U.K., many of the primary upstream raw materials our vendors use are being sourced from outside of the U.K., which could expose us to cross-border issues and raw material price impacts.

We will mitigate this potential impact of Brexit on the import of goods to the U.K.

by strategically managing our inventory levels and logistical channels.

In February 2020, the U.K.

announced its intention to introduce border controls and our U.K.

businesses have positioned themselves well to cope with additional demands and tariffs that this will bring in order to comply and facilitate the flow of goods in and out of the U.K.

We are still clarifying what the impact of associated tariffs could be.

The global economy remains uncertain due to currency devaluations, political unrest, terror threats, global pandemics such as COVID-19, and even the political landscape in the U.S.

These and other macro-economic factors have impacted the global financial markets, which may have contributed to significant changes in foreign currencies.

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For the Years Ended October 31,

2020 2019 2020 vs.

Amounts % of Sales Amounts % of Sales $ Change Variance %

(Dollars in millions)

Net sales $ 851.6 100% $ 893.8 100% $ (42.2) (5)%

Cost of sales (excluding depreciation and amortization) 658.8 77% 694.4 78% (35.6) 5%

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Asset impairment charges — —% 74.6 8% (74.6) 100%

Operating income

Operating income (loss) 55.3 6% (26.4) (3)% 81.7 309%

Interest expense (5.2) (1)% (9.6) (1)% 4.4 46%

Income tax (expense) benefit

Net (loss) income

Other, net 0.2 —% 0.1 —% 0.1 100%

Income tax expense (11.8) (1)% (10.8) (1)% (1.0) (9)%

Net income (loss) $ 38.5 5% $ (46.7) (5)% $ 85.2 182%

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

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For the Years Ended October 31,

2020 2019 $ Change Variance %

(Dollars in millions)

Net sales $ 483.4 $ 503.8 $ (20.4) (4)%

Cost of sales (excluding depreciation and amortization) 371.8 386.2 (14.4) 4%

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Operating income margin 8 % 8 %

Net sales increased $18.4 million , or 4% , for the twelve months ended October 31, 2019 compared to the same period in 2018 .

We experienced an increase of $10.0 million related to price, $7.2 million of revenue growth driven both by new volume and market growth, and an increase of $1.2 million related to surcharges.

Net sales decreased $20.4 million, or 4%, for the twelve months ended October 31, 2020 compared to the same period in 2019, which was primarily driven by a decrease in volumes of $22.9 million, which includes the impacts of COVID-19.

The decrease in volume was partially offset by increases in prices and surcharges of $2.5 million.

Cost of Sales.

Cost of sales increased $14.2 million , or 4% , for the twelve months ended October 31, 2019 compared to the same period in 2018 .

Cost of sales increased due to the corresponding increase in volume coupled with inflationary cost increases.

A portion of the raw material increases are recovered through surcharges.

Cost of sales decreased $14.4 million, or 4%, for the twelve months ended October 31, 2020 compared to the same period in 2019.

Cost of sales decreased due to lower volumes during the period, including a corresponding decrease in selling expenses as a result of the impacts of COVID-19 as mentioned above.

Selling, General and Administrative.

Our selling, general and administrative expenses decreased by $2.6 million, or 5%, for the twelve months ended October 31, 2020 compared to the same period in 2019.

This decrease was due primarily to lower compensation expenses as a result of a reduction in headcount.

This decrease was due primarily to lower general expenses due to COVID-19 restrictions and lower compensation and benefits year-over-year.

Restructuring Charges.

Restructuring charges of $0.4 million incurred during the twelve months ended October 31, 2019 primarily relate to facility lease expense related to a vinyl extrusion plant which was closed in January 2017 in the U.S.

that has not been sublet or otherwise exited as of October 31, 2019 .

Restructuring charges of $1.4 million incurred for the twelve months ended October 31, 2018 relate to two such plants in the prior year.

Restructuring charges incurred during the twelve months ended October 31, 2020 and 2019 relate to facility lease expense for a vinyl extrusion plant in the U.S.

which was closed in January 2017 that has not been sublet or otherwise exited as of October 31, 2020.

EU Fenestration

For the Years Ended October 31,

2020 2019 $ Change Variance %

(Dollars in millions)

Net sales $ 161.1 $ 164.9 $ (3.8) (2)%

Cost of sales (excluding depreciation and amortization) 108.8 114.1 (5.3) 5%

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Operating income margin 12 % 12 %

Net sales increased $4.9 million , or 3% , when comparing the twelve months ended October 31, 2019 compared to the same period in 2018 .

This increase reflects $7.4 million of volume increases and $6.2 million of base price increases, partially offset by $8.7 million of unfavorable foreign currency rate changes.

Net sales decreased $3.8 million, or 2%, when comparing the twelve months ended October 31, 2020 compared to the same period in 2019.

A decrease in volumes of $5.5 million year-over-year, which includes of the impacts of COVID-19 was partially offset by $1.1 million of base price increases and $0.6 million of favorable foreign currency rate changes.

Cost of Sales .

The cost of sales decreased $5.3 million for the twelve months ended October 31, 2020 compared to the same period in 2019.

This decrease is primarily related to the impact of foreign currency rate changes during the period.

Cost of sales decreased due to lower volumes during the period, including a corresponding decrease in selling expenses as a result of the impacts of COVID-19 as mentioned above.

Selling, General and Administrative .

Our selling, general and administrative expense increased $0.2 million for the twelve months ended October 31, 2019 compared to the same period in 2018 due to increased marketing expenses, which were offset by foreign currency rate changes.

Depreciation and Amortization .

Depreciation and amortization expense decreased $0.8 million for the twelve months ended October 31, 2019 compared to the same period in 2018 due to foreign currency rate changes coupled with the run-off of depreciation expense.

Our selling, general and administrative expense decreased $0.3 million for the twelve months ended October 31, 2020 compared to the same period in 2019.

The decrease is due to savings incurred from reduced marketing and other general expenses as a result of COVID-19 restrictions, reimbursements for labor costs in the U.K.

from government aid for COVID-19 furloughs, and lower incentive compensation.

NA Cabinet Components

For the Years Ended October 31,

2020 2019 $ Change Variance %

(Dollars in millions)

Net sales $ 210.1 $ 229.6 $ (19.5) (8)%

Cost of sales (excluding depreciation and amortization) 179.8 197.2 (17.4) 9%

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Net sales decreased $19.5 million for the twelve months ended October 31, 2020 compared to the same period in 2019.

On a year-over-year basis, we realized a decrease of $23.7 million as a result of lower volumes primarily related to the industry shift from semi-custom to stock cabinets, which was partially offset by $3.5 million of price increases and raw material surcharges.

Approximately $14.0 million of the decrease in sales was due to lower volume related to customer strategic shifts and the impacts of COVID-19.

Sales declined an additional $5.5 million due to lower price impacts.

Cost of Sales .

The cost of sales decreased $16.9 million for the twelve months ended October 31, 2019 compared to the same period in 2018 as a result of market volume declines.

The cost of sales decreased $17.4 million for the twelve months ended October 31, 2020 compared to the same period in 2019 as a result of lower volume, including a corresponding decrease in selling expenses as a result of the impacts of COVID-19 as mentioned above.

Selling, General and Administrative .

Our selling, general and administrative expense increased $0.8 million for the twelve months ended October 31, 2019 compared to the same period in 2018 , largely driven by a loss on the sale of fixed assets.

Our selling, general and administrative expense remained relatively flat for the twelve months ended October 31, 2020 compared to the same period in 2019.

Restructuring Charges.

Restructuring charges of $0.1 million for the year ended October 31, 2018 represent the remaining costs from the Kansas plant closure effected in September 2017 which were incurred during the first quarter of the year ended October 31, 2018.

Depreciation and Amortization .

Depreciation and amortization expense decreased $1.2 million for the twelve months ended October 31, 2019 compared to the same period in 2018 , reflecting the run-off of depreciation expense related to existing assets and disposals during the period.

Restructuring charges of $0.3 million in the twelve months ended October 31, 2020 related to severance, equipment moving and other charges incurred for a plant closure.

Asset Impairment Charge.

Asset impairment charges of $74.6 million relate to goodwill impairment charges.

For further information, see Note 5 , " Goodwill and Intangible Assets " included elsewhere in this Annual Report on Form 10-K.

Asset impairment charges incurred during the twelve months ended October 31, 2019 related to goodwill impairment charges.

There were no corresponding asset impairment charges incurred during the twelve months ended October 31, 2020.

For further information, see Note 6, "Goodwill and Intangible Assets," of the accompanying financial statements in this Annual Report on Form 10-K.

Unallocated Corporate & Other

For the Years Ended October 31,

2020 2019 $ Change Variance %

(Dollars in millions)

Net sales $ (3.0) $ (4.5) $ 1.5 33%

Cost of sales (excluding depreciation and amortization) (1.6) (3.1) 1.5 (48)%

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Selling, General and Administrative .

Our selling, general and administrative expenses increased $0.2 million , for the twelve months ended October 31, 2019 compared to the same period in 2018 .

This increase is attributable to $2.0 million of higher compensation expense primarily related to the valuations of our stock based compensation awards and higher severance expense of $1.9 million related to executive severance and headcount reduction, which were offset by $3.6 million of lower medical expenses due to reimbursement of certain medical expenses during the twelve months ended October 31, 2019.

Our selling, general and administrative expenses decreased $8.5 million, for the twelve months ended October 31, 2020 compared to the same period in 2019.

This decrease is attributable to $4.4 million of lower medical expenses, $2.0 million of lower compensation expense primarily related to the valuations of our stock based compensation awards, lower transaction costs of $1.4 million and lower severance costs related to executive severance and headcount reduction.

Changes Related to Non-Operating Items:

Interest Expense .

Interest expense decreased $1.5 million for the twelve months ended October 31, 2019 compared to the same period in 2018 .

The decrease in interest expense was primarily driven by the absence of $1.1 million of deferred financing fees which were incurred in 2018 related to amending the 2016 Credit Agreement.

Excluding these fees, interest expense decreased slightly due to lower debt balances during 2019, partially offset by higher interest rates.

Interest expense decreased $4.4 million for the twelve months ended October 31, 2020 compared to the same period in 2019 primarily due to lower interest rates and lower overall debt outstanding.

The weighted average interest rate for borrowings outstanding for the twelve months ended October 31, 2020 was 2.45% compared with 4.07% for the twelve months ended October 31, 2019.

The reduction in other, net of $1.1 million for the twelve months ended October 31, 2019 compared to the same period in 2018 relates primarily to a decrease in net pension service benefits.

Other, net increased $0.1 million for the twelve months ended October 31, 2020 compared to the same period in 2019.

Improvements in the impacts of foreign currency transactions were partially offset by a decrease in pension benefits year-over-year.

Income Taxes .

We recorded income tax expense of $10.8 million on a pre-tax loss of $36.0 million for the twelve months ended October 31, 2019 , an effective rate of 30.0%, and income tax benefit of $0.8 million on pre-tax income of $25.8 million for the twelve months ended October 31, 2018, an effective benefit rate of 3.1%.

The effective rate for the twelve months ended October 31, 2019 was primarily impacted by the fact that a majority of the $74.6 million asset impairment charge in the NA Cabinet Components segment did not generate a tax benefit, and a net charge of $1.2 million related to GILTI and FDII.

The effective rate for the twelve months ended October 31, 2018 reflects the impact of the Act, which reduced our federal tax rate from 35.0% to 21.0% as of January 1, 2018, and resulted in a discrete tax benefit.

We recorded income tax expense of $11.8 million on pre-tax income of $50.3 million for the twelve months ended October 31, 2020, an effective rate of 23.5%, and income tax expense of $10.8 million on pre-tax loss of $36.0 million for the twelve months ended October 31, 2019, an effective rate of 30.0%.

The effective rate for the twelve months ended October 31, 2020 was impacted by the true-up of our accruals and related deferred taxes from prior year filings and settled audits.

The effective rate for the twelve months ended October 31, 2019 was primarily impacted by the $74.6 million asset impairment charge in the NA Cabinet Components segment which did not generate a tax benefit, and a net charge of $1.2 million related to GILTI and FDII.

Liquidity and Capital Resources

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

As of October 31, 2019 , we had $30.9 million of cash and equivalents, $142.5 million outstanding under our credit facilities, $4.8 million of outstanding letters of credit and $15.9 million outstanding under capital leases.

As of October 31, 2020, we had $51.6 million of cash and cash equivalents, $103.0 million outstanding under our credit facilities, $4.8 million of outstanding letters of credit and $15.3 million outstanding under finance leases.

We had $217.2 million available for use under a revolving credit facility at October 31, 2020.

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Risk Factors," included elsewhere within this Annual Report on Form 10-K.

We expect to repatriate excess cash moving forward and use the funds to retire debt or meet current working capital needs.

Funds from operations may be impacted by softer demand and liquidity concerns of our customers as a result of COVID-19.

In the U.K., we insure against a portion of our credit losses.

In light of the COVID-19 pandemic, the Company has implemented a range of actions aimed at reducing costs and preserving liquidity.

We believe our business model, our current cash reserves and the recent steps we have taken to strengthen our balance sheet leave us well-positioned to manage our business as a going concern and remain in compliance with our debt covenants through the COVID-19 crisis as it continues to unfold.

Analysis of Cash Flow

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Year Ended October 31,

2020 2019 2018

(In millions)

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Cash flows used for financing activities $ (55.1) $ (71.3) $ (65.8)

Our year-over-year cash flow analysis follows.

Our cash flow analysis for the fiscal years ended October 31, 2019 and 2018 for the prior year comparative periods can be found in the annual report on Form 10-K for the year ended October 31, 2019.

Operating Activities

Operating cash flow for the year ended October 31, 2019 declined by approximately $8.2 million compared to the year ended October 31, 2018.

Unfavorable impacts to cash receipts as a result of a reduction in net income were largely offset by favorable working capital changes, including a lower accrued incentive, a favorable change in accounts payable and improved inventory management.

Cash provided by operating activities increased $24.8 million for the year ended October 31, 2018 compared to the year ended October 31, 2017.

Cash receipts were impacted favorably by higher net income along with a reduction of inventory in 2018 versus a build in 2017 and favorable changes in accounts payable and accrued liabilities.

Operating cash flow for the year ended October 31, 2020 increased $4.4 million while cash flow for the year ending October 31, 2019 decreased by $8.2 million.

Our ability to continue operations and deliver orders as an essential service provider mitigated some of the effects of COVID-19.

Our efforts to maintain operating levels in accordance with demand allowed us to remain efficient with our working capital and use inventory effectively.

To date, slower paying customers as a result of COVID-19 have not significantly impacted our liquidity, but this could become a concern in the future.

Investing Activities

Cash used for investing activities for the year ended October 31, 2019 decreased $2.5 million compared to the year ended October 31, 2018 due to a $1.6 million decline in our investment in capital expenditures year-over-year, as well as $0.9 million of additional proceeds from the sale of capital assets.

Cash used for investing activities decreased $6.5 million in 2018 compared to 2017.

Our investment in capital expenditures declined $8.1 million during 2018, which partially offset a decrease of $1.5 million in proceeds from the sale of capital assets during the year.

Cash used for investing activities for the year ended October 31, 2020 increased $1.7 million compared to the year ended October 31, 2019 due to an increase of $0.8 million in our investment in capital expenditures and a decline in proceeds from the disposition of capital assets of $0.8 million.

At October 31, 2020, we had firm purchase commitments of approximately $2.2 million for the purchase or construction of capital assets.

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In 2020, cash used for financing activities was $55.1 million and related primarily to net debt repayments of $40.5 million, payment of dividends of $10.5 million, and share repurchases of $7.2 million.

In 2018, our cash used for financing activities was $65.8 million and related primarily to share repurchases of $32.0 million, net debt repayments of $29.5 million, payment of dividends of $7.0 million, and other spending of $2.0 million, partially offset by funds received from the issuance of common stock in settlement of stock option exercises of $4.7 million.

In 2017, cash used for financing activities was $55.1 million and related primarily to repayment of borrowings under our credit facility, an acquisition earn-out payment of $8.5 million, and payment of dividends of $5.5 million, partially offset by funds received from the issuance of common stock in settlement of stock option exercises of $8.0 million.

In 2019, cash used for financing activities was $71.3 million and related primarily to net debt repayments of $54.0 million, payment of dividends of $10.6 million, and share repurchases of $9.6 million.

Liquidity Requirements

Our strategy for deploying cash is to invest in organic growth opportunities, develop our infrastructure, and make strategic acquisitions.

Our strategy for deploying cash is to invest in organic growth opportunities, develop our infrastructure, and explore strategic acquisitions.

Other uses of cash include paying cash dividends to our shareholders and repurchasing our own stock.

We have historically invested cash and cash equivalents in commercial paper with terms of three months or less.

We did not have any investments during the years ended October 31, 2019 and 2018 .

We maintain cash balances in foreign countries which totaled $16.8 million and $9.8 million as of October 31, 2020 and 2019.

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The applicable margin and commitment fees range from 0.45% to 2.30%, depending upon the type of loan and consolidated leverage ratio.

The Credit Facility contains appropriate provisions to substitute LIBOR with a replacement rate upon transition away from LIBOR.

These provisions include a temporary conversion of applicable interest for all borrowings outstanding to be calculated as base rate loans until such time that the replacement rate is agreed upon.

The 2018 Credit Facility provides for revolving credit commitments for a minimum principal amount of $10.0 million, up to an aggregate amount of $150.0 million, subject to the lender's discretion to elect or decline the incremental increase.

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The program does not have an expiration date or a limit on the number of shares that may be purchased.

During the years ended

October 31, 2019 and 2018, we purchased 583,398 shares and 1,900,000 shares, respectively, at a cost of $9.6 million and $32.0 million , respectively, under this program.

Contractual Obligations and Commercial Commitments

The following table summarizes our known contractual obligations and commitments as of October 31, 2019 :

Payments Due by Period

Contractual Obligations:

(In thousands)

Long-term debt, including interest (1)

Capital leases

Operating leases (2)

Unconditional purchase obligations (3)

Total contractual cash obligations (4)

Interest on our long-term debt was computed using rates in effect at October 31, 2019 .

Operating leases include facilities, light vehicles, forklifts, office equipment and other operating equipment.

The unconditional purchase obligations consist of commitments to buy miscellaneous parts, inventory, and expenditures related to capital projects in progress.

This table excludes tax reserves recorded in accordance with ASC Topic 740 “ Income Taxes ,” as we are unable to reasonably estimate the timing of future cash flows related to these reserves.

During fiscal 2020 , we expect to contribute approximately $3.7 million to our pension plan to maintain our 100% funding threshold and meet our minimum contribution requirements.

Pension contributions beyond 2020 cannot be determined since the amount of any contribution is heavily dependent on the future economic environment and investment returns on pension plan assets.

Obligations are based on current and projected obligations of the plans, performance of the plan assets, if applicable, and the timing and amount of funding contributions.

At October 31, 2019 , we have recorded a long-term liability for deferred pension and postretirement benefits totaling $13.3 million .

We believe the effect of the plans on liquidity is not significant to our overall financial condition.

Our supplemental benefit plan and deferred compensation plan liabilities fluctuate based on changes in the market value of certain equity securities, including our common stock.

As of October 31, 2019 , our liability under the supplemental benefit plan and the deferred compensation plan was approximately $4.2 million and $3.8 million , respectively.

The following table reflects other commercial commitments or potential cash outflows that may result from a contingent event.

Amount of Commitment Expiration per Period

Other Commercial Commitments:

(In thousands)

Standby letters of credit

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as such term is defined in the rules promulgated by the SEC, that we believe would be material to investors and for which it is reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Effects of Inflation

We have experienced the impact of inflation on our cost of raw materials, labor, freight and overhead.

While we utilize contractual price indexing along with periodic base price increases to minimize the effect of inflation on our results, we have not been able to fully recover all of the inflationary cost increases.

We believe inflation has not had a significant effect on our earnings or financial position over the previous three fiscal years.

We cannot provide assurance, however, that our results of operations and financial position will not be materially impacted by inflation in the future.

During the years ended October 31, 2020 and 2019, we purchased 450,000 shares and 583,398 shares, respectively, at a cost of $7.2 million and $9.6 million, respectively, under this program.

Critical Accounting Policies and Estimates

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We consider an estimate to be critical if it is subjective and if changes in the estimate using different assumptions would result in a material impact to our financial position or results of operations.

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

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

We recognize revenue that reflects the consideration we expect to receive for product sales when the promised items are transferred to customers.

We recognize revenue that reflects the consideration we expect to receive for product sales upon transfer to customers.

Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we expect to be entitled to consideration in exchange for transferring those products.

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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.

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 consolidated statements of income (loss).

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.

Allowance for Doubtful Accounts

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Different assumptions or changes in economic circumstances could result in changes to the allowance.

Our historical bad debt expense has approximated 0.3% of sales for the years ended October 31, 2019 , 2018 and 2017 .

If bad debt expense increased by 1% of net sales, the impact on operating results would have been an increase in net loss of $6.8 million for the year ended October 31, 2019, and a decrease in net income of $9.2 million and $6.4 million for the years ended October 31, 2018 and 2017, respectively.

Our historical bad debt expense has been less than 0.1% of sales for the years ended October 31, 2020, 2019 and 2018.

If bad debt expense increased by 1% of net sales, the impact on operating results would have been a decrease in net income of $6.4 million for the year ended October 31, 2020, an increase in net loss of $6.8 million for the year ended October 31, 2019 and a decrease in net income of $9.2 million for the year ended October 31, 2018.

Business Combinations - Contingencies

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However, there is a risk that we may not identify all pre-acquisition contingencies or that our estimates may not reflect the actual results when realized.

We utilize a reasonable measurement period to record any adjustment related to the opening balance sheet (generally, less than one year).

We use a reasonable measurement period to record any adjustment related to the opening balance sheet (generally, less than one year).

After the measurement period, changes to the opening balance sheet can result in the recognition of income or expense as period costs.

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We apply a variety of techniques to establish the carrying value of our intangible assets, including the relief from royalty and excess current year earnings methods.

During October 2016 and continuing throughout 2017, we determined that a triggering event occurred which necessitated a review of our long-term assets as prescribed above (expected reduction in volume for our U.S.

vinyl business and results below our forecasts for Woodcraft).

Based on an undiscounted cash flow analysis, we determined that our property, plant and equipment and defined-lived intangible assets were not impaired.

However, with regard to our U.S.

vinyl business, we recorded a change in accounting estimate associated with shortening the remaining useful lives of certain property, plant and equipment to be retired as part of the announced closures of several plants.

We recognized incremental depreciation expense of $4.3 million in 2017 as a result of the change in estimates.

In addition, we shortened the life of several defined-lived intangible assets, which resulted in the recognition of incremental amortization expense of $1.9 million for the year ended October 31, 2017.

There have been no impairments or related expenses of property, plant and equipment and defined-lived intangibles during the year ended October 31, 2019 and 2018.

We use the acquisition method to account for business combinations and, to the extent that the purchase price exceeds the fair value of the net assets acquired, we record goodwill.

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We perform our annual goodwill assessment as of August 31, or more frequently if indicators of impairment exist.

Qualitative factors that indicate impairment could include, but are not limited to, (i) macroeconomic conditions, (ii) industry and market considerations, (iii) cost factors, (iv) overall financial performance of the reporting unit, and (v) other relevant entity-specific events.

The first step in our annual goodwill assessment is to perform the optional qualitative assessment allowed by ASC Topic 350 “Intangibles - Goodwill and Other” (ASC 350).

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If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, ASC 350 requires us to compare the fair value of such reporting unit to its carrying value including goodwill.

To determine the fair value of our reporting units, we use multiple valuation techniques including a discounted cash flow analysis, using the applicable weighted average cost of capital, in combination with a market approach that utilizes market multiples and a selection of guideline public companies.

To determine the fair value of our reporting units, we use multiple valuation techniques including a discounted cash flow analysis, using the applicable weighted average cost of capital, in combination with a market approach that uses market multiples and a selection of guideline public companies.

This test requires us to make assumptions about the future growth of our business and the market in general, as well as other variables such as the level of investment in capital expenditure, growth in working capital requirements and the terminal or residual value of our reporting units beyond the periods of estimated annual cash flows.

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We believe the estimates and assumptions used in our impairment assessment are reasonable based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated during current or future periods.

During the second quarter of 2019, our reporting unit included in our NA Cabinet Components segment experienced financial performance for the year to date period ended March 31, 2019 that was below our 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 this reporting unit was greater than its fair value.

Therefore, we performed a quantitative impairment test of the goodwill balance at March 31, 2019.

The quantitative impairment test was conducted using multiple valuation techniques, including a discounted cash flow analysis, which utilizes Level 3 fair value inputs, and resulted in an asset impairment charge of $30.0 million during the second quarter of 2019.

As a result of quantitative assessments performed during the year ended October 31, 2019, we recorded impairment charges totaling $74.6 million during the year ended October 31, 2019, reducing the goodwill balance applicable to the reporting unit included in our NA Cabinet Components operating segment from $113.7 million to $39.1 million.

For the year ended October 31, 2020, the World Health Organization's declaration of COVID-19 as a global pandemic also created significant changes in market conditions that were indicators of triggering events which necessitated an evaluation of certain long-term assets, including goodwill, for potential impairment.

We performed quantitative assessments based upon undiscounted cash flows we expected to realize associated with these assets over the remaining useful lives of the primary operating assets to the net book value of the long-term assets, including goodwill, and determined that these assets, including goodwill, were not impaired.

At our annual testing date, August 31, 2020, we had five reporting units with goodwill balances:

two reporting units included in our NA Fenestration operating segment, two reporting units included in our EU Fenestration operating segment, and one reporting unit included in our NA Cabinet Components operating segment.

We performed a qualitative assessment of the two reporting units in the NA Fenestration segment and the two reporting units in the EU Fenestration segment.

We performed a qualitative assessment of the two reporting units in the NA Fenestration segment and one of the reporting units in the EU Fenestration segment.

This review included an analysis of historical goodwill test results, operating results relative to forecast, projected results over the next five years, and other measures and concluded that there were no indicators of potential impairment associated with these reporting units.

Therefore, no additional testing was deemed necessary for the reporting units in the NA Fenestration segment and the EU Fenestration segment.

Also, at our annual testing date, we performed a quantitative assessment of the reporting unit in our NA Cabinet Components segment primarily due to the recent impairment of goodwill during the second quarter of 2019 and the history of a narrow margin of fair value above carrying value in quantitative assessments performed in prior years.

We determined that the fair value of this reporting unit exceeded its carrying value by approximately 5%.

At that date, we concluded that no impairment was necessary.

After the annual assessment date and prior to our fiscal year end of October 31, 2019, the reporting unit in our NA Cabinet Components segment was notified about a change in strategy at one of our large customers that may result in lower sales volumes in the future.

In addition, we continued to experience lower-than-expected volumes as a result of the ongoing shift in demand from semi-custom cabinets to stock cabinets.

Based on this information, we updated our long-range forecast for this reporting unit to reflect the expected volume declines.

This revised long-range forecast was utilized to perform another quantitative

impairment test of this reporting unit as of October 31, 2019, which resulted in an asset impairment charge of $44.6 million during the fourth quarter of 2019.

As a result of the quantitative assessments performed in the second and fourth quarters of 2019, we recorded impairment charges totaling $74.6 million during the year ended October 31, 2019, reducing the goodwill balance applicable to the reporting unit included in our NA Cabinet Components operating segment from $113.7 million to $39.1 million .

Therefore, no additional testing was deemed necessary for the reporting units in the NA Fenestration segment and the EU Fenestration segment that were assessed qualitatively.

We also updated the quantitative assessments for the reportable unit in the NA Cabinet Compnents segment and the second reportable unit in the EU Fenestration segment.

We determined the fair value of these reportable units exceeded the carrying value by 5% and 36%, respectively, and concluded that no impairment was necessary.

Restructuring

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For other costs directly related to the restructuring effort, such as equipment moving costs, we expense in the period incurred.

In 2017, we incurred costs related to plant closures which were announced in 2016, including equipment moving costs, additional employee termination and severance costs, retirements and inventory adjustments, operating lease costs, accelerated amortization and depreciation costs, and equipment lease termination costs.

In addition, we incurred costs related to the closure of a kitchen and bathroom cabinet door plant in Lansing, Kansas.

Restructuring costs totaled $4.6 million for the year ended October 31, 2017.

During the year ended October 31, 2018, we negotiated the exit from one of the vinyl extrusion plants, and the lease for the plant in Lansing, Kansas expired.

During the years ended October 31, 2019 and 2018, we incurred $0.4 million and $1.5 million of restructuring costs related to these leases, and expect to continue to incur costs related to the remaining vinyl plant during fiscal 2020 until such time we are able to sublet or otherwise negotiate an exit from the facility.

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 common area maintenance 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.

We operate in various jurisdictions and therefore our income tax expense relates to income taxes in the U.S., U.K., Canada, and Germany, as well as local and state income taxes.

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Annually, we evaluate our tax positions to determine if there have been any changes in uncertain tax positions or if there has been a lapse in the statute of limitations with regard to such positions.

Our liability for uncertain tax positions at October 31, 2019 and 2018 totaled $0.6 million and related to certain state tax items regarding the interpretation of tax laws and regulations.

Our liability for uncertain tax positions at October 31, 2020 and 2019 totaled $0.5 million and $0.6 million, respectively, and related to certain state tax items regarding the interpretation of tax laws and regulations.

We believe we will have sufficient taxable income in the future to fully utilize our unreserved deferred tax assets recorded as of October 31, 2020.

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We have recorded the benefit associated with the “patent box” deduction in the U.K.

with regard to our operations at HLP.

with regard to our operations at Liniar.

We believe that it is more likely than not that our deduction with regard to this position would be sustained upon examination.

In addition, we recorded the effect of a statutory change in the deferred tax rate from 19% to 17% in the U.K.

in 2017 results, which provided a discrete tax benefit of $1.0 million during the period.

Our deferred tax assets at October 31, 2020 and 2019 totaled $20.1 million and $21.0 million, respectively, against which we had recorded a valuation allowance of $1.5 million and $1.6 million, respectively.

We manage our costs of workers’ compensation, group medical, property, casualty and other liability exposures through a combination of self-insurance retentions and insurance coverage with third-party carriers.

Liabilities associated with our portion

of this exposure are not discounted.

Liabilities associated with our portion of this exposure are not discounted.

We estimate our exposure by considering various factors which may include:

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We do not recognize insurance recoveries until any contingencies relating to the claim have been resolved.

We record inventory at the lower of cost or market value.

We record inventory at the lower of cost or net realizable 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 3 , " Inventories ", contained elsewhere herein this Annual Report on Form 10-K.

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

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For the years ended October 31, 2020, 2019 and 2018, our inventory reserves are approximately 10%, 5%, and 6% of gross inventory, respectively.

Assuming an increase in obsolescence equal to 1% of gross inventory, net loss would have increased by $0.5 million for the year ended October 31, 2019, and net income would have been reduced by $1.0 million and $0.7 million for the years ended October 31, 2018 and 2017, respectively.

Assuming an increase in obsolescence equal to 1% of gross inventory, net income would have decreased by $0.5 million for the year ended October 31, 2020, net loss would have increased by $0.5 million for the year ended October 31, 2019, and net income would have been reduced by $1.0 million for the year ended October 31, 2018.

Retirement Plans

We sponsor a defined benefit pension plan and an unfunded postretirement plan that provides health care and life insurance benefits for a limited pool of eligible retirees and dependents.

The measurement of liabilities related to these plans is based on our assumptions related to future events, including expected return on plan assets, rate of compensation increases, and healthcare cost trend rates.

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.

The measurement of liabilities related to these plans is based on our assumptions related to future events, including expected return on plan assets and healthcare cost trend rates.

The discount rate reflects the rate at which benefits could be effectively settled on the measurement date.

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Actual pension plan asset investment performance, as well as other economic experience such as discount rate and demographic experience, will either reduce or increase unamortized pension losses at the end of any fiscal year, which ultimately affects future pension costs.

As of October 31, 2019 , our projected benefit obligation (PBO) and accumulated benefit obligation (ABO) exceeded the fair value of the plan assets by $13.1 million and $12.1 million , respectively.

As of October 31, 2020, our projected benefit obligation (PBO) and accumulated benefit obligation (ABO) each exceeded the fair value of the plan assets by $10.7 million.

As a comparison, our PBO and ABO exceeded the fair value of plan assets by $13.1 million and $12.1 million, respectively, as of October 31, 2019.

During fiscal 2020, we contributed $3.7 million to the pension plan to meet minimum contribution requirements.

We expect to continue to fund at this level for fiscal 2020 .

Expected contributions are dependent on many variables, including the variability of the market value of the assets as compared to the obligation and other market or regulatory conditions.

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The effect on fiscal years after 2020 will depend on the actual experience of the plans.

Mortality assumptions used to determine the obligations for our pension plans are based on the RP-2006 base mortality table with MP-2018 mortality improvement scale.

Mortality assumptions used to determine the obligations for our pension plans are based on the Pri-2012 base mortality table with MP-2018 mortality improvement scale.

Stock-Based Compensation

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We have recorded current and non-current liabilities related to these awards reflected in our consolidated balance sheets at October 31, 2020 and 2019, included elsewhere within this Annual Report on Form 10-K.

In addition, we have granted performance share units which settle in cash and shares upon vesting.

The awards granted during the years ended October 31, 2018 and 2017 have vesting criteria based on a market condition (relative total shareholder return) and an internal performance condition (earnings per share growth).

The award granted during the year ended October 31, 2019 utilizes return on net assets as the vesting condition and settles in cash.

We utilize a Monte Carlo simulation model to value the market condition and our stock price on the date of grant to value the internal performance condition.

In addition, we have granted performance share awards which settle in cash and shares upon vesting.

The award granted during the year ended October 31, 2018 has vesting criteria based on a market condition (relative total shareholder return) and an internal performance condition (earnings per share growth).

The awards granted during the years ended October 31, 2020 and 2019 use return on net assets as the vesting condition and settle in cash.

We use a Monte Carlo simulation model to value the market condition and our stock price on the date of grant to value the internal performance condition.

We bifurcate the liability and equity portion of the awards (amounts expected to settle in cash and shares, respectively) and recognize expense ratably over the vesting period of three years.

We estimate that the performance measures will be met and shares will vest at target until the year of settlement (third year of cliff vesting).

As of October 31, 2019, we expect 56,103 performance share awards to vest, of which 28,051 would be paid in our common stock and 28,051 would settle in cash.

As of October 31, 2020, we do not expect any performance share awards to vest.

We also awarded performance restricted stock units to key employees and officers in December 2019, 2018, and 2017.

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The number of performance restricted stock units 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 utilize a Monte Carlo simulation model to arrive at a grant-date fair value.

To value the performance restricted stock units, we use 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.

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 October 31, 2020, we have deemed 32,322 shares related to the December 2017 grants of performance restricted stock units as probable to vest.

Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments include unconditional purchase obligations which consist of commitments to buy miscellaneous parts, inventory, and expenditures related to capital projects in progress.

In addition, during fiscal 2021, we expect to contribute approximately $0.5 million to our pension plan to meet our minimum contribution requirements.

Pension contributions beyond 2021 cannot be determined since the amount of any contribution is heavily dependent on the future economic environment and investment returns on pension plan assets.

Obligations are based on current and projected obligations of the plans, performance of the plan assets, if applicable, and the timing and amount of funding contributions.

At October 31, 2020, we have recorded a long-term liability for deferred pension and postretirement benefits totaling $10.9 million.

We believe the effect of the plans on liquidity is not significant to our overall financial condition.

Our supplemental benefit plan and deferred compensation plan liabilities fluctuate based on changes in the market value of certain equity securities, including our common stock.

As of October 31, 2020, our liability under the supplemental benefit plan and the deferred compensation plan was approximately $2.6 million and $3.3 million, respectively.

Off-Balance Sheet Arrangements

Effects of Inflation

We have experienced the impact of inflation on our cost of raw materials, labor, freight and overhead.

Although we use contractual price indexing along with periodic base price increases to minimize the effect of inflation on our results, we have not been able to fully recover all of the inflationary cost increases.

We believe inflation has not had a significant effect on our earnings or financial position over the previous three fiscal years.

We cannot provide assurance, however, that our results of operations and financial position will not be materially impacted by inflation in the future.

Recent Accounting Pronouncements

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In addition, the amendment provides guidance with regard to the use of an allowance for credit losses for purchased financial assets and available-for-sale debt securities.

This amendment

becomes effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year.

This amendment becomes effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year.

We expect to adopt this amendment during fiscal 2021, with no material impact on our consolidated financial statements.

In February 2016, the FASB established Topic 842, Leases , by issuing ASU No.

2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements.

The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.

Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard is effective for us on November 1, 2019, with early adoption permitted.

We plan to adopt using a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application.

We expect to adopt the new standard on November 1, 2019 and use the effective date as our date of initial application.

Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to November 1, 2019.

The new standard provides a number of optional practical expedients in transition.

We will elect all of the new standard’s available transition practical expedients.

This standard will have a material effect on our financial statements.

The most significant effects on our financial statements relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our operating leases and providing significant new disclosures about our leasing activities.

We do not expect a significant change in our leasing activities between now and adoption.

On adoption, we will recognize additional operating liabilities ranging from $40.0 million to $45.0 million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

The new standard also provides practical expedients for an entity’s ongoing accounting.

We will elect the short-term lease recognition exemption for all leases that qualify.

This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.

We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.

In August 2018, the FASB issued ASU No.

3 unchanged sentences

This amendment becomes effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year.

We expect to adopt this amendment during fiscal 2022, with no impact on our consolidated financial statements.

We expect to adopt this amendment during fiscal 2022 with no material impact on our consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis