What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2020-12-11 compared with 2019-12-12 · 559 added, 552 removed, 932 unchanged (54% of the section changed)

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Consolidated Balance Sheets 44

Consolidated Statements of (Loss) Income

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Income (Loss) 45

Consolidated Statements of Comprehensive Income (Loss) 46

Consolidated Statement of Stockholders’ Equity 47

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Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Quanex Building Products Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of October 31, 2019 and 2018, the related consolidated statements of (loss) income, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2019, and the related notes (collectively referred to as the “financial statements”).

We have audited the accompanying consolidated balance sheets of Quanex Building Products Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of October 31, 2020 and 2019, the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of October 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated December 11, 2020 expressed an unqualified opinion.

Change in accounting principle

As discussed in Note 19 to the consolidated financial statements, the Company has changed its method of accounting for leases due to the adoption of the new leasing standard.

The Company adopted the new leasing standard by recognizing a cumulative catch-up adjustment to the opening balance sheet as of November 1, 2019.

Basis for opinion

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Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

Goodwill impairment of the reporting unit included in the North American Cabinet Components operating segment

As described further in Note 1 to the Company’s financial statements, the Company is required to evaluate goodwill for impairment annually or more frequently if indicators of impairment exist.

The Company performs its annual goodwill impairment test as of August 31.

The Company determined that indicators of impairment exist as of March 31, 2019 and then subsequently on October 31, 2019 for the reporting unit included in the North American (“NA”) Cabinet Components operating segment.

As such, the Company estimated the fair value of this reporting unit to determine if the fair value was less than the carrying amount.

As a result of these assessments, the Company recognized goodwill impairments of $30.0 million at March 31, 2019 and $44.6 million at October 31, 2019.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Qualitative goodwill impairment assessment

As described further in Note 1 to the financial statements, the Company is required to evaluate goodwill for impairment annually or more frequently if indicators of impairment exist.

In evaluating whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company performed a qualitative assessment of relevant events and circumstances that could impact the fair value of such reporting unit.

If, after assessing the totality of events and circumstances, it is deemed more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company estimates the fair value of the reporting unit by performing a quantitative goodwill impairment assessment.

The Company determined that indicators of impairment existed as of March 31, 2020 for all reporting units.

As such, the Company performed a qualitative assessment for each of the reporting units.

As a result of the analysis, the Company determined for each of the reporting units that the goodwill was not more likely than not impaired, and no quantitative

assessment was necessary.

We identified the Company’s assessment of qualitative factors for the March 31, 2020 goodwill impairment assessment as a critical audit matter.

The principal consideration for our determination that the assessment of qualitative factors for the March 31, 2020 goodwill impairment assessment is a critical audit matter is that there are significant judgments management made in assessing and weighting the relevant qualitative factors in determining whether it was more likely than not that the fair value of its reporting units was less than its carrying amount.

As disclosed by management, qualitative factors may 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.

Our audit procedures related to the relevant qualitative factors for each reporting unit included in the March 31, 2020 goodwill impairment assessment to evaluate whether it is more likely than not the fair value of each reporting unit is less than the carrying value included the following, among others.

• We tested the design and operating effectiveness of controls related to the evaluation of the assumptions and inputs used as part of management’s review of the qualitative assessment.

• We evaluated the qualitative factors used by management for reasonableness, which included a consolidated market capitalization reconciliation and an assessment of the macroeconomic conditions and forecasted performance for each reporting unit.

• We compared the actual results of each reporting unit to the Company’s historical forecasted performance to evaluate the accuracy of management’s estimates.

Quantitative goodwill impairment assessment of the reporting unit included in the North American Cabinet Components operating segment

As described further in Note 1 to the financial statements, the Company performs its annual goodwill impairment test as of August 31.

The Company performed a quantitative assessment of the reporting unit in the North American (NA) Cabinet Components primarily due to the recent impairment of goodwill during the second and fourth quarters of 2019 and the history of narrow margin of fair value above carrying value in the quantitative assessments performed in prior years.

We identified the estimation of the fair value of the reporting unit included in the NA Cabinet Components operating segment as a critical audit matter.

The principal considerations for our determination that the goodwill impairment of the reporting unit included in the NA Cabinet Components operating segment is a critical audit matter include the significant judgments and assumptions management makes to estimate the fair value of the reporting unit for purposes of measuring the impairment of goodwill.

Auditing the fair value of

the reporting unit involved a high degree of auditor judgment, subjectivity and audit effort in evaluating management’s significant assumptions, including future revenues, earnings and cash flows, expected growth rates, terminal growth rates, discount rates, guideline public companies and market multiples.

The principal considerations for our determination that the quantitative goodwill impairment assessment of the reporting unit included in the NA Cabinet Components operating segment is a critical audit matter include the significant judgments and assumptions management makes to estimate the fair value of the reporting unit.

Auditing the fair value of the reporting unit involved a high degree of auditor judgment, subjectivity and audit effort in evaluating management’s significant assumptions, including future revenues, earnings and cash flows, expected growth rates, terminal growth rates, discount rates, guideline public companies and market multiples.

In addition, the audit effort involved the use of valuation specialists to assist in performing these procedures and evaluating the audit evidence obtained.

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Grant Thornton LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting.

This report appears on page 40.

QUANEX BUILDING PRODUCTS CORPORATION

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Accounts receivable, net of allowance for doubtful accounts of $ 161 and $ 393

88,287 82,946

Inventories, net 61,181 67,159

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Property, plant and equipment, net of accumulated depreciation of $ 340,144 and $ 317,568

184,104 193,600

Operating lease right-of-use assets 51,824 —

Goodwill 146,154 145,563

Intangible assets, net 93,068 107,297

Other assets 9,129 8,324

Total assets $ 691,585 $ 645,110

LIABILITIES AND STOCKHOLDERS' EQUITY

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Current maturities of long-term debt 692 746

Current operating lease liabilities 7,459 —

Total current liabilities 130,240 109,754

Long-term debt 116,728 156,414

Noncurrent operating lease liabilities 44,873 —

Deferred pension and postretirement benefits 10,923 13,322

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Stockholders’ equity:

Preferred stock, no par value, shares authorized 1,000,000;

issued and outstanding - none

Common stock, $0.01 par value, shares authorized 125,000,000;

issued 37,370,402 and 37,433,817 respectively;

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 37,296,166 and 37,370,402 respectively;

outstanding 32,804,737 and 33,021,789 , respectively

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Treasury stock at cost, 4,491,429 and 4,348,613 shares, respectively

( 78,565 ) ( 76,746 )

Total stockholders’ equity 355,759 330,187

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QUANEX BUILDING PRODUCTS CORPORATION

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

For the Years Ended October 31, 2020, 2019 and 2018

Year Ended October 31,

2020 2019 2018

(In thousands, except per share amounts)

Net sales $ 851,573 $ 893,841 $ 889,785

Cost and expenses:

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Asset impairment charges — 74,600 —

Operating (loss) income

Non-operating (expense) income:

Operating income (loss) 55,265 ( 26,427 ) 35,697

Non-operating income (expense):

Interest expense ( 5,245 ) ( 9,643 ) ( 11,100 )

(Loss) income before income taxes

Other, net 280 116 1,156

Income (loss) before income taxes 50,300 ( 35,954 ) 25,753

Income tax (expense) benefit ( 11,804 ) ( 10,776 ) 800

Net (loss) income

Basic (loss) earnings per common share

Diluted (loss) earnings per common share

Net income (loss) $ 38,496 $ ( 46,730 ) $ 26,553

Basic earnings (loss) per common share $ 1.18 $ ( 1.42 ) $ 0.77

Diluted earnings (loss) per common share $ 1.17 $ ( 1.42 ) $ 0.76

Weighted-average common shares outstanding:

Basic 32,689 32,960 34,701

Diluted 32,821 32,960 35,025

Cash dividends per share

$ 0.32 $ 0.32 $ 0.20

See notes to consolidated financial statements.

QUANEX BUILDING PRODUCTS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended October 31, 2020, 2019 and 2018

Year Ended October 31,

2020 2019 2018

(In thousands)

Net (loss) income

Other comprehensive (loss) income:

Net income (loss) $ 38,496 $ ( 46,730 ) $ 26,553

Other comprehensive income (loss):

Foreign currency translation adjustments gain (loss) 1,078 1,864 ( 6,640 )

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Change in pension from net unamortized (loss) gain tax benefit (expense) 91 1,596 ( 1,242 )

Total other comprehensive (loss) income, net of tax

Comprehensive (loss) income

Total other comprehensive income (loss), net of tax 793 ( 3,112 ) ( 5,629 )

Comprehensive income (loss) $ 39,289 $ ( 49,842 ) $ 20,924

See notes to consolidated financial statements.

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For the Years Ended October 31, 2020, 2019 and 2018

Treasury Stock

Additional Paid-in

Other Comprehensive Loss

Stockholders’

Common Stock Accumulated Treasury Stock Total

Shares Amount Additional Paid-in

Capital Retained

Earnings Other Comprehensive Loss Shares Amount Stockholders’

(In thousands, except share amounts)

Balance at October 31, 2017 37,508,877 $ 375 $ 255,719 $ 226,549 $ ( 25,076 ) ( 2,670,743 ) $ ( 49,875 ) $ 407,692

Net income — — — 26,553 — — — 26,553

Foreign currency translation adjustment — — — — ( 6,640 ) — — ( 6,640 )

Change in pension from net unamortized gain (net of tax expense of $ 1,242 )

— — — — 1,011 — — 1,011

Common dividends ($ 0.20 per share)

— — — ( 7,020 ) — — — ( 7,020 )

Treasury shares purchased, at cost ( 1,900,000 ) ( 32,034 ) ( 32,034 )

Expense related to stock-based compensation — — 1,874 — — — — 1,874

Stock options exercised — — ( 149 ) ( 2,141 ) — 377,218 7,036 4,746

Tax benefit from share-based compensation

Restricted stock awards granted — — ( 1,371 ) — — 73,400 1,371 —

Performance share awards vested — — ( 473 ) — — 25,340 473 —

Other ( 75,060 ) ( 1 ) ( 922 ) ( 37 ) — — — ( 960 )

Balance at October 31, 2018 37,433,817 $ 374 $ 254,678 $ 243,904 $ ( 30,705 ) ( 4,094,785 ) $ ( 73,029 ) $ 395,222

Net loss — — — ( 46,730 ) — — — ( 46,730 )

Foreign currency translation adjustment — — — — 1,864 — — 1,864

Change in pension from net unamortized gain (net of tax expense of $1,242)

Change in pension from net unamortized loss (net of tax of benefit of $ 1,596 )

— — — — ( 4,976 ) — — ( 4,976 )

Common dividends ($ 0.32 per share)

— — — ( 10,644 ) — — — ( 10,644 )

Expense related to stock-based compensation — — 2,045 — — — — 2,045

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Restricted stock awards granted — — ( 1,720 ) ( 505 ) — 124,800 2,225 —

Performance share awards vested

Other ( 63,415 ) ( 1 ) ( 330 ) — — — — ( 331 )

Balance at October 31, 2019 37,370,402 $ 374 $ 254,673 $ 185,703 $ ( 33,817 ) ( 4,348,613 ) $ ( 76,746 ) $ 330,187

Net income — — — 38,496 — — — 38,496

Foreign currency translation adjustment — — — — 1,078 — — 1,078

Change in pension from net unamortized loss (net of tax expense of $1,596)

Change in pension from net unamortized loss (net of tax benefit of $ 91 )

— — — — ( 285 ) — — ( 285 )

Common dividends ($ 0.32 per share)

— — — ( 10,534 ) — — — ( 10,534 )

Treasury shares purchased, at cost — — — — — ( 450,000 ) ( 7,233 ) ( 7,233 )

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Restricted stock awards granted — — ( 1,212 ) 94 — 63,400 1,118 —

Performance share awards vested — — ( 495 ) — — 28,051 495 —

Other ( 74,236 ) ( 1 ) ( 453 ) — — — — ( 454 )

Balance at October 31, 2020 37,296,166 $ 373 $ 253,458 $ 213,517 $ ( 33,024 ) ( 4,491,429 ) $ ( 78,565 ) $ 355,759

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Year Ended October 31,

2020 2019 2018

(In thousands)

Operating activities:

Net (loss) income

Adjustments to reconcile net (loss) income to cash provided by operating activities:

Net income (loss) $ 38,496 $ ( 46,730 ) $ 26,553

Adjustments to reconcile net income (loss) to cash provided by operating activities:

Depreciation and amortization 47,229 49,586 51,822

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Asset impairment charges — 74,600 —

Other, net 1,689 2,176 135

Changes in assets and liabilities, net of effects from acquisitions:

Decrease (increase) in accounts receivable

Decrease (increase) in inventory

(Increase) decrease in other current assets

Increase (decrease) in accounts payable

(Increase) decrease in accounts receivable ( 5,766 ) 574 ( 5,550 )

Decrease in inventory 6,119 3,797 17,230

Decrease (increase) in other current assets 2,896 ( 2,014 ) 217

Increase in accounts payable 15,922 8,124 8,325

(Decrease) increase in accrued liabilities ( 3,156 ) ( 6,760 ) 6,892

Increase in income taxes

Increase in deferred pension and postretirement benefits

Increase (decrease) in other long-term liabilities

Increase in income taxes payable 237 3,416 676

(Decrease) increase in deferred pension and postretirement benefits ( 2,775 ) 2,531 2,038

(Decrease) increase in other long-term liabilities ( 236 ) 513 ( 523 )

Other, net ( 549 ) 522 ( 444 )

Cash provided by operating activities 100,796 96,372 104,611

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Issuance of common stock 3,626 3,287 4,746

Payment of acquisition earn-out contingency

Payroll tax paid to settle shares forfeited upon vesting of stock ( 454 ) ( 330 ) ( 960 )

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Effect of exchange rate changes on cash and cash equivalents 303 316 ( 1,194 )

Increase (decrease) in cash and cash equivalents

Increase in cash and cash equivalents 20,753 1,865 11,548

Cash and cash equivalents at beginning of period 30,868 29,003 17,455

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Revenue from Contracts with Customers

On November 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method and applying ASC Topic 606 to all revenue contracts with customers.

Results for reporting periods beginning on or after November 1, 2018 are presented under ASC Topic 606.

In accordance with the modified retrospective approach, prior period amounts were not adjusted and are reported under ASC Topic 605, “Revenue Recognition.” As a result of adoption, there was not a material impact on our consolidated financial statements.

We expect the impact of the adoption of ASC Topic 606 to continue to be immaterial to our net income on an ongoing basis.

Revenue recognition

The core principle of ASC Topic 606 is to recognize revenue that reflects the consideration we expect to receive for product sales when the promised items are transferred to customers.

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

We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those services, and when collectability of the consideration due is probable.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we are entitled to consideration in exchange for such transfer.

We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those products, and when collectability of the consideration due is probable.

Performance obligations

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For contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment.

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Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Shipping and handling costs

We have elected to account for shipping and handling services as fulfillment services in accordance ASC Topic 606 guidance;

accordingly, freight revenue will be combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement.

Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in Cost of sales in the accompanying Condensed Consolidated Statements of Income.

Shipping and handling cost s

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 consolidated statements of income.

Contract assets and liabilities

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Year Ended October 31,

2020 2019 2018

(in thousands)

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International - non-fenestration 7,935 16,134 15,846

$ 483,415 $ 503,837 $ 485,366

EU Fenestration:

United States - fenestration

International - fenestration 134,432 139,638 135,415

International - non-fenestration 26,622 25,359 24,558

$ 161,054 $ 164,997 $ 159,973

NA Cabinet Components:

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International - non-fenestration 1,778 2,289 2,227

$ 210,099 $ 229,644 $ 249,813

Unallocated Corporate & Other:

Eliminations $ ( 2,995 ) $ ( 4,637 ) $ ( 5,367 )

$ ( 2,995 ) $ ( 4,637 ) $ ( 5,367 )

Net sales $ 851,573 $ 893,841 $ 889,785

Cash and Cash Equivalents

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Although we believe we have an extensive customer base, the loss of one of these large customers or if such customers were to incur a prolonged period of decline in business, our financial condition and results of operations could be adversely affected.

For the years ended October 31, 2019 , 2018 and 2017 , no customers provided more than 10% of our consolidated net sales.

For the year ended October 31, 2020, one customer provided more than 10 % of our consolidated net sales.

For the years ending October 31, 2019 and 2018, no customers provided more than 10% of our consolidated net sales.

We have established an allowance for doubtful accounts to estimate the risk of loss associated with our accounts receivable balances.

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Significant unanticipated variances to our forecasts could require a change in the provision for excess or obsolete inventory, resulting in a charge to net income during the period of the change.

During the year ended October 31, 2019, we changed the method of inventory costing for certain inventory in two plants located in our NA Fenestration reportable business segment to the first-in first-out (FIFO) method from the last-in first-out 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 how we internally manage inventory, 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 .”

Long-Lived Assets

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If the carrying value exceeds the sum of the undiscounted cash flows, and there is no alternative use for the asset, we determine that the asset is impaired.

To measure the impairment charge, we compare the carrying amount of the long-lived asset to its fair value, as determined by quoted market prices in active markets, if available, or by discounting the projected future cash flows using our incremental borrowing rate.

This calculation of fair value requires us to develop and employ long-term forecasts of future operating results related to these assets.

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When we originally value our intangible assets, we use a variety of techniques to establish the carrying value of the assets, including the relief from royalty method, excess current year earnings method and income method.

Changes in market conditions throughout 2019 and 2017 impacted our long-term forecasts of future operating results with regard to the reduction of significant sales volume to a large customer of our United States (U.S.) vinyl operations, and lower-than-expected operating performance of our North American Cabinet Components business.

We determined that these conditions were indicators of triggering events which necessitated an evaluation of certain long-term assets utilized in these businesses for potential impairment.

Changes in market conditions throughout 2019 impacted our long-term forecasts of future operating results with regard to the reduction of significant sales volume to a large customer of our United States (U.S.) vinyl operations, and lower-than-expected operating performance of our NA Cabinet Components business.

The World Health Organization's (WHO), declaration of COVID-19 as a global pandemic also created significant changes in market conditions throughout 2020.

We determined that these conditions were indicators of triggering events which necessitated an evaluation of certain long-term assets used in these businesses for potential impairment.

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

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We cease capitalization of software costs when the software is substantially complete and is ready for its intended use.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The software is then amortized over its estimated useful life.

When events or circumstances indicate the carrying value of internal use software might not be recoverable, we assess the recoverability of these assets by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated from the asset’s use, consistent with the methodology to test other property, plant and equipment for impairment.

Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets.

Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

lives of the assets.

We capitalize betterments which extend the useful lives or significantly improve the operational efficiency of assets.

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Useful Life (in Years)

Land improvements

Building improvements

Machinery and equipment

Land improvements 7 to 25

Buildings 25 to 40

Building improvements 5 to 20

Machinery and equipment 2 to 15

Leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the lease.

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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.

During the three months ended April 30, 2020, we determined the WHO's characterization of the outbreak of COVID-19 as a global pandemic was a triggering event which could indicate that the carrying value of our goodwill was no longer greater than the fair value.

As a result of this determination, we performed a qualitative assessment for each of the five goodwill reportable units.

As a result of this analysis, we determined that our goodwill was not more likely than not impaired and no quantitative assessment was necessary.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 these three reporting units.

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 and fourth quarters of 2019 and the history of a narrow margin of fair value above carrying value in quantitative assessments performed in prior years.

We also elected to update the quantitative assessment of the other reportable unit in the EU Fenestration operating segment.

We determined that the fair value of these reporting units exceeded their carrying values by approximately 5 % and 36 %, respectively.

We concluded that no impairment was necessary.

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.

In addition, we accrue costs associated with the termination of contractual commitments including 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 lease expense through the cease-use date.

After the cease-use date, we determine if our operating lease payments are at market.

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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 September 2017, we closed a kitchen and bathroom cabinet door plant in Lansing, Kansas.

We expensed $ 4.6 million associated with our restructuring efforts for the year ended October 31, 2017, including cost of equipment moves, employee termination costs and severance, professional fees and operating lease costs.

Our facility lease obligations were deemed to be at fair market value.

We negotiated the exit of one of the vinyl facilities during September 2018, and the lease of the cabinet door plant expired during fiscal 2018.

We incurred $ 0.4 million and $ 1.5 million of expenses related to operating leases costs during the years ended October 31, 2019 and 2018, respectively, and we expect to incur costs related to the operating leases for the remaining vinyl facility during fiscal 2020 until we are able to sublet or otherwise exit the lease.

In addition, we evaluated the remaining depreciable lives of property, plant and equipment that has been abandoned, displaced or otherwise disposed as a result of the plant closures.

We recorded a change in estimate associated with the remaining useful lives of these assets which resulted in an increase in depreciation expense of $ 4.3 million for the year ended October 31, 2017.

Furthermore, we evaluated the remaining service lives of intangible assets with defined lives associated with our U.S.

vinyl extrusion business and recorded a change in estimate associated with the remaining useful lives of a customer relationship intangible and a utility process intangible asset resulting in an increase in amortization expense of $ 1.9 million for the year ended October 31, 2017.

We did not incur similar increases in depreciation or amortization expenses related to restructuring activities during the years ended October 31, 2019 and 2018.

COVID-19 Impact

On March 11, 2020, the WHO declared the outbreak of COVID-19 as a global pandemic and advised aggressive containment action.

In response to this declaration and the rapid global spread of COVID-19, national, state, and local governments have taken extraordinary and continuously evolving measures to limit the outbreak and spread of the virus, including travel bans, quarantines, "stay-at-home" orders and similar mandates imposing varying degrees of restrictions on social and non-essential commercial activity to promote social distancing.

Measures providing for business shutdowns generally exclude certain essential services commonly including critical infrastructure such as construction and the businesses that support that critical infrastructure.

To date, we have not experienced significant challenges or expenses implementing crisis management plans intended to meet government requirements for containment and prevention.

The COVID-19 pandemic and actions taken in response thereto are continuing to have an adverse effect on many sectors of the economy.

We initially reduced operating schedules and implemented furloughs to balance production and demand, but all facilities were operational as of October 31, 2020.

However, the duration and severity 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.

Therefore, while we expect some negative impacts on our business, results of operations, cash flows and financial position, the overall financial impact cannot be reasonably estimated at this time.

Additionally, in response to the business environment impacted by COVID-19 during 2020, we reduced capital expenditures and discretionary spending during the second and third quarters of the year.

We have currently resumed our normal business operations but we continue to closely monitor our working capital needs as events unfold.

As a result of the economic and business impact of COVID-19, we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of goodwill, intangibles, right-of-use assets, long-lived assets, accounts receivable (including allowances for doubtful accounts), and inventory, which could have a material adverse effect on our financial position and results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

We manage our exposure to losses for workers’ compensation, group medical, property, casualty and other insurance claims through a combination of self-insurance retentions and insurance coverage with third-party carriers.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Retirement Plans

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Thus, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.

We recorded a net loss for the year ended October 31, 2019 and net income for the years ended October 31, 2018 and 2017.

We recorded net income for the years ended October 31, 2020 and October 31, 2018 and net loss for the year ended October 31, 2019.

We have recorded pre-tax cumulative income from operations of $ 40.1 million for the three-year period ended October 31, 2020.

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On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law.

The Act reduced our federal income tax statutory rate from 35.0% to 21.0% and 23.3% for the fiscal years ended October 31, 2019 and 2018, respectively.

We have re-measured our deferred income tax assets and liabilities and have recorded tax expense for the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings.

For further details of the impact of the Act, see Note 10 , " Income Taxes ."

The Act reduced our federal income tax statutory rate from 35.0% to 21.0% for each of the fiscal years ended October 31, 2020 and 2019, respectively.

For the fiscal year ended October 31, 2018 we used a rate of 23.3 %, which reflects the period of November 1, 2017 through December 31,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2017 at the previous 35% rate, and the period of January 1, 2018 through October 31, 2018 at the new 21% rate.

For further details of the impact of the Act, see Note 10, "Income Taxes."

Final regulations were published by the Internal Revenue Service regarding Uniform Capitalization (UNICAP) that became effective during fiscal 2020.

Also, on March 27, 2020, The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law.

We are evaluating these regulations but do not believe they will result in a material impact on our consolidated financial statements.

Derivative Instruments

We have historically used financial and commodity-based derivative contracts to manage our exposure to fluctuations in foreign currency exchange rates and aluminum prices.

All derivatives are measured at fair value on a recurring basis and the methodology and classifications are discussed further in Note 13, "Derivative Instruments." We have not designated the derivative instruments we use as cash flow hedges under ASC Topic 815 " Derivatives and Hedging ” (ASC 815).

All derivatives are measured at fair value on a recurring basis.

We have not designated the derivative instruments we use as cash flow hedges under ASC Topic 815 "Derivatives and Hedging” (ASC 815).

Therefore, all gains and losses, both realized and unrealized, are recognized in the consolidated statements of income (loss) in the period of the change as the underlying assets and liabilities are marked-to-market.

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When these assets or liabilities settle, we record realized transaction gains or losses.

These realized and unrealized gains or losses are included in the accompanying consolidated statements of (loss) income under the caption, “Other, net.”

These realized and unrealized gains or losses are included in the accompanying consolidated statements of income (loss) under the caption, “Other, net.”

Stock–Based Compensation

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Accordingly, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

We have granted other awards which are linked to the performance of our common stock, but will settle in cash rather than the issuance of shares of our common stock.

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See Note 15, “Stock-based Compensation.”

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.

We bifurcate the liability

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

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 have also granted performance restricted stock units which settle in shares upon vesting.

These awards cliff vest upon a three-year service period with the absolute performance of our common stock as the vesting criteria.

We utilized a Monte Carlo simulation model to arrive at a grant-date value of these performance restricted stock units.

We used a Monte Carlo simulation model to arrive at a grant-date value of these performance restricted stock units.

This amount, which is settled in our common stock, is expensed over the three-year term of the award with a credit to additional paid-in-capital.

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Supplemental Cash Flow Information

The following table summarizes our supplemental cash flow information for the years ended October 31, 2019 , 2018 and 2017 :

The following table summarizes our supplemental cash flow information for the years ended October 31, 2020, 2019 and 2018 (in thousands):

Year Ended October 31,

(In thousands)

2020 2019 2018

Cash paid for interest $ 4,715 $ 9,020 $ 7,890

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Noncash investing and financing activities:

Investment in capital leases

Increase in capitalized expenditures in accounts payable and accrued liabilities $ 2,370 $ 2,897 $ 264

Related Party Transactions

During the years ended October 31, 2018 and 2017, we leased several operating facilities from a company that was directly owned by the former owner of our U.K.-based vinyl extrusion business, who was our employee until his retirement in October 2018.

We recorded rent expense of $ 1.3 million and $ 1.2 million related to the related party leases for the years ended October 31, 2018 and 2017.

We did not participate in any related party transactions during the year ended October 31, 2019.

Subsequent Events

We have evaluated events occurring after the balance sheet date for possible disclosure as a subsequent event through the date the financial statements were issued.

During the year ended October 31, 2018, we leased several operating facilities from a company that was directly owned by the former owner of our U.K.-based vinyl extrusion business, who was our employee until his retirement in October 2018.

We recorded rent expense of $ 1.3 million related to the related party leases for the year ended October 31, 2018.

We did no t participate in any related party transactions during the years ended October 31, 2020 and 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Subsequent Events

We have evaluated events occurring after the balance sheet date for possible disclosure as a subsequent event through the date the financial statements were issued.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consisted of the following as of October 31, 2019 and 2018 :

(In thousands)

Accounts receivable consisted of the following as of October 31, 2020 and 2019 (in thousands):

Trade receivables $ 88,287 $ 82,745

Other 161 594

Total 88,448 83,339

Allowance for doubtful accounts 161 393

Accounts receivable, net $ 88,287 $ 82,946

The changes in our allowance for doubtful accounts were as follows:

The changes in our allowance for doubtful accounts were as follows (in thousands):

Year Ended October 31,

(In thousands)

2020 2019 2018

Beginning balance as of November 1, 2019, 2018 and 2017, respectively $ 393 $ 325 $ 333

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Amounts written off ( 494 ) ( 916 ) ( 54 )

Recoveries — 284 —

Balance as of October 31, $ 161 $ 393 $ 325

Inventories consisted of the following at October 31, 2019 and 2018 :

(In thousands)

Inventories consisted of the following at October 31, 2020 and 2019 (in thousands):

Raw materials $ 33,298 $ 32,818

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Supplies and other 2,020 2,593

Total 67,665 70,949

Inventory reserves 6,484 3,790

Inventories, net $ 61,181 $ 67,159

The changes in our inventory reserve accounts were as follows for the years ended October 31, 2019 , 2018 and 2017 :

The changes in our inventory reserve accounts were as follows (in thousands):

Year Ended October 31,

(In thousands)

2020 2019 2018

Beginning balance as of November 1, 2019, 2018 and 2017, respectively $ 3,790 $ 4,375 $ 4,620

Charged to cost of sales 2,713 341 1,201

Write-offs — ( 939 ) ( 1,415 )

Other ( 19 ) 13 ( 31 )

Balance as of October 31, $ 6,484 $ 3,790 $ 4,375

As described in Note 1 , “ Nature of Operations and Basis of Presentation - Inventories,” during the year ended October 31, 2019, we elected to change our method of accounting for certain inventory in our NA Fenestration reportable business segment from LIFO to FIFO.

We applied this change in method of inventory costing by retrospectively adjusting the prior period financial statements.

As a result of the retrospective adjustment of the change in accounting principle, certain amounts in our consolidated

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

statements of net income for the three months and year ended October 31, 2018 was adjusted as follows (there was no impact to the corresponding three months and year ended October 31, 2017):

Three months ended October 31, 2018

Year ended October 31, 2018

As Reported (1)

Impact of change to FIFO

As Reported (1)

Impact of change to FIFO

(In thousands, except per share amounts)

Cost of sales

Operating income

Income before income taxes

Income tax (expense) benefit

Basic earnings per common share

Diluted earnings per common share

(1) As reported cost of sales and operating income have been updated to reflect the adoption of accounting standards update 2017-07.

See Note 20 , " New Accounting Guidance " for further details.

The consolidated balance sheet for the year ended October 31, 2018 was adjusted as follows:

As of October 31, 2018

Impact of change to FIFO

(In thousands)

Inventories, net

Deferred income taxes

Retained earnings

The consolidated statement of cash flow for the year ended October 31, 2018 was adjusted as follows (there was no impact to the corresponding year ended October 31, 2017):

As of October 31, 2018

Impact of change to FIFO

(In thousands)

Deferred income tax

Decrease in inventory

During the fourth quarter of 2019, we updated our assessment of the impact of the change in method of inventory costing and noted the impact would have not changed significantly.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Property, Plant and Equipment

Property, plant and equipment consisted of the following at October 31, 2019 and 2018 :

(In thousands)

Property, plant and equipment consisted of the following at October 31, 2020 and 2019 (in thousands):

Land and land improvements $ 10,298 $ 10,298

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Depreciation expense for the years ended October 31, 2020, 2019, and 2018 was $ 31.8 million, $ 34.3 million and $ 35.6 million, respectively.

Assets recorded under capital leases had a historical cost of $ 16.6 million and $ 22.2 million , respectively, and accumulated depreciation of $ 3.7 million and $ 3.4 million , respectively as of October 31, 2019 and 2018 .

Depreciation expense related to these assets totaled $ 0.2 million , $ 1.1 million and $ 2.0 million for the periods ended October 31, 2019 , 2018 , and 2017 , respectively.

Refer to Note 7 , " "Debt and Capital Lease Obligations" " for additional information on capital leases.

If there are indicators of potential impairment, we evaluate our property, plant and equipment for recoverability over the remaining useful lives of the assets.

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See further discussion at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Property, Plant and Equipment and Intangible Assets with Defined Lives."

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 (calculated as the present value of lease payments over the term of the lease) 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 October 31, 2020 (in thousands):

Leases Classification October 31, 2020

Operating lease assets Operating lease right-of-use assets $ 51,824

Finance lease assets Property, plant and equipment (less accumulated depreciation of $ 1,089 )

Total lease assets $ 67,433

Operating Current operating lease liabilities $ 7,459

Finance Current maturities of long-term debt 962

Operating Noncurrent operating lease liabilities 44,873

Finance Long-term debt 14,236

Total lease liabilities $ 67,530

The table below presents the components for the year ended October 31, 2020 (in thousands):

Components of lease costs Year Ended October 31, 2020

Operating lease cost

Finance lease cost

Amortization of leased assets

Interest on lease liabilities

Variable lease costs

Total lease cost $ 8,316

The table below presents supplemental cash flow information related to leases for the year ended October 31, 2020 (in thousands):

Supplemental Cash Flow Information Year Ended October 31, 2020

Cash paid for amounts included in the measurement of lease liabilities:

Finance leases - financing cash flows $ 1,092

Finance leases - operating cash flows $ 557

Operating leases - operating cash flows $ 8,681

Right-of-use assets obtained in exchange for lease liabilities:

Operating leases $ 19,559

Finance Leases $ 398

The table below presents the weighted average remaining lease terms and weighted average discount rates for the Company's leases as of October 31, 2020:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Year Ended October 31, 2020

Weighted average remaining lease term (in years)

Operating leases 7.8

Financing leases 15.25

Weighted average discount rate

Operating leases 3.52 %

Financing leases 3.62 %

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

Operating Leases Finance Leases

2021 $ 9,191 $ 1,496

2022 8,754 1,449

2023 8,340 1,350

2024 7,581 1,247

2025 6,166 1,188

Thereafter 19,941 12,768

Total lease payments 59,973 19,498

present value discount

Total lease liabilities $ 52,332 $ 15,198

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 (in thousands):

Operating Leases Finance Leases

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

amount representing interest 5,064

Present value of minimum lease payments $ 10,659

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Goodwill and Intangible Assets

The change in the carrying amount of goodwill for the years ended October 31, 2019 and 2018 was as follows:

The change in the carrying amount of goodwill for the years ended October 31, 2020 and 2019 was as follows (in thousands):

Year Ended October 31,

(In thousands)

Beginning balance as of November 1, 2020 and 2019 $ 145,563 $ 219,627

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Two of these units were included in our NA Fenestration segment and had goodwill balances of $ 35.9 million and $ 2.8 million, two units were included in our EU Fenestration segment with goodwill balances of $ 50.9 million and $ 17.4 million, and our NA Cabinet Components segment had one unit with a goodwill balance of $ 39.1 million.

During the the year ended October 31, 2019, we recorded impairment charges of $ 74.6 million associated with our NA Cabinet Components segment.

The details of the impairment charges, as well as the results of our goodwill assessment as of August 31, 2019 are more fully described at Note 1 , "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Goodwill."

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the year ended October 31, 2019, we recorded impairment charges of $ 74.6 million associated with our NA Cabinet Components segment.

The details of the impairment charges, as well as the results of our goodwill assessments during the year ended October 31, 2020 are more fully described at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Goodwill." For a summary of the change in the carrying amount of goodwill by segment, see Note 17, "Segment Information."

Identifiable Intangible Assets

Amortizable intangible assets consisted of the following as of October 31, 2019 and 2018 :

October 31, 2019

October 31, 2018

Remaining Weighted Average Useful Life

Gross Carrying

(In thousands)

Customer relationships

Trademarks and trade names

Patents and other technology

Amortizable intangible assets consisted of the following as of October 31, 2020 and 2019 (in thousands):

October 31, 2020 October 31, 2020 October 31, 2019

Remaining Weighted Average Useful Life Gross Carrying

Amount Accumulated

Amortization Gross Carrying

Amount Accumulated

Customer relationships 9 years $ 154,004 $ 80,441 $ 153,950 $ 70,103

Trademarks and trade names 9 years 55,745 37,314 55,745 35,210

Patents and other technology 3 years 22,386 21,312 22,386 19,471

Total $ 232,135 $ 139,067 $ 232,081 $ 124,784

We do not estimate a residual value associated with these intangible assets.

During the year ended October 31, 2017, we determined that triggering events occurred which necessitated a review of our long-term assets.

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

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.

We did not incur any corresponding incremental amortization expense during the years ended October 31, 2019 and 2018.

See additional disclosure at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring."

During each of the years ended October 31, 2019 and 2018, we retired fully amortized identifiable assets of $ 0.3 million related to customer relationships and patents and other technology, respectively.

During the year ended October 31, 2019, we retired fully amortized identifiable intangible assets of $ 0.3 million related to customer relationships and patents and other technology.

We retired $ 0.3 million of fully amortized identifiable assets related to customer relationships during the year ended October 31, 2020.

The aggregate amortization expense associated with identifiable intangible assets for the years ended October 31, 2020, 2019, and 2018 was $ 14.3 million, $ 15.3 million and $ 16.2 million, respectively.

Estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for future fiscal years ending October 31, is as follows (in thousands):

Amortization Expense

We did not incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2019 , 2018 , and 2017 .

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amortization Expense

2021 $ 12,573

Thereafter 37,657

Total $ 93,068

We did no t incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2020, 2019, and 2018.

Accrued Liabilities

Accrued liabilities consisted of the following at October 31, 2019 and 2018 :

(In thousands)

Accrued liabilities consisted of the following at October 31, 2020 and 2019 (in thousands):

Payroll, payroll taxes and employee benefits $ 16,000 $ 19,637

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Deferred revenue 763 1,251

Warranties 81 136

Audit, legal, and other professional fees 1,562 2,561

Accrued taxes 4,000 2,403

Other 4,286 2,165

Accrued liabilities $ 38,289 $ 39,221

Debt and Capital Lease Obligations

Long-term debt consisted of the following at October 31, 2019 and 2018 :

(In thousands)

Long-term debt consisted of the following at October 31, 2020 and 2019 (in thousands):

Revolving Credit Facility $ 103,000 $ 142,500

Capital lease obligations

Finance lease obligations and other 15,321 15,865

Unamortized deferred financing fees ( 901 ) ( 1,205 )

Total debt 117,420 157,160

Current maturities of long-term debt 692 746

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In addition, we were subject to commitment fees for the unused portion of the 2016 Credit Agreement ( 0.20 % to 0.30 %).

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On October 18, 2018, we amended and extended the 2016 Credit Agreement by entering into a $ 325.0 million revolving credit facility (the “2018 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 2018 Credit Facility has a five -year term, maturing on October 18, 2023, and required 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 2018 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.

At the time of the initial borrowing, the applicable rate was LIBOR + 1.50 %.

In addition, we are subject to commitment fees for the unused portion of the 2018 Credit Facility.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Less than or equal to 1.50 to 1.00

Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00

Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00

Greater than 3.00 to 1.00

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 accrue interest at the Default Rate, as defined, whereby the obligations will bear interest at a per annum rate equal to 2 % above the total per annum rate otherwise applicable.

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Some of these limitations, however, do not take effect so long as total leverage is less than or equal to 2.75 to 1.00 and available liquidity exceeds $ 25 million.

Substantially all of our domestic assets, with the exception of real property were utilized as collateral for the Credit Agreement.

We utilized initial borrowings of $ 205.0 million from the 2018 Credit Facility, along with additional funding of $ 10.0 million of cash on hand, to repay outstanding borrowings under the 2016 Credit Agreement of $ 213.5 million , to settle outstanding interest accrued and loan fees under the prior facility, and to pay loan fees associated with the 2018 Credit Agreement which totaled $ 1.0 million .

Substantially all of our domestic assets, with the exception of real property were used as collateral for the Credit Agreement.

Our initial borrowings from the 2018 Credit Facility were $ 205.0 million and along with additional funding of $ 10.0 million of cash on hand, was used to repay outstanding borrowings under the 2016 Credit Agreement of $ 213.5 million, to settle outstanding interest accrued and loan fees under the prior facility, and to pay loan fees associated with the 2018 Credit Agreement which totaled $ 1.0 million.

We expensed $ 1.1 million of unamortized deferred financing fees associated with the 2016 Credit Agreement, while deferring the remaining $ 0.5 million of unamortized deferred financing fees attributable to the remaining lenders from the previous facility over the life of the 2018 Credit Facility.

As of October 31, 2019 , we had $ 142.5 million of borrowings outstanding under the 2018 Credit Facility (reduced by unamortized debt issuance costs of $ 1.2 million ), $ 4.8 million of outstanding letters of credit and $ 15.9 million outstanding under capital leases.

As of October 31, 2020, we had $ 103.0 million of borrowings outstanding under the 2018 Credit Facility (reduced by unamortized debt issuance costs of $ 0.9 million), $ 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 the 2018 Credit Facility at October 31, 2020.

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We were in compliance with our debt covenants as of October 31, 2020.

Other Debt Instruments

We maintain certain capital lease obligations related to equipment purchases, vehicles, and warehouse space.

The cost and accumulated depreciation of property, plant and equipment under capital leases at October 31, 2019 was $ 16.6 million and $ 3.7 million .

These obligations accrue interest at an average rate of 3.60 % , and extend through the year 2037.

We maintain certain finance lease obligations related to equipment purchases, vehicles, and warehouse space.

Refer to Note 5 "Leases" for further information regarding our finance leases.

The table below presents the scheduled maturity dates of our long-term debt outstanding (excluding deferred loan costs of $ 0.9 million ) at October 31, 2020 (in thousands):

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The table below presents the scheduled maturity dates of our long-term debt outstanding (excluding deferred loan costs of $ 1.2 million ) at October 31, 2019 (in thousands):

Revolving Credit Facility

Capital Leases and Other Obligations

Aggregate Maturities

Revolving Credit Facility Finance Leases and Other Obligations Aggregate Maturities

2021 $ — $ 1,529 $ 1,529

2022 — 1,482 1,482

2023 103,000 1,383 104,383

2024 — 1,271 1,271

2025 — 1,188 1,188

Thereafter — 12,768 12,768

Total debt payments 103,000 19,621 122,621

present value discount of finance leases — ( 4,300 ) ( 4,300 )

Total $ 103,000 $ 15,321 $ 118,321

Retirement Plans

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Defined Benefit Plan

We have a non-contributory, single employer defined benefit pension plan that covers the majority of our domestic employees, excluding the Woodcraft employees who are not currently participating.

Effective January 1, 2007, we amended this defined benefit pension plan to include a cash balance formula for all new salaried employees hired on or after January 1, 2007 and for any non-union employees who were not participating in a defined benefit plan prior to January 1, 2007.

All participating salaried employees hired after January 1, 2007, are eligible to receive credits equivalent to 4 % of their annual eligible wages.

Some of the employees at the time of the amendment were “grandfathered” and are eligible to receive credits ranging up to 6.5 % based upon a percentage of benefits received under our defined benefit plan prior to this amendment of the pension plan.

Additionally, every year the participants will receive an interest related credit on their respective balance equivalent to the prevailing 30-year Treasury rate.

For employees who were participating in this plan prior to January 1, 2007, the benefit formula is a more traditional formula for retirement benefits, whereby the plan pays benefits to employees upon retirement, using a formula which considers years of service and pensionable compensation prior to retirement.

We have a non-contributory, single employer defined benefit pension plan that covers the majority of our domestic employees, excluding the NA Cabinet Component employees who are not currently participating.

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.

Every year, the participants will receive an interest related credit on their respective balance equivalent to the prevailing 30-year Treasury rate.

Of our pension plan participants, 99% have their benefit determined pursuant to the cash balance formula.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law on December 8, 2003.

For the remaining 1% of participants, the benefit formula is a traditional formula for retirement benefits, whereby the plan pays benefits to employees upon retirement, using a formula which considers years of service and pensionable compensation prior to retirement.

As a result of this action, we remeasured the pension assets and obligations for the pension plan, which resulted in a decrease to our projected benefit obligation and a corresponding net actuarial gain that was recorded in accumulated other comprehensive income (loss).

This remeasurement is included in the tables below, which reflect the full impact of pension plan results and accounting measurements for the year ended October 31, 2020.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law on December 8, 2003.

This Act introduces a Medicare prescription-drug benefit beginning in 2006 as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit at least “actuarially equivalent” to the Medicare benefit.

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Funded Status and Net periodic Benefit Cost

The changes in benefit obligation and plan assets, and our funded status (reported in deferred pension and postretirement benefits on the consolidated balance sheets) were as follows:

The changes in benefit obligation and plan assets, and our funded status (reported in deferred pension and postretirement benefits on the consolidated balance sheets) were as follows (in thousands):

Change in Benefit Obligation:

(In thousands)

Beginning balance as of November 1, 2019 and 2018, respectively $ 44,323 $ 35,959

Service cost 1,262 3,629

Interest cost 1,139 1,456

Actuarial loss (gain)

Actuarial loss 2,823 7,690

Benefits paid ( 712 ) ( 3,581 )

Administrative expenses ( 785 ) ( 830 )

Curtailments ( 1,141 ) —

Settlements ( 2,084 ) —

Projected benefit obligation at October 31, $ 44,825 $ 44,323

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Administrative expenses ( 785 ) ( 830 )

Settlements ( 2,084 ) —

Fair value of plan assets at October 31, $ 34,120 $ 31,212

Non current liability - Funded Status

Noncurrent liability - Funded Status $ ( 10,705 ) $ ( 13,111 )

As of October 31, 2020 and 2019, included in our accumulated comprehensive loss was a net actuarial loss of $ 9.9 million and $ 6.7 million, respectively.

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The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels.

The net periodic benefit cost for the years ended October 31, 2019 , 2018 and 2017 , was as follows:

The net periodic benefit cost for the years ended October 31, 2020, 2019 and 2018, was as follows (in thousands):

Year Ended October 31,

(In thousands)

2020 2019 2018

Service cost $ 1,262 $ 3,629 $ 3,908

Interest cost 1,139 1,456 1,130

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Amortization of net loss 162 125 64

Settlements 462 — —

Net periodic benefit cost $ 1,019 $ 3,233 $ 2,930

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The changes in plan assets and projected benefit obligations which were recognized in our other comprehensive loss for the years ended October 31, 2019 , 2018 and 2017 were as follows:

The changes in plan assets and projected benefit obligations which were recognized in our other comprehensive loss for the years ended October 31, 2020, 2019 and 2018 were as follows (in thousands):

Year Ended October 31,

(In thousands)

2020 2019 2018

Net loss (gain) arising during the period $ 2,141 $ 6,697 $ ( 2,189 )

Amortization of net loss 162 125 64

Curtailments 1,141 — —

Settlements 462 — —

Total recognized in other comprehensive loss $ 376 $ 6,572 $ ( 2,253 )

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For the Year Ended October 31,

2020 2019 2018 2020 2019 2018

Weighted Average Assumptions:

Benefit Obligation

Net Periodic Benefit Cost

Benefit Obligation Net Periodic Benefit Cost

Discount rate 3.22 % 3.10 % 4.44 % 3.10 % 4.44 % 3.68 %

Rate of compensation increase — % 3.00 % 3.00 % — % 3.00 % 3.00 %

Expected return on plan assets

Expected return on plan assets n/a n/a n/a 6.50 % 6.50 % 6.50 %

The discount rate was used to calculate the present value of the projected benefit obligation for pension benefits.

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The rate of compensation increase represents the long-term assumption for expected increases in salaries.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following tables provide our target allocation for the year ended October 31, 2020, as well as the actual asset allocation by asset category and fair value measurements as of October 31, 2020 and 2019:

Target Allocation

Actual Allocation

October 31, 2019

October 31, 2018

Target Allocation Actual Allocation

October 31, 2020 October 31, 2020 October 31, 2019

Equity securities 60.0 % 60.0 % 61.0 %

Fixed income 40.0 % 40.0 % 39.0 %

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fair Value Measurements at

October 31, 2019

October 31, 2018

October 31, 2020 October 31, 2019

(In thousands)

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International equity 6,130 6,219

Other 1,853 1,848

Equity securities $ 18,344 $ 18,648

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High-yield bond 1,252 1,237

Fixed income $ 12,244 $ 11,990

Total securities (1)

$ 34,120 $ 31,212

(1) Quoted prices in active markets for identical assets (Level 1).

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Pension Benefits

2026 - 2030 10,910

Total $ 23,703

Defined Contribution Plan

We also sponsor a defined contribution plan into which we and our employees make contributions.

We merged a predecessor plan sponsored by Woodcraft into our defined contribution plan effective January 1, 2017.

We match 50 % up to the first 5 % of employee annual salary deferrals under our existing plan.

Beginning January 1, 2018, the plan was amended to provide the same match to Woodcraft employees.

Prior to January 1, 2018, we matched 35 % up to the first 5 % of employee deferrals for employees who participated in the predecessor Woodcraft plan.

We also sponsor two defined contribution plans into which we and our employees make contributions.

As of January 1, 2020, we match 100 % up to the first 5 % of employee annual salary deferrals under our plan for all employees excluding NA Cabinet Components participants, who receive a 100 % match up to 4 % of employee annual salary deferrals.

Between January 1, 2018 and January 1, 2020, we matched 50 % up to the first 5 % of employee salary deferrals.

We do not offer our common stock as a direct investment option under these plans.

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The table below indicates the amount of these liabilities included in the accompanying consolidated balance sheets:

October 31, 2019

October 31, 2018

October 31, 2020 October 31, 2019

(In thousands)

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Deferred pension and postretirement benefits 218 311

Total $ 267 $ 360

We also have supplemental benefit plans covering certain executive officers and a non-qualified deferred compensation plan covering members of the Board of Directors and certain key employees.

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As of October 31, 2020 and 2019, the current portion of these liabilities was recorded under the caption "Accrued Liabilities," and the long-term portion was included under the caption "Other Liabilities" in the accompanying balance sheets.

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.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 consolidated balance sheets) follows:

Year Ended October 31,

(In thousands)

Beginning balance as of November 1, 2018, and 2017, respectively

Provision for warranty expense

Change in accrual for preexisting warranties

Warranty costs paid

Total accrued warranty

Current portion of accrued warranty

Long-term portion at October 31,

We provide for income taxes on taxable income at the applicable statutory rates.

The following table summarizes the components of income tax expense (benefit) for the years ended October 31, 2019 , 2018 and 2017 :

The following table summarizes the components of income tax expense (benefit) for the years ended October 31, 2020, 2019 and 2018 (in thousands):

Year Ended October 31,

(In thousands)

2020 2019 2018

Federal $ 6,043 $ 3,338 $ 983

State and local 1,505 299 417

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Total current 11,993 7,516 4,756

Federal ( 64 ) 1,497 ( 5,828 )

State and local ( 315 ) 1,087 670

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Total income tax expense (benefit) $ 11,804 $ 10,776 $ ( 800 )

For financial reporting purposes, (loss) income before income taxes for the years ended October 31, 2019 , 2018 and 2017 includes the following components:

For financial reporting purposes, income (loss) before income taxes for the years ended October 31, 2020, 2019 and 2018 includes the following components (in thousands):

Year Ended October 31,

(In thousands)

Total (loss) income before income taxes

2020 2019 2018

Domestic $ 26,229 $ ( 58,247 ) $ 9,721

Foreign 24,071 22,293 16,032

Total income (loss) before income taxes $ 50,300 $ ( 35,954 ) $ 25,753

The following table reconciles our effective income tax rate to the federal statutory rate for the years ended October 31, 2020, 2019 and 2018:

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Year Ended October 31,

2020 2019 2018

United States tax at statutory rate 21.0 % 21.0 % 23.3 %

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Non-United States income tax ( 0.8 ) % ( 0.5 ) % ( 1.6 ) %

Deferred rate impact

General business credits ( 2.3 ) % ( 4.7 ) % ( 0.4 ) %

Change in valuation allowance

Other permanent differences 1.7 % 3.0 % — %

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Foreign tax positions under the Act (GILTI and FDII) 2.5 % 3.3 % — %

Tax impact of stock based compensation

Impact of deemed repatriation — % ( 1.1 ) % 4.8 %

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Effective tax rate 23.5 % ( 30.0 ) % ( 3.1 ) %

On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law.

The Act reduced our federal income tax statutory rate from 35.0 % to 21.0 % for the fiscal year ending October 31, 2019 and 23.3 % for the fiscal year ended October 31, 2018, which reflects the period November 1, 2017 to December 31, 2017 at the previous 35.0 % rate and the period January 1, 2018 to October 31, 2018 at the new 21.0% rate.

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).

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law.

This Act reduced our federal income tax statutory rate from 35.0% to 21.0% for the fiscal years ending October 31, 2020 and October 31, 2019, and 23.3 % for the fiscal year ended October 31, 2018, which reflects the period November 1, 2017 to December 31, 2017 at the previous 35.0% rate and the period January 1, 2018 to October 31, 2018 at the new 21.0% rate.

This 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).

We elected to account for the tax on GILTI as a period cost and therefore have not recorded deferred taxes related to GILTI on our foreign subsidiaries.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The October 31, 2020 effective tax rate was impacted by the true-up of our accruals and related deferred taxes from prior year filings and settled tax audits as well as $ 0.6 million related to the vesting or exercise of equity-based compensation awards.

The October 31, 2019 effective rate was primarily impacted by a net charge of $ 1.2 million related to GILTI and FDII, as well as discrete charge of $ 0.4 million for the adjustment of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings and $ 0.6 million related to the vesting or exercise of equity-based compensation awards.

Additionally, during the year ended October 31, 2019, we recorded a $ 74.6 million asset impairment charge, which was primarily non-deductible, in the NA Cabinet Components segment, as further explained in Note 6, "Goodwill and Intangible Assets."

Discrete items contributing to the October 31, 2018 income tax benefit included $ 7.7 million for the re-measurement of our deferred income tax assets and liabilities due to the decrease in the federal corporate income tax rate, a benefit of $ 0.2 million for the true up of our accruals and related deferred taxes from prior year filings and settled tax audits, and a benefit of $ 0.2 million related to the vesting or exercise of equity-based compensation awards, partially offset by a tax expense of $ 1.2 million for the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings.

The decrease in the October 31, 2017 effective tax rate is due primarily to a greater proportion of U.S.

taxable income in relation to foreign taxable income for the year.

tax rate is generally higher than the foreign tax rate.

The effective rate is also lower due to a change over a period of three years in the deferred tax rate, primarily in the U.K., from 19% to 17%.

Given the significance of the Act, the SEC staff issued Staff Accounting Bulletin No.

118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period”.

As of October 31, 2019, we have completed the accounting for the tax effects of the Act.

In light of the Act, we repatriated $ 24.2 million and $ 2.8 million of foreign earnings from our international operations during the years ended October 31, 2019 and 2018 , respectively.

Discrete items contributing to the October 31, 2018 income tax benefit included $ 7.7 million for the remeasurement of our deferred income tax assets and liabilities due to the decrease in the federal corporate income tax rate, a benefit of $ 0.2 million for the true up of our accruals and related deferred taxes from prior year filings and settled tax audits, and a benefit of $ 0.2 million related to the vesting or exercise of equity-based compensation awards, partially offset by a tax expense of $ 1.2 million for the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings.

Given the significance of the Tax Cuts and Jobs Act, the SEC staff issued Staff Accounting Bulletin No.

118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period." As of October 31, 2019, we have completed the accounting for the tax effects of the Act.

In light of the Tax Cuts and Jobs Act, we repatriated $ 31.9 million and $ 24.2 million of foreign earnings from our international operations during the years ended October 31, 2020 and 2019, respectively.

This was repatriation of excess cash that was a portion of the one-time mandatory transition tax discussed above.

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With the exception of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings, we do not anticipate any material tax impact from any potential repatriation of previously unremitted foreign earnings.

If the investment in our foreign subsidiaries were completely realized, we could incur an estimated residual U.S.

tax liability of $ 0.1 million .

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The decrease in the 2017 effective tax rate is due primarily to a greater proportion of U.S.

taxable income in relation to foreign taxable income for the year.

tax rate is generally higher than the foreign tax rate.

The effective rate is also lower due to a change over a period of three years in the deferred tax rate, primarily in the U.K., from 19% to 17%.

Significant components of our net deferred tax liabilities and assets were as follows:

(In thousands)

If the investment in our foreign subsidiaries were completely realized, we would not incur a residual U.S.

tax liability.

Significant components of our net deferred tax liabilities and assets were as follows (in thousands):

Deferred tax assets:

2 unchanged sentences

Pension and other benefit obligations 3,303 4,365

Inventory 471 632

Loss and tax credit carry forwards 2,331 2,915

Other 103 110

Total gross deferred tax assets 14,313 16,895

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We evaluate tax benefits of operating losses and tax credit carry forwards on an ongoing basis, including a review of historical and projected future operating results, the eligible carry forward period and other circumstances.

We have recorded a valuation allowance for certain state net operating losses as of October 31, 2019 and 2018 , totaling $ 1.6 million and $ 1.3 million , respectively ( $ 1.2 million and $ 1.0 million , respectively, net of federal taxes) for the respective periods.

In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets.

The following table reconciles the change in the unrecognized income tax benefit associated with uncertain tax positions for the years ended October 31, 2019 , 2018 and 2017 (in thousands):

We have recorded a valuation allowance for certain state net operating losses as of October 31, 2020 and 2019, totaling $ 1.5 million and $ 1.6 million, respectively ($ 1.2 million net of federal taxes for each year) for the respective periods.

In assessing the need for a

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets.

The following table shows the change in the unrecognized income tax benefit associated with uncertain tax positions for the years ended October 31, 2020, 2019 and 2018 (in thousands):

Income Tax Benefits

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Additions for tax positions related to the prior year 16

Reassessment of position ( 66 )

Balance at October 31, 2019 $ 556

3 unchanged sentences

Balance at October 31, 2020 $ 522

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of October 31, 2020, our unrecognized tax benefit (UTB) relates to certain state tax items regarding the interpretation of tax laws and regulations.

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Commitments and Contingencies

Operating Leases and Purchase Obligations

We have operating leases for certain real estate and equipment used in our business.

Rental expense for the years ended October 31, 2019 , 2018 and 2017 was $ 9.9 million , $ 9.5 million and $ 10.5 million , respectively.

Purchase Obligations

We are a party to non-cancelable purchase obligations primarily for door hardware, primary and secondary steel and primary and secondary aluminum used in our manufacturing processes, as well as expenditures related to capital projects in progress.

2 unchanged sentences

Future amounts paid pursuant to these arrangements will depend, to some extent, on our usage.

The following table presents future minimum rental payments under operating leases with remaining terms in excess of one year at October 31, 2019 (in thousands):

Asset Retirement Obligation

2 unchanged sentences

We are depreciating the asset and accreting the liability over a seven year term, to culminate in an asset retirement obligation of $ 2.3 million as of February 2025.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Remediation and Environmental Compliance Costs

3 unchanged sentences

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 .

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 2021.

While we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time.

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We have been and are currently party to multiple claims, some of which are in litigation, relating to alleged defects in a commercial sealant product that was manufactured and sold during the 2000's.

During the years ended October 31, 2018 and 2017 , our insurance carrier reimbursed fees and expenses originally incurred as part of our defense of these various commercial sealant claims totaling $ 0.5 million and $ 4.0 million , respectively.

There were no corresponding reimbursements during 2019.

During the year ended October 31, 2018 our insurance carrier reimbursed fees and expenses originally incurred as part of our defense of these various commercial sealant claims totaling $ 0.5 million.

There were no corresponding reimbursements during the years ended October 31, 2020 or 2019.

While we believe that our product was not defective and that we would prevail in these commercial sealant product claims if taken to trial, the timing, ultimate resolution and potential impact of these claims is not currently determinable.

Nevertheless, after taking into account all currently available information, including our defenses, the advice of our counsel, and the extent and currently-expected availability of our existing insurance coverage, we believe that the eventual outcome of these commercial sealant claims will not have a material adverse effect on our overall financial condition, results of operations or cash flows, and we have not recorded any accrual with regard to these claims.

Derivative Instruments

Our derivative activities are subject to the management, direction, and control of the Chief Financial Officer and Chief Executive Officer.

Certain transactions in excess of specified levels require further approval from the Board of Directors.

The nature of our business activities requires the management of various financial and market risks, including those related to changes in foreign currency exchange rates and aluminum scrap prices.

We have historically used foreign currency forwards and options to mitigate or eliminate certain of those risks at our subsidiaries.

We use foreign currency contracts to offset fluctuations in the value of accounts receivable and payable balances that are denominated in currencies other than the United States Dollar, including the Euro, British Pound Sterling and Canadian Dollar.

Currently, we do not enter into derivative transactions for speculative or trading purposes.

We are exposed to credit loss in the event of nonperformance by the counterparties to our derivative transactions.

We attempt to mitigate this risk by monitoring the creditworthiness of our counterparties and limiting our exposure to individual counterparties.

In addition, we have established master netting agreements in certain cases to facilitate the settlement of gains and losses on specific derivative contracts.

We have not designated any of our derivative contracts as hedges for accounting purposes in accordance with the provisions under the Accounting Standards Codification topic 815, Derivatives and Hedging (ASC 815).

Therefore, changes in the fair value of these contracts and the realized gains and losses are recorded in the consolidated statements of (loss) income for the years ended October 31, 2019 , 2018 and 2017 were as follows (in thousands):

Year Ended October 31,

Derivatives Not Designated as Hedging Instruments

Location of (Loss) or Gain:

Foreign currency derivatives

We have chosen not to offset any of our derivative instruments in accordance with the provisions of ASC 815.

Therefore, the assets and liabilities are presented on a gross basis on our accompanying consolidated balance sheets.

Less than $ 0.1 million of fair value related to foreign currency derivatives was included in prepaid and other current assets as of the years ended October 31, 2019 and 2018, and less than $ 0.1 million of fair value related to foreign currency derivatives was included in accrued liabilities as of October 31, 2019.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes the notional amounts and fair value of outstanding derivative contracts at October 31, 2019 and 2018 (in thousands):

Notional as indicated

Fair Value in $

Foreign currency derivatives:

Buy EUR, Sell USD

Sell CAD, Buy USD

Sell GBP, Buy USD

Buy EUR, Sell GBP

Buy USD, Sell EUR

For the classification in the fair value hierarchy, see Note 13 , " Fair Value Measurements of Assets and Liabilities ", included herewith.

Fair Value Measurements of Assets and Liabilities

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

As of October 31, 2019 and 2018 , foreign currency derivatives were the only instruments being measured on a recurring basis.

Less than $ 0.1 million of foreign currency derivatives were included in total assets as of October 31, 2019 and less than $ 0.1 million of foreign currency derivatives were included in total assets and total liabilities as of October 31, 2018 .

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of October 31, 2020 no instruments were being measured on a recurring basis.

For the year ended October 31, 2019, foreign currency derivatives were the only instruments being measured on a recurring basis.

Less than $ 0.1 million of foreign currency derivatives were included in total assets as of October 31, 2019.

There were no outstanding foreign currency derivatives as of October 31, 2020.

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.

As of October 31, 2019 and 2018 , we had approximately $ 2.4 million of certain property, plant and equipment located in our NA Fenestration segment that was recorded at fair value on a non-recurring basis and classified as Level 3.

The fair value was based on broker opinions.

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.

Carrying amounts reported on the balance sheets 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 changes in interest rate risk.

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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 14, "Stock-Based Compensation - Performance Share Awards."

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

For further information refer to Note 13.

Stock-Based Compensation - Performance Share Awards."

Stock-Based Compensation

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We grant restricted stock units to non-employee directors on the first business day of each fiscal year.

Annually, pending approval by the Compensation & Management Development Committee of our Board of Directors in December, we grant a mix of restricted stock awards, performance shares and/or performance restricted stock units to officers, management and key employees.

As approved by the Compensation & Management Development Committee of our Board of Directors annually, we grant a mix of restricted stock awards, 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.

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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 awards is entitled to all of the rights of a shareholder, except that the awards are nontransferable during the vesting period.

The recipient of a restricted stock award is entitled to all of the rights of a shareholder, except that the awards are 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 years ended October 31, 2019 , 2018 and 2017 , follows:

Restricted Stock Awards

Weighted Average

A summary of non-vested restricted stock award activity during the years ended October 31, 2020, 2019 and 2018, follows:

Restricted Stock Awards Weighted Average

Grant Date Fair Value per Share

Non-vested at October 31, 2017 284,300 $ 19.66

Granted 73,400 20.70

Vested ( 111,800 ) 20.16

Forfeited ( 28,700 ) 19.66

Non-vested at October 31, 2018 217,200 19.76

Granted 124,800 13.78

Vested ( 42,500 ) 17.87

Forfeited ( 69,400 ) 19.19

Non-vested at October 31, 2019 230,100 17.02

Granted 63,400 18.82

Vested ( 51,000 ) 17.30

Cancelled ( 55,000 ) 19.45

Non-vested at October 31, 2020 187,500 $ 16.82

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The total weighted average grant-date fair value of restricted stock awards that vested during the years ended October 31, 2020, 2019 and 2018 was $ 1.1 million, $ 1.3 million and $ 2.3 million, respectively.

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We expect to recognize this expense over the remaining weighted average period of 1.7 years.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 grant of stock options to non-employee directors.

In December 2017, the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted stock units as further described below.

As a result, stock options were not granted during the years ended October 31, 2020, 2019, and 2018.

Stock options typically vest ratably over a three -year period with service and continued employment as the vesting conditions.

Stock options typically vested ratably over a three-year period with service and continued employment as the vesting conditions.

Our stock options may be exercised up to a maximum of ten years from the date of grant.

The fair value of the stock options 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 the Black-Scholes pricing model to estimate the fair value of our stock options.

A description of the methodology for the valuation assumptions follows:

Expected Volatility – For stock options granted prior to July 1, 2013, we used an estimate of the historical volatility of a selected peer group.

Effective July 1, 2013, we determined that we had sufficient historical data to calculate the volatility of our common stock since our spin-off in April 2008.

We believe there has been uncertainty in the U.S.

equities market over the past several years and that uncertainty has contributed to volatility in equities in general.

We expect this volatility to continue over the foreseeable future.

Therefore, we believe that our historical volatility is a proxy for expected volatility.

We have not excluded any of our historical data from the volatility calculation, and we are not aware of any specific significant factors which might impact our future volatility.

Expected Term – For stock options granted prior to July 1, 2013, we determined the expected term using historical information of our former parent company prior to the spin-off in 2008, with regards to option vesting, exercise behavior and contractual expiration, as we believed that this employee group was the most similar to our employee group.

Separate groups of employees that have similar historical exercise behavior were considered separately.

Effective July 1, 2013, we determined that we had sufficient historical data to estimate our expected term using our own data with regards to the exercise behavior, cancellations, retention patterns and remaining contractual terms.

When analyzing these patterns and variables, we considered the stratification of the awards (large grants to relatively few employees versus smaller grants to many others), the age of certain employees with larger grants, the historical exercise behavior of the employee group, and fluctuations/volatility of our underlying common stock, as to whether the stock options are expected to be out-of-the-money.

For our directors, stock options vested immediately, and, as such, the expected term approximated the contractual term, after adjusting for historical forfeitures.

We believe our estimates are reasonable given these factors.

Risk-Free Rate – We base the risk-free rate on the yield at the date of grant of a zero-coupon United States Treasury bond whose maturity period equals the option’s expected term.

Expected Dividend Yield – We base the expected dividend yield on our historical dividend payment of approximately $ 0.16 per share.

The following table summarizes the assumptions used to estimate the fair value of our stock options granted during the year ended October 31, 2017 .

Year Ended October 31, 2017

Weighted-average expected volatility

Weighted-average expected term (in years)

Risk-free interest rate

Expected dividend yield over expected term

Weighted average grant date fair value

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The fair value of the stock options was determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital.

We used the Black-Scholes pricing model to estimate the grant date fair value.

The inputs to this model included expected volatility, expected term, a risk-free rate and expected dividend rate at the time of grant.

For employees who were nearing retirement-eligibility, we recognized stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date.

The following table summarizes our stock option activity for the years ended October 31, 2020, 2019 and 2018.

Stock Options

Weighted Average

Exercise Price

Weighted Average

Stock Options Weighted Average

Exercise Price Weighted Average

Remaining Contractual

Term (in years)

Term (in years) Aggregate

Outstanding at October 31, 2017 2,152,758 $ 17.44 5.2 $ 9,700

Exercised ( 377,218 ) 12.58

Forfeited/Expired ( 21,884 ) 19.28

Outstanding at October 31, 2018 1,753,656 $ 18.47 5.0 $ 51

Exercised ( 204,770 ) 15.76

Forfeited/Expired ( 132,700 ) 20.01

Outstanding at October 31, 2019 1,416,186 $ 18.71 4.2 $ 1,449

Exercised ( 215,733 ) 17.09

Forfeited/Expired ( 105,124 ) 20.28

Outstanding at October 31, 2020 1,095,329 $ 18.88 3.6 $ 561,000

Vested or expected to vest at October 31, 2019

Vested at October 31, 2020 1,095,329 $ 18.88 3.6 $ 561,000

Exercisable at October 31, 2020 1,095,329 $ 18.88 3.6 $ 561,000

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The total fair value of stock options vested during the years ended October 31, 2020, 2019 and 2018, was $ 0.6 million, $ 1.1 million and $ 1.5 million, respectively.

As of October 31, 2019 , substantially all compensation cost related to stock options has been recognized.

As of October 31, 2020, all compensation cost related to stock options has been recognized.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Restricted Stock Units

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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 years ended October 31, 2019 , 2018 and 2017 , 34,050 , 18,050 and 24,560 restricted stock units, respectively, were granted and immediately vested with corresponding weighted average grant date fair value of $ 15.51 , $ 21.85 and $ 15.65 , respectively.

As of October 31, 2019 , there were 4,616 non-vested restricted stock units from the fiscal 2019 grant which will vest in December 2020.

As of October 31, 2018 and 2017 , there were no non-vested restricted stock units.

During the years ended October 31, 2020, 2019 and 2018, 25,621 , 34,050 and 18,050 restricted stock units, respectively, were granted with corresponding weighted average grant date fair value of $ 18.18 , $ 15.51 , and $ 21.85 , respectively.

As of October 31, 2019, there were 4,616 non-vested restricted stock units from the fiscal 2019 grant that will vest in December 2020.

As of October 31, 2020 there were 21,774 unvested restricted stock units from the fiscal 2020 grant.

During the year ended October 31, 2019, we paid less than $ 0.4 million to settle restricted stock units.

We did not make any payments to settle restricted stock units during the years ended October 31, 2018 and 2017 .

Performance Share Awards

We have granted performance share awards to key employees and officers annually in December.

In addition, we awarded performance shares in January 2016 to a new officer.

These awards cliff vest after a three -year period with service and performance measures such as relative total shareholder return (R-TSR) and earnings per share (EPS) growth as vesting conditions.

During the year ended October 31, 2020, we paid $ 0.2 million to settle restricted stock units.

There were no payments to settle restricted stock units during the year ended October 31, 2018.

Performance Share Award s

We have awarded annual grants of performance shares to key employees and officers.

Awards issued during the year ended October 31, 2018 cliff vest after a three-year period with service and performance measures such as relative total shareholder return (R-TSR) and earnings per share (EPS) growth as vesting conditions.

The number of performance share awards earned is variable depending on the metrics achieved.

The settlement method is 50 % in cash and 50 % in our common stock.

Performance share awards issued during the year ended October 31, 2019 vest with return on net assets (RONA) as the vesting condition and pay out 100 % in cash.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Performance share awards issued during the years ended October 31, 2020 and October 31, 2019 vest with return on net assets (RONA) as the performance 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.

For awards issued during the year ended October 31, 2018, 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 used 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.

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Grant Date Fair Value

Shares Awarded

November 30, 2016

Grant Date Shares Awarded EPS R-TSR RONA Forfeited

December 7, 2017 146,500 $ 20.70 $ 21.81 $ — 54,008

December 5, 2018 131,500 $ — $ — $ 13.63 40,900

On December 3, 2018 and January 25, 2019, 139,164 shares vested pursuant to the December 2013 grant and a total of 4,300 shares vested pursuant to the January 2016 grant, however, performance conditions resulted in no share issuances or cash payments for either of these awards.

The November 2016 and December 2017 grants include a return on invested capital (ROIC) metric which, if achieved, could enhance the number of shares that are ultimately issued but cannot exceed the maximum (200%).

Due to the uncertainty with regard to achieving this metric, no value has been assigned.

In the event and at such time as the metric is deemed achievable, compensation expense will begin to be recognized through the remaining vesting period.

For the years ended October 31, 2019 and 2017, we recorded $ 1.1 million and $ 3.0 million , respectively, of compensation expense related to performance share awards.

For the year ended October 31, 2018, we recorded a decrease in compensation expense of $ 0.9 million , which reflected a decrease in the number of shares expected to vest in November 2019 associated with the November 30, 2016 performance share grant.

December 5, 2019 55,900 $ — $ — $ 19.40 5,300

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.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

Performance shares 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.

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.

We evaluate the probability of the performance share vesting within one year of the vesting date.

As of October 31, 2019, we have deemed 56,103 performance share awards from our November 30, 2016 grant to vest, of which 28,051 will be paid in our common stock and 28,051 , along with accrued dividends, will settle in cash.

For the years ended October 31, 2019 and 2017, there were 28,051 and 23,175 shares, respectively, related to performance shares that were potentially dilutive and considered in the diluted weighted average shares calculations.

As of October 31, 2020, we have deemed that no shares related to the December 2017 grants of performance shares are probable to vest.

For the year ended October 31, 2019 there were 28,051 related to performance shares that were potentially dilutive and considered in the diluted weighted average shares calculations.

No contingent shares related to performance shares are included in diluted weighted average shares for the year ended October 31, 2018.

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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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

awarded performance restricted stock units may vest.

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

A-TSR greater than or equal to 50%

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

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

A-TSR less than -20%

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:

Shares Awarded

Grand Date Fair Value

Shares Forfeited

Grant Date Shares Awarded Grant Date Fair Value Shares Forfeited

December 7, 2017 78,200 $ 17.76 28,854

December 5, 2018 89,200 $ 13.63 25,500

During the years ended October 31, 2019 and 2018, we recorded compensation expense of approximately $ 0.7 million and $ 0.4 million related to our performance share restricted units.

December 5, 2019 35,000 $ 19.40 —

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.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes amounts expensed as selling, general and administrative expense related to restricted stock awards, stock options, restricted stock units, performance share awards and performance restricted stock units for the years ended October 31, 2020, 2019 and 2018 (in thousands):

Year Ended October 31,

2020 2019 2018

Restricted stock awards $ 625 $ 1,018 $ 1,462

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Net compensation expense

$ 892 $ 2,968 $ 1,057

Stockholders' Equity

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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.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

We record treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.

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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 $ 0.3 million and $ 2.1 million in the years ended October 31, 2019 and 2018 , respectively.

We recorded a charge to retained earnings of $ 0.1 million, $ 0.3 million and $ 2.1 million, in the years ended October 31, 2020, 2019, and 2018, respectively.

For a summary of treasury stock activity for the years ended October 31, 2020, 2019 and 2018, refer to the Consolidated Statement of Stockholders' Equity located elsewhere herein.

Other Income (Expense)

Other income included under the caption "Other, net" on the accompanying consolidated statements of (loss) income, consisted of the following (in thousands):

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other income included under the caption "Other, net" on the accompanying consolidated statements of income (loss), consisted of the following (in thousands):

Year Ended October 31,

2020 2019 2018

Foreign currency transaction (losses) gains $ ( 42 ) $ ( 187 ) $ 113

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Interest income 28 63 69

Other income for the years ended October 31, 2018 and 2017 has been updated to reflect the adoption of Accounting Standards Update 2017-07.

For further information, see Note 21, "New Accounting Guidance".

Other 66 41 7

Other income $ 280 $ 116 $ 1,156

Segment Information

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

and (3) NA Cabinet Components, comprising our cabinet door and components operations.

and (3) NA Cabinet Components, comprising our cabinet door and components segment.

We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance and legal costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process.

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Segment information for the years ended October 31, 2020, 2019 and 2018 was as follows (in thousands):

NA Fenestration (1)

EU Fenestration (1)

NA Cabinet Comp.

NA Fenestration EU Fenestration NA Cabinet Comp.

Unallocated Corp.

& Other Total

Year Ended October 31, 2020

Net sales $ 483,415 $ 161,054 $ 210,099 $ ( 2,995 ) $ 851,573

Depreciation and amortization 23,555 9,468 13,732 474 47,229

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Capital expenditures 15,761 5,435 4,423 107 25,726

Total assets $ 252,703 $ 223,248 $ 174,713 $ 40,921 $ 691,585

Year Ended October 31, 2019

Net sales $ 503,837 $ 164,997 $ 229,644 $ ( 4,637 ) $ 893,841

Depreciation and amortization 27,054 8,845 13,178 509 49,586

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Capital expenditures 12,984 6,365 5,383 151 24,883

Total assets $ 226,243 $ 212,239 $ 181,416 $ 25,212 $ 645,110

Year Ended October 31, 2018

Net sales $ 485,366 $ 159,973 $ 249,813 $ ( 5,367 ) $ 889,785

Depreciation and amortization 27,248 9,607 14,401 566 51,822

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Capital expenditures $ 13,929 $ 5,450 $ 6,965 $ 140 $ 26,484

(1) NA Fenestration and EU Fenestration were previously named "NA Engineered Components" and "EU Engineered Components".

The following table summarizes the change in the carrying amount of goodwill by segment for the years ended October 31, 2020 and 2019 (in thousands):

NA Fenestration

EU Fenestration

NA Cabinet Comp.

NA Fenestration EU Fenestration NA Cabinet Comp.

Unallocated Corp.

& Other Total

Balance as of October 31, 2018 $ 38,712 $ 67,168 $ 113,747 $ — $ 219,627

Asset impairment charge — — ( 74,600 ) — ( 74,600 )

Foreign currency translation adjustment — 536 — — 536

Balance as of October 31, 2019 $ 38,712 $ 67,704 $ 39,147 $ — $ 145,563

Asset impairment charge

Foreign currency translation adjustment — 591 — — 591

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We did not allocate non-operating expense or income tax expense to the reportable segments.

The following table reconciles operating income (loss) as reported above to net (loss) income for the years ended October 31, 2019 , 2018 and 2017 :

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table reconciles operating income (loss) as reported above to net income (loss) for the years ended October 31, 2020, 2019 and 2018 (in thousands):

Year Ended October 31,

(in thousands)

Operating (loss) income

2020 2019 2018

Operating income (loss) $ 55,265 $ ( 26,427 ) $ 35,697

Interest expense ( 5,245 ) ( 9,643 ) ( 11,100 )

Other, net 280 116 1,156

Income tax (expense) benefit ( 11,804 ) ( 10,776 ) 800

Net (loss) income

Net income (loss) $ 38,496 $ ( 46,730 ) $ 26,553

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Geographic Information

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Year Ended October 31,

Net sales 2020 2019 2018

United States $ 654,802 $ 683,204 $ 676,776

Europe 158,829 162,106 159,652

Canada 18,213 20,088 23,610

Asia 11,504 18,360 18,584

Other foreign countries 8,223 10,083 11,163

Total net sales $ 851,573 $ 893,841 $ 889,785

Year Ended October 31,

Long-lived assets, net 2020 2019

United States $ 307,534 $ 288,722

Germany 25,519 16,899

United Kingdom 142,097 140,839

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and intangible assets, net.

Beginning in the year ended October 31, 2020, this amount also includes operating lease right-of-use assets.

QUANEX BUILDING PRODUCTS CORPORATION

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Earnings Per Share

We compute basic (loss) earnings per share by dividing net (loss) income by the weighted average number of common shares outstanding during the period.

We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the period.

Diluted earnings per common and potential common shares include the weighted average of additional shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock as determined using the treasury stock method prescribed by U.S.

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The computation of basic and diluted earnings per share for the years ended October 31, 2020, 2019 and 2018 follows (in thousands, except per share data):

Net (Loss) Income

Weighted Average Shares

Year Ended October 31, 2020 Net Income (Loss) Weighted Average Shares Per Share

Basic earnings per common share $ 38,496 32,689 $ 1.18

Effect of dilutive securities:

Stock options 10

Restricted stock 90

Performance restricted stock units 32

Diluted loss per common share $ 38,496 32,821 $ 1.17

Year Ended October 31, 2019

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Diluted loss per common share $ ( 46,730 ) 32,960 $ ( 1.42 )

Year Ended October 31, 2018

Basic earnings per common share

Effect of dilutive securities:

Effect of anti-dilutive securities:

Stock options 40

Restricted stock 113

Diluted earnings per common share

Performance share awards 28

Year Ended October 31, 2018

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Restricted stock 126

Performance shares

Diluted earnings per common share $ 26,553 35,025 $ 0.76

(1) The computation of diluted earnings per share excludes outstanding stock options and other common stock equivalents when their inclusion would be anti-dilutive.

During the twelve-month period ended October 31, 2019, 39,766 shares of common stock equivalents, 113,383 shares of restricted stock and 28,051 contingent shares related to performance share awards and performance restricted stock units were excluded from the computation of diluted earnings per share.

For the years ended October 31, 2020, 2019 and 2018, we had 1,032,201 , 1,267,141 , and 1,000,356 securities, respectively, that were potentially dilutive in future earnings per share calculations.

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Se lected quarterly financial data for the years ended October 31, 2020 and 2019 was as follows (amounts in thousands, except per share amounts):

For the Quarter Ended

January 31, 2019

April 30, 2019

July 31, 2019

October 31, 2019

For the Quarter Ended January 31, 2020 April 30, 2020 July 31, 2020 October 31, 2020

Net sales $ 196,597 $ 187,475 $ 212,096 $ 255,405

Cost of sales (excluding depreciation and amortization) 157,427 149,732 162,427 189,164

Depreciation and amortization 12,905 11,886 11,060 11,378

Operating (loss) income

Net (loss) income

Operating income 1,980 8,893 16,563 27,829

Net income $ 10 $ 5,501 $ 10,833 $ 22,152

Basic earnings per share — 0.17 0.33 0.68

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Cash dividends paid per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08

For the Quarter Ended

January 31, 2018

April 30, 2018

July 31, 2018

October 31, 2018

For the Quarter Ended January 31, 2019 April 30, 2019 July 31, 2019 October 31, 2019

Net sales $ 196,808 $ 218,203 $ 238,461 $ 240,369

Cost of sales (excluding depreciation and amortization) 158,557 171,378 181,357 183,128

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Cash dividends paid per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08

Quarterly (loss) earnings per share results may not sum to the consolidated earnings per share results on the accompanying consolidated statements of (loss) income due to rounding and changes in weighted average shares during the respective periods.

Results for the 2018 quarters have been updated to reflect the impact of an accounting change from the LIFO inventory method to the FIFO inventory method and for the adoption of Accounting Standards Update 2017-07.

See Note 3 , " Inventories " and Note 20 , " New Accounting Guidance " for further details.

Quarterly earnings (loss) per share results may not sum to the consolidated earnings per share results on the accompanying consolidated statements of income (loss) due to rounding and changes in weighted average shares during the respective periods.

New Accounting Guidance

Accounting Standards Recently Adopted

In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2017-09, Compensation - Stock Compensation (Topic 718) , which provides guidance as to when changes in share-based payment awards under Topic 718 should be accounted for as a modification of the award.

Essentially, the changes should be considered a modification unless specific criteria are met.

We adopted this guidance as of November 1, 2018 with no impact to the financial statements.

In March 2017, the FASB issued ASU No.

2017-07, Compensation - Retirement Benefits (Topic 715) , Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

This update provides explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization.

We adopted this change retrospectively as of November 1, 2018, resulting in a reclassification for the twelve months ended October 31, 2018 and 2017 of $ 0.8 million and $ 0.3 million of benefit, respectively, from the "Cost of sales" line item and approximately $ 0.2 million and $ 0.1 million of benefit for the corresponding periods from the "Selling, general and administrative" line item to the "Other, net" line item on the accompanying condensed consolidated statement of income.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) , which provides clarity when determining whether a set of assets and activities constitutes a business.

Specifically, if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set

Effective November 1, 2019 we adopted ASC Topic 842 , using the modified retrospective approach and did not have a cumulative-effect adjustment in retained earnings as a result of the adoption.

Topic 842 significantly changes accounting for leases by requiring that lessees recognize a liability representing the obligation to make lease payments and a related ROU asset for virtually all lease transactions.

Upon adoption, we implemented policy elections and practical expedients which include the following:

• package of practical expedients which allows us to avoid reassessing contracts that commenced prior to adoption that

were properly evaluated under legacy lease accounting guidance;

• excluding ROU assets and lease liabilities for leases with terms that are less than one year;

• combining lease and non-lease components and accounting for them as a single lease (elected by asset class);

• excluding land easements that existed or expired prior to adoption;

• policy election that eliminates the need for adjusting prior period comparable financial statements prepared under

legacy (Accounting Standards Codification Topic 840) lease accounting guidance.

As a result of adopting ASC Topic 842, we recorded additional lease liabilities of approximately $ 39.3 million and ROU assets of approximately $ 38.9 million on our consolidated balance sheet.

The difference between the lease liabilities and ROU assets is due to rent holiday and lease build-out incentives that were recorded as deferred lease liabilities under legacy accounting guidance.

The adoption of ASC Topic 842 did not materially change our consolidated statements of income or consolidated statements of cash flows.

"Leases," for further discussion.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

is not deemed to be a business.

We adopted this change prospectively as of November 1, 2018 with no impact to the financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350).

This guidance simplifies the current two-step goodwill impairment test by eliminating the second step.

Essentially, the entity compares the fair value of a reporting unit with its carrying value amount and recognizes an impairment charge for the amount by which the carrying value exceeds the fair value.

The resulting loss is limited to the amount of goodwill.

This guidance also eliminates the requirement for a reporting unit with zero or negative carrying value to perform a qualitative assessment of goodwill and apply step-two of the goodwill impairment test if the qualitative assessment fails.

Thus, the same impairment assessment will be applied to all reporting units (even if the carrying value is zero or negative).

We prospectively adopted this guidance as of February 1, 2019 with no material impact to the consolidated financial statements.

See Note 5 , " Goodwill and Intangible Assets ," for further details of the goodwill impairment analysis performed during the year ended October 31, 2019.

In August 2016, the FASB issued ASU No.

2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments .

This amendment is intended to reduce diversity in practice as to how certain cash receipts and cash payments are presented and classified in the statement of cash flows by providing guidance for several specific cash flow issues.

We adopted this change retrospectively as of November 1, 2018 which resulted in a reclassification of $ 8.5 million of earn-out payments related to a prior period acquisition from investing activities to financing activities within the Statement of Cash Flow for the year ended October 31, 2017.

In May 2014, the FASB issued ASU No.

2014-09, Revenue from Contracts with Customers .

This guidance prescribes a methodology to determine when revenue is recognizable and constitutes a principles-based approach to revenue recognition based on the consideration to which the entity expects to be entitled in exchange for goods or services.

In addition, this guidance requires additional disclosure in the notes to the financial statements with regard to the methodology applied.

This pronouncement essentially superseded and replaced existing revenue recognition rules in U.S.

GAAP, including industry-specific guidance.

We adopted this guidance using the modified retrospective approach on November 1, 2018.

Based on our evaluation, we have concluded that the adoption of this new guidance did not have a material impact on our consolidated financial statements.

For additional information, refer to Note 1, “Nature of Operations and Basis of Presentation - Revenue from Contracts with Customers”.

Accounting Standards Not Yet Adopted

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 June 2016, the Financial Accounting Standards Board (FASB) issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326).

This amendment replaces the incurred loss impairment methodology in current U.S.

GAAP and requires that financial assets be measured on an amortized cost basis and presented at the net amount expected to be collected.

This new methodology reflects expected credit losses (rather than probable credit losses) and requires consideration of a broader range of supportable information when determining these estimated credit losses, including relevant experience, current conditions and supportable forecasts to determine collectability.

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.

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

In August 2018, the FASB issued ASU No.

2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20).

This amendment modifies the disclosure requirements for employers that sponsor defined benefit pensions or other postretirement plans.

Specifically, the amendment removes disclosures which were no longer considered cost beneficial, clarifies certain disclosure requirements, and adds disclosures identified as relevant.

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 material impact on our consolidated financial statements.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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 8. Financial Statements and Supplementary Data