What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-03-05 compared with 2020-09-04 · 198 added, 433 removed, 462 unchanged (58% of the section changed)

6 unchanged sentences

Cash and cash equivalents $ 43,426 $ 51,621

Accounts receivable, net of allowance for doubtful accounts of $ 344 and $ 393

Accounts receivable, net of allowance for credit losses of $ 196 and $ 161

82,538 88,287

18 unchanged sentences

Long-term debt 112,090 116,728

Noncurrent operating lease liabilities 42,740 —

Non current operating lease liabilities 46,086 44,873

Deferred pension and postretirement benefits 10,871 10,923

18 unchanged sentences

QUANEX BUILDING PRODUCTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

Three Months Ended Nine Months Ended

July 31, July 31,

2020 2019 2020 2019

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended

(In thousands, except per share amounts)

5 unchanged sentences

Depreciation and amortization 11,015 12,905

Asset impairment charges — — — 29,978

Operating income (loss) 16,563 19,110 27,436 ( 2,703 )

Operating income 11,835 1,980

Non-operating (expense) income:

1 unchanged sentence

Other, net 192 36

Income (loss) before income taxes 15,178 16,799 23,242 ( 9,856 )

Income before income taxes 11,276 434

Income tax expense ( 3,424 ) ( 424 )

Net income (loss) $ 10,833 $ 11,841 $ 16,344 $ ( 15,782 )

Basic earnings (loss) per common share $ 0.33 $ 0.36 $ 0.50 $ ( 0.48 )

Diluted earnings (loss) per common share:

$ 0.33 $ 0.36 $ 0.50 $ ( 0.48 )

Net income $ 7,852 $ 10

Basic earnings per common share $ 0.24 $ —

Diluted earnings per common share:

Weighted-average common shares outstanding:

2 unchanged sentences

Cash dividends per share $ 0.08 $ 0.08

$ 0.08 $ 0.08 $ 0.24 $ 0.24

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

QUANEX BUILDING PRODUCTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended Nine Months Ended

July 31, July 31,

2020 2019 2020 2019

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended

(In thousands)

Net income (loss) $ 10,833 $ 11,841 $ 16,344 $ ( 15,782 )

Net income $ 7,852 $ 10

Other comprehensive income:

Foreign currency translation gain (loss) 7,344 ( 10,147 ) 3,088 ( 7,565 )

Change in pension from net unamortized gain (loss) adjustment (pretax) — — 2,519 ( 11 )

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

Other comprehensive income (loss) 7,344 ( 10,147 ) 4,998 ( 7,569 )

Comprehensive income (loss) $ 18,177 $ 1,694 $ 21,342 $ ( 23,351 )

Foreign currency translation gain 8,600 2,743

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

Change in pension from net unamortized gain adjustment tax expense — ( 609 )

Other comprehensive income 8,600 4,653

Comprehensive income $ 16,452 $ 4,663

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

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

Three Months Ended

(In thousands)

Operating activities:

Net income (loss) $ 16,344 $ ( 15,782 )

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

Net income $ 7,852 $ 10

Adjustments to reconcile net income to cash used for operating activities:

Depreciation and amortization 11,015 12,905

1 unchanged sentence

Deferred income tax 1,925 ( 413 )

Asset impairment charges — 29,978

Other, net 3,189 1,096

Changes in assets and liabilities:

(Increase) decrease in accounts receivable ( 1,852 ) 323

Decrease (increase) in inventory 3,553 ( 14,747 )

Decrease (increase) in other current assets 1,218 ( 1,022 )

(Decrease) increase in accounts payable ( 1,878 ) 1,562

Decrease in accounts receivable 7,103 18,641

Increase in inventory ( 14,061 ) ( 10,657 )

(Increase) decrease in other current assets ( 873 ) 1,200

Decrease in accounts payable ( 14,577 ) ( 12,063 )

Decrease in accrued liabilities ( 2,692 ) ( 12,519 )

Increase in income taxes payable 107 396

Increase in deferred pension and postretirement benefits 573 2,351

Decrease in income taxes payable ( 2,790 ) ( 936 )

(Decrease) increase in deferred pension and postretirement benefits ( 52 ) 448

Decrease in other long-term liabilities ( 399 ) ( 405 )

Other, net 442 ( 725 )

Cash provided by operating activities 47,561 30,036

Cash used for operating activities ( 3,395 ) ( 3,657 )

Investing activities:

10 unchanged sentences

Purchase of treasury stock ( 1,927 ) ( 4,639 )

Cash used for financing activities ( 17,394 ) ( 30,548 )

Cash (used for) provided by financing activities ( 567 ) 5,038

Effect of exchange rate changes on cash and cash equivalents 949 177

Increase (decrease) in cash and cash equivalents 10,205 ( 18,352 )

Decrease in cash and cash equivalents ( 8,195 ) ( 7,754 )

Cash and cash equivalents at beginning of period 51,621 30,868

3 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine Months Ended July 31, 2020 Common

Three Months Ended January 31, 2021 Common

Stock Additional

8 unchanged sentences

Common dividends ($ 0.08 per share)

Purchase of treasury stock — — — — ( 4,639 ) ( 4,639 )

Change in pension from net unamortized gain (net of tax expense of $609) — — — 1,910 — 1,910

— — ( 2,637 ) — — ( 2,637 )

Treasury shares purchased, at cost — — — — ( 1,927 ) ( 1,927 )

Stock-based compensation activity:

Stock-based compensation benefit — ( 239 ) — — — ( 239 )

Expense related to stock-based compensation — 523 — — — 523

Stock options exercised — 635 — — 9,395 10,030

Restricted stock awards granted — ( 1,282 ) — — 1,282 —

Performance share awards vested — ( 495 ) — — 495 —

Performance restricted stock units vested — ( 565 ) — — 565 —

Other — ( 492 ) — — — ( 492 )

Balance at January 31, 2021 $ 373 $ 252,277 $ 218,732 $ ( 24,424 ) $ ( 69,250 ) $ 377,708

Net income — — 5,501 — — 5,501

Foreign currency translation adjustment — — — ( 6,999 ) — ( 6,999 )

Common dividends ($0.08 per share) — — ( 2,628 ) — — ( 2,628 )

Purchase of treasury stock — — — — ( 2,054 ) ( 2,054 )

Stock-based compensation activity:

Expense related to stock-based compensation — 325 — — — 325

Stock options exercised — ( 38 ) ( 83 ) — — ( 121 )

Restricted stock awards granted — ( 65 ) — — 65 —

Balance at April 30, 2020 $ 373 $ 252,717 $ 185,779 $ ( 36,163 ) $ ( 78,749 ) $ 323,957

Net income — — 10,833 — — 10,833

Foreign currency translation adjustment — — — 7,344 — 7,344

Common dividends ($0.08 per share) — — ( 2,623 ) — — ( 2,623 )

Stock-based compensation activity:

Expense related to stock-based compensation — 427 — — — 427

Balance at July 31, 2020 $ 373 $ 253,144 $ 193,989 $ ( 28,819 ) $ ( 78,749 ) $ 339,938

Nine Months Ended July 31, 2019 Common

Three Months Ended January 31, 2020 Common

Stock Additional

3 unchanged sentences

Stockholders’

(In thousands, no per share amounts shown except in verbiage)

Balance at October 31, 2019 $ 374 $ 254,673 $ 185,703 $ ( 33,817 ) $ ( 76,746 ) $ 330,187

Net loss — — ( 3,649 ) — — ( 3,649 )

Foreign currency translation adjustment — — — 4,066 — 4,066

Common dividends ($0.08 per share) — — ( 2,675 ) — — ( 2,675 )

Purchase of treasury stock — — — — ( 2,016 ) ( 2,016 )

Stock-based compensation activity:

Expense related to stock-based compensation — 224 — — — 224

Stock options exercised — — ( 35 ) — 62 27

Restricted stock awards granted — ( 1,649 ) ( 496 ) — 2,145 —

Other — ( 322 ) — ( 4 ) — ( 326 )

Balance at January 31, 2019 $ 374 $ 252,931 $ 237,049 $ ( 26,643 ) $ ( 72,838 ) $ 390,873

Net income — — 10 — — 10

1 unchanged sentence

Common dividends ($ 0.08 per share)

Purchase of treasury stock — — — — ( 2,686 ) ( 2,686 )

Stock-based compensation activity:

Expense related to stock-based compensation — 819 — — — 819

Restricted stock awards granted — ( 71 ) ( 9 ) — 80 —

Balance at April 30, 2019 $ 374 $ 253,679 $ 210,406 $ ( 28,127 ) $ ( 75,444 ) $ 360,888

Net income — — 11,841 — — 11,841

Foreign currency translation adjustment — — — ( 10,147 ) — ( 10,147 )

Common dividends ($0.04 per share) — — ( 2,655 ) — — ( 2,655 )

— — ( 2,659 ) — — ( 2,659 )

Purchase of treasury stock — — — — ( 4,639 ) ( 4,639 )

Change in pension from net unamortized loss (net of tax expense of $ 609 )

— — — 1,910 — 1,910

Stock-based compensation activity:

Expense related to stock-based compensation — 381 — — — 381

Stock-based compensation benefit — ( 239 ) — — — ( 239 )

Stock options exercised — 92 ( 159 ) — 3,142 3,075

Restricted stock awards granted — ( 1,082 ) 94 — 988 —

Performance share awards vested — ( 495 ) — — 495 —

Other ( 1 ) ( 454 ) — — — ( 455 )

Balance at July 31, 2019 $ 374 $ 254,053 $ 219,340 $ ( 38,274 ) $ ( 74,143 ) $ 361,350

Balance at January 31, 2020 $ 373 $ 252,495 $ 182,989 $ ( 29,164 ) $ ( 76,760 ) $ 329,933

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

14 unchanged sentences

Unless the context indicates otherwise, references to "Quanex", the "Company", "we", "us" and "our" refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries.

The accompanying interim condensed consolidated financial statements include the accounts of Quanex Building Products Corporation.

The accompanying interim unaudited condensed consolidated financial statements include the accounts of Quanex Building Products Corporation.

All intercompany accounts and transactions have been eliminated in consolidation.

12 unchanged sentences

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 actually transferred to our customers, and we expect to be entitled to consideration in exchange for such transfer.

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

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

23 unchanged sentences

In addition, we produce certain non-fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other products.

The following table summarizes our product sales for the three and nine months ended July 31, 2020 and 2019 into groupings by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors.

The following table summarizes our product sales for the three months ended January 31, 2021 and 2020 into groupings by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors.

For further details regarding our results by segment, refer to Note 11 “Segment Information”.

1 unchanged sentence

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Three Months Ended Nine Months Ended

July 31, July 31,

2020 2019 2020 2019

Three Months Ended

(In thousands)

18 unchanged sentences

Net sales $ 230,147 $ 196,597

Restructuring

We accrue one-time severance costs pursuant to an approved plan of restructuring at the communication date, when affected employees have been notified of the potential severance and sufficient information has been provided for the employee to calculate severance benefits, in the event the employee is involuntarily terminated.

In addition, we accrue costs associated with the termination of contractual commitments including operating leases at the time the lease is terminated pursuant to the lease provisions or in accordance with another agreement with the landlord.

Otherwise, we continue to recognize operating lease expense through the cease-use date.

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

We assume sublet of the facility at the market rate.

To the extent our lease obligations exceed the fair value rentals, we discount to arrive at the present value and record a liability.

If the facility is not sublet, we expense the amount of the rental in the current period.

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

During the year ended October 31, 2019, our North American Cabinet Components segment experienced declines in current and forecasted demand as a result of an industry-wide shift from semi-custom cabinets to stock cabinets, and received notice about a change in strategy at one of our large customers that may result in lower sales volumes in the future.

As a result, during the first quarter of fiscal 2020, we began to restructure our operations within that segment by announcing the closure of one of our plants.

We incurred expenses for severance, equipment moves, and other exit activities of $ 0.3 million related to this plant closure during the nine months ended July 31, 2020 and we may incur costs related to additional restructuring activities in future periods.

Allowance for Credit Losses

We have established an allowance for credit losses to estimate the risk of losses, which represents an estimate of expected losses over the remaining contractual life of our receivables.

The allowance is determined using two methods.

The amounts calculated from each of these methods are combined to determine the total amount reserved.

First, a specific reserve is established for individual accounts where information indicates the customers may have an inability to meet financial obligations.

Second, a reserve is determined for all customers based on a range of percentages applied to aging categories.

These percentages are based on historical collection rates, write-off experience, and forecasts of future economic conditions.

Actual write-offs are charged against the allowance when collection efforts have been unsuccessful.

COVID-19 Impact

On March 11, 2020, the World Health Organization (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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 reopened during May 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 current business environment as impacted by COVID-19, we are reducing capital expenditures and discretionary spending as well as closely monitoring our working capital needs.

The COVID-19 pandemic and its impacts are continuing to have an adverse effect on many sectors of the economy.

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 for containment and prevention.

While we could 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.

The health and safety of our employees are high priority.

In response to the COVID-19 pandemic, we have taken additional measures to limit possible infections at the workplace by implementing social distancing, sanitizing the workspace, and requiring employees to wear masks and other measures necessary to ensure safety as infection surges dictate.

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 credit losses), and inventory, which could have a material adverse effect on our financial position and results of operations.

Effective November 1, 2019, we adopted Accounting Standards Codification Topic 842, "Leases" (ASC Topic 842), which requires leases to be recognized on the balance sheet.

We recognize a right-of-use (ROU) asset and lease liability for each operating and finance lease with a contractual term greater than 12 months at the time of lease inception.

We include ROU assets and lease liabilities for leases that exist within other contracts.

Leases with an original term of 12 months or less are not recognized on the balance sheet, and the rent expense related to those short-term leases is recognized over the lease term.

We do not account for lease and non-lease (e.g.

common area maintenance) components of contracts separately for any underlying asset class.

We lease certain manufacturing plants, warehouses, office space, vehicles and equipment under finance and operating leases.

Lease commencement occurs on the date we take possession or control of the property or equipment.

Original terms for our real estate-related leases are generally between five and twenty years .

Original terms for equipment-related leases, primarily manufacturing equipment and vehicles, are generally between one and ten years .

Some of our leases also include rental escalation clauses.

Renewal options are included in the determination of lease payments when management determines the options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital.

If readily determinable, the rate implicit in the lease is used to discount lease payments to present value;

however, substantially all of our leases do not provide a readily determinable implicit rate.

When the implicit rate is not determinable, our estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on information available at lease commencement.

Total lease costs recorded include fixed operating lease costs and variable lease costs.

Most of our real estate leases require we pay certain expenses, such as common area maintenance costs, of which the fixed portion is included in operating lease costs.

We recognize operating lease costs on a straight-line basis over the lease term.

In addition to the above costs, variable lease costs are recognized when probable and are not included in determining the present value of our lease liability.

The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date and initial direct costs.

For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method.

For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term.

Interest expense on each finance lease liability is recognized utilizing the effective interest method.

ROU assets are tested for impairment in the same manner as long-lived assets.

Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required.

The table below presents the lease-related assets and liabilities recorded on the balance sheet at July 31, 2020 (in thousands):

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Leases Classification July 31, 2020

Operating lease assets Operating lease right-of-use assets $ 49,644

Finance lease assets Property, plant and equipment (less accumulated depreciation of $821) 14,960

Total lease assets $ 64,604

Operating Current operating lease liabilities $ 7,307

Finance Current maturities of long-term debt 961

Operating Noncurrent operating lease liabilities 42,740

Finance Long-term debt 14,637

Total lease liabilities $ 65,645

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

Three Months Ended Nine Months Ended

July 31, 2020 July 31, 2020

Components of lease costs

Operating lease cost $ 2,243 $ 6,464

Finance lease cost

Amortization of leased assets 285 899

Interest on lease liabilities 136 418

Variable lease costs 207 535

Total lease cost $ 2,871 $ 8,316

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

Nine Months Ended

July 31, 2020

Supplemental Cash Flow Information

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

Finance leases - financing cash flows $ 857

Finance leases - operating cash flows $ 418

Operating leases - operating cash flows $ 6,400

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

Operating leases $ 15,331

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 July 31, 2020:

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

July 31, 2020

Weighted average remaining lease term (in years)

Operating leases 8.2

Financing leases 15.5

Weighted average discount rate

Operating leases 3.62 %

Financing leases 3.62 %

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

Operating Leases Finance Leases

(in thousands)

2020 (remaining three months) $ 2,271 $ 378

2021 8,762 1,510

2022 8,028 1,463

2023 7,592 1,364

2024 6,816 1,260

Thereafter 24,292 14,114

Total lease payments 57,761 20,089

present value discount 7,714 4,491

Total lease liabilities $ 50,047 $ 15,598

As a result of the adoption of ASC Topic 842, we are required to present future minimum lease payments for operating and financing obligations having initial or remaining non-cancelable lease terms in excess of one year.

These future minimum lease payments were previously disclosed in our 2019 Annual Report on Form 10-K and accounted for under previous lease guidance.

Commitments as of October 31, 2019 were as follows:

Operating Leases Capital Leases

(in thousands)

2020 $ 9,121 $ 1,020

2021 6,981 810

2022 6,012 815

2023 5,506 973

2024 4,699 713

Thereafter 15,220 11,392

Total 47,539 15,723

amount representing interest 5,064

Present value of minimum lease payments 10,659

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Inventories consisted of the following at July 31, 2020 and October 31, 2019:

Inventories consisted of the following at January 31, 2021 and October 31, 2020 (in thousands):

2021 October 31,

(In thousands)

Raw materials $ 40,822 $ 33,298

6 unchanged sentences

Goodwill and Intangible Assets

The change in the carrying amount of goodwill for the nine months ended July 31, 2020 was as follows:

Nine Months Ended

July 31, 2020

(In thousands)

The change in the carrying amount of goodwill for the three months ended January 31, 2021 was as follows (in thousands):

Three Months Ended

January 31, 2021

Beginning balance as of November 1, 2020 $ 146,154

1 unchanged sentence

Balance as of the end of the period $ 149,941

During the year ended October 31, 2019, we recorded impairment charges of $ 74.6 million associated with our NA Cabinet Components segment, which reduced the goodwill balance applicable to this reporting unit from $ 113.7 million to $ 39.1 million.

Our other reporting units were not deemed to be impaired at our annual goodwill impairment testing date, August 31, 2019.

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.

During the three months ended July 31, 2020, we determined that there were no further triggering events related to the impacts of COVID-19 or any other areas of our operations.

At our last annual test date, August 31, 2020, we evaluated the recoverability of goodwill at each of our five reporting units with goodwill balances and determined that our goodwill was no t impaired.

We evaluated for indicators of impairment during the three months ended January 31, 2021 and determined that there were no triggering events related to the impacts of COVID-19 or any other areas of our operations.

However, the long term effects of the COVID-19 pandemic on the demand and pricing of our products may result in future impairment charges.

1 unchanged sentence

Identifiable Intangible Assets

Amortizable intangible assets consisted of the following as of July 31, 2020 and October 31, 2019:

July 31, 2020 October 31, 2019

Amortizable intangible assets consisted of the following as of January 31, 2021 and October 31, 2020 (in thousands):

January 31, 2021 October 31, 2020

Gross Carrying

2 unchanged sentences

Amount Accumulated

(In thousands)

Customer relationships $ 146,236 $ 73,600 $ 154,004 $ 80,441

2 unchanged sentences

Total $ 225,222 $ 133,416 $ 232,135 $ 139,067

During the three months ended July 31, 2020, we retired identifiable intangibles of $ 9.9 million related to fully amortized customer relationships.

We had aggregate amortization expense related to intangible assets for the three months ended January 31, 2021 of $ 3.4 million and $ 3.7 million for the comparable prior year period.

We retired fully amortized identifiable assets of $ 9.9 million related to customer relationships during the three months ended January 31, 2021.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

We had aggregate amortization expense related to intangible assets for the three and nine months ended July 31, 2020 of $ 3.4 million and $ 10.8 million, respectively, and $ 3.7 million and $ 11.6 million, respectively, for the comparable prior year periods.

Estimated remaining amortization expense, based on current intangible balances, for each of the fiscal years ending October 31, is as follows (in thousands):

Amortization Expense

2020 (remaining three months) $ 3,474

2021 (remaining nine months) $ 9,369

Thereafter 38,897

Total $ 96,957

Debt and Finance Lease Obligations

Debt consisted of the following at July 31, 2020 and October 31, 2019:

Long-term debt consisted of the following at January 31, 2021 and October 31, 2020 (in thousands):

2021 October 31,

(In thousands)

Revolving Credit Facility $ 98,000 $ 103,000

4 unchanged sentences

Long-term debt $ 112,090 $ 116,728

As more fully described in our Annual Report on Form 10-K for the year ended October 31, 2019, on October 18, 2018, we amended and extended our prior credit facility by entering into a $ 325.0 million revolving credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A.

Revolving Credit Facility

As more fully described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020, on October 18, 2018, we amended and extended our prior credit facility 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 requires interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin or the LIBOR Rate plus an applicable margin.

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

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

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.

6 unchanged sentences

In the event of default, outstanding borrowings would accrue interest at the Default Rate, as defined, whereby the obligations will bear interest at a per annum rate equal to 2 % above the total per annum rate otherwise applicable.

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

We can also borrow up to the lesser of $ 15.0 million or the revolving credit commitment, as defined, under a Swingline feature of the Credit Facility.

QUANEX BUILDING PRODUCTS CORPORATION

3 unchanged sentences

In addition to maintaining these financial covenants, the 2018 Credit Facility also limits our ability to enter into certain business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted payments, pay dividends (limited to $ 20.0 million per year) and other transactions as further defined in the 2018 Credit Facility.

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

As of July 31, 2020, we had $ 138.0 million of borrowings outstanding under the Credit Agreement (reduced by unamortized debt issuance costs of $ 1.0 million), $ 4.8 million of outstanding letters of credit and $ 15.7 million outstanding primarily under finance leases and other debt.

We had $ 182.2 million available for use under the Credit Agreement at July 31, 2020.

Outstanding borrowings under the Credit Agreement accrue interest at 1.91 % per annum.

Our weighted average borrowing rate for borrowings outstanding during the nine months ended July 31, 2020 and 2019 was 2.62 % and 4.16 %, respectively.

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

During the three months ended July 31, 2020, we repaid $78.0 million of borrowings outstanding on the Credit Facility, including $50.0 million of precautionary borrowings in March 2020 as a result of COVID-19.

In the future, we may be required to borrow additional funds in order to be prepared for any unforeseen impacts of the COVID-19 pandemic.

Other Debt Instruments

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

Refer to Note 2, "Leases" for further information regarding our finance leases.

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, are used as collateral for the Credit Agreement.

As of January 31, 2021, we had $ 98.0 million of borrowings outstanding under the 2018 Credit Facility (reduced by unamortized debt issuance costs of $ 0.8 million), $ 4.5 million of outstanding letters of credit and $ 15.6 million outstanding primarily under finance leases and other debt.

We had $ 222.5 million available for use under the 2018 Credit Facility at January 31, 2021.

Outstanding borrowings under the 2018 Credit Facility accrue interest at 1.37 % per annum.

Our weighted average borrowing rate for borrowings outstanding during the three months ended January 31, 2021 and 2020 was 1.56 % and 3.27 %, respectively.

We were in compliance with our debt covenants as of January 31, 2021.

Retirement Plans

Our non-contributory, single employer defined benefit pension plan covers a majority of our employees in the U.S.

The net periodic pension cost for this plan for the three and nine months ended July 31, 2020 and 2019 was as follows:

Three Months Ended Nine Months Ended

July 31, July 31,

2020 2019 2020 2019

(In thousands)

The net periodic pension cost for this plan for the three months ended January 31, 2021 and 2020 was as follows (in thousands):

Three Months Ended

Service cost $ 212 $ 538

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Amortization of net loss 36 108

Net periodic pension cost $ 9 $ 808 $ 572 $ 2,425

Net periodic pension (benefit) cost $ ( 53 ) $ 448

On January 1, 2020, we enacted changes to our pension plan whereby the benefits for all participants were frozen and thereafter those participants will receive increased benefits in the Company sponsored defined contribution plan in lieu of participation in a defined benefit plan.

As a result of this action, we have remeasured the pension assets and obligations for the pension plan as of December 31, 2019.

This resulted in a decrease in our projected benefit obligation and recognition of a net actuarial gain of approximately $ 2.5 million that was recorded in accumulated other comprehensive income.

The decrease in the projected benefit obligation was impacted by our asset performance through December 31, 2019, the impact of the pension plan freeze and an increase in the discount rate since October 31, 2019.

The remeasurement described above is in addition to our annual year-end measurement of the funded status of our benefit plans that we will record as of October 31, 2020.

As a result, the change in our pension benefit obligation and net actuarial loss will differ from the $2.5 million discussed above primarily as a result of any changes in interest rates and actual asset performance differs from our expected return on assets during the year.

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.

During September 2020, we contributed $ 3.7 million to fund our plan, and we expect to make a contribution to our plan in September 2021 of approximately $ 0.5 million.

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

As of July 31, 2020 and October 31, 2019, our liability under the supplemental benefit plan was approximately $ 2.4 million and $ 4.2 million, respectively.

As of July 31, 2020 and October 31, 2019, the liability associated with the deferred compensation plan was approximately $ 3.4 million and $ 3.8 million, respectively.

As of January 31, 2021 and October 31, 2020, our liability under the supplemental benefit plan was approximately $ 2.7 million and $ 2.6 million, respectively.

As of January 31, 2021 and October 31, 2020, the liability associated with the deferred compensation plan was approximately $ 4.2 million and $ 3.3 million, respectively.

We record the current portion of liabilities associated with these plans under the caption "Accrued Liabilities," and the long-term portion under the caption "Other Liabilities" in the accompanying condensed consolidated balance sheets.

To determine our income tax expense or benefit for interim periods, consistent with accounting standards, we apply the estimated annual effective income tax rate to year-to-date results.

Our estimated annual effective tax rates for the nine months ended July 31, 2020 and 2019 was 27.4 % and 24.8 %, respectively, excluding discrete items.

The 2020 effective rate was primarily impacted by a discrete charge of $0.5 million related to the vesting or exercise of equity-based compensation awards.

The 2019 effective rate was primarily impacted by the goodwill impairment charge recorded during the nine months ended July 31, 2019, which did not generate a significant tax benefit.

As of July 31, 2020, our liability for uncertain tax positions (UTP) of $ 0.6 million relates to certain state tax items regarding the interpretation of tax laws and regulations.

Our estimated annual effective tax rates for the three months

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

ended January 31, 2021 and 2020 was 26.0 % and 20.5 %, respectively, excluding discrete items.

The 2021 effective tax rate was primarily impacted by a discrete benefit of $ 0.5 million related to the vesting or exercise of equity-based compensation awards and a charge of $ 0.8 million for the true-up of our deferred taxes from prior year filings.

The 2020 effective tax rate was primarily impacted by a discrete charge of $ 0.4 million related to the vesting or exercise of equity-based compensation awards.

As of January 31, 2021, our liability for uncertain tax positions (UTP) of $ 0.5 million, compared to $ 0.6 million for the comparable prior year period, relates to certain state tax items regarding the interpretation of tax laws and regulations.

Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.

The final outcome of the future tax consequences of legal proceedings, if any, as well as the outcome of competent authority proceedings, changes in regulatory tax laws, or interpretation of those tax laws could impact our financial statements.

The outcome of the future tax consequences of legal proceedings, if any, as well as the outcome of competent authority proceedings, changes in regulatory tax laws, or interpretation of those tax laws could impact our financial statements.

We are subject to the effect of these matters occurring in various jurisdictions.

The disallowance of the UTP would not materially affect the annual effective tax rate.

We do not believe any of the UTP at July 31, 2020 will be recognized within the next twelve months.

We do not believe any of the UTP at January 31, 2021 will be recognized within the next twelve months.

We evaluate the likelihood of realization of our deferred tax assets by considering both positive and negative evidence.

We maintain a valuation allowance for certain state net operating losses which totaled $ 1.6 million at July 31, 2020 and October 31, 2019.

We maintain a valuation allowance for certain state net operating losses which totaled $ 1.5 million at January 31, 2021 and October 31, 2020.

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.

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

In addition, the Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020.

We evaluated the UNICAP regulations and the CARES Act and determined that there were no material impacts on our condensed consolidated financial statements.

We are evaluating the CAA and do not believe there will be a material impact on our condensed consolidated financial statements.

Contingencies

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We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks to the extent deemed prudent by our management and to the extent such insurance is available.

However, there is no

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assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations.

However, there is no assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations.

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

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

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

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effect on our overall financial condition, results of operations or cash flows, and we have not recorded any accrual with regard to these claims.

Fair Value Measurement of Assets and Liabilities

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

As of July 31, 2020 and October 31, 2019, foreign currency derivatives were being measured on a recurring basis.

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

There were no outstanding foreign currency derivatives as of July 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.

Carrying amounts reported on the balance sheet for cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.

Our outstanding debt is variable rate debt that re-prices frequently, thereby limiting our exposure to significant change in interest rate risk.

As a result, the fair value of our debt instrument approximates carrying value at July 31, 2020, and October 31, 2019 (Level 2 measurement).

The liability portion of our performance share awards are marked-to-market on a quarterly basis during a three-year vesting period based on market data (Level 2 measurement).

As a result, the fair value of our debt instrument approximates carrying value at January 31, 2021, and October 31, 2020 (Level 2 measurement).

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

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We have established and maintain an Omnibus Incentive Plan (2020 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards, performance restricted stock units, and other stock-based and cash-based awards.

The 2020 Plan replaced a prior plan (formerly the 2008 Plan) in February 2020.

The 2020 Plan is administered by the Compensation and Management Development Committee of the Board of Directors.

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Occasionally, we may make additional grants to key employees at other times during the year.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Restricted Stock Awards

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Shares are generally issued from treasury stock at the time of grant.

A summary of non-vested restricted stock awards activity during the nine months ended July 31, 2020 is presented below:

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A summary of non-vested restricted stock awards activity during the three months ended January 31, 2021 is presented below:

Restricted Stock Awards Weighted Average

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Vested ( 44,400 ) 20.70

Non-vested at July 31, 2020 192,000 $ 16.82

The total weighted average grant-date fair value of restricted stock awards that vested during each of the nine month periods ended July 31, 2020 and 2019 was $ 1.1 million and $ 1.3 million, respectively.

As of July 31, 2020, total unrecognized compensation cost related to unamortized restricted stock awards was $ 1.4 million.

Non-vested at January 31, 2021 216,400 $ 17.28

The total weighted average grant-date fair value of restricted stock awards that vested during each of the three months ended January 31, 2021 and 2020 was $ 0.9 million and $ 1.1 million, respectively.

As of January 31, 2021, total unrecognized compensation cost related to unamortized restricted stock awards was $ 2.7 million.

We expect to recognize this expense over the remaining weighted average vesting period of 2.2 years.

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Historically, stock options have been awarded to key employees, officers and non-employee directors.

Effective May 2015, the director compensation structure was revised to eliminate the annual grant of stock options to non-employee directors.

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

As a result, stock options were not granted during the years ended October 31, 2018, October 31, 2019, or during the nine months ended July 31, 2020.

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

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, the final stock options were granted during the fiscal year ended October 31, 2017.

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.

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.

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.

We use a Black-Scholes pricing model to estimate the fair value of stock options.

A description of the methodology for the valuation assumptions was disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

The following table summarizes our stock option activity for the nine months ended July 31, 2020:

The following table summarizes our stock option activity for the three months ended January 31, 2021:

Stock Options Weighted Average

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Outstanding at October 31, 2020 1,095,329 $ 18.88

Granted — $ —

Exercised ( 536,561 ) 18.69

Forfeited/Expired ( 1,000 ) 16.90

Outstanding at July 31, 2020 1,144,419 $ 18.85 3.7 $ 16

Vested or expected to vest at July 31, 2020 1,144,419 $ 18.85 3.7 $ 16

Exercisable at July 31, 2020 1,144,419 $ 18.85 3.7 $ 16

Outstanding at January 31, 2021 557,768 $ 19.07 4.3 $ 1,628

Vested at January 31, 2021 557,768 $ 19.07 4.3 $ 1,628

Exercisable at January 31, 2021 557,768 $ 19.07 4.3 $ 1,628

Intrinsic value is the amount by which the market price of the common stock on the date of exercise exceeds the exercise price of the stock option.

The total intrinsic value of stock options exercised during the nine months ended July 31, 2020 and 2019 was $ 0.5 million and $ 0.3 million, respectively.

The weighted-average grant date fair value of stock options that vested

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

during the nine months ended July 31, 2020 and 2019 was $ 0.4 million and $ 1.1 million, respectively.

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

The total intrinsic value of stock options exercised during the three months ended January 31, 2021 and 2020 was $ 2.3 million and $ 0.5 million, respectively.

The weighted-average grant date fair value of stock options that vested during the three months ended January 31, 2020 was $ 0.4 million.

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

Restricted Stock Units

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The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date.

Restricted stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued employment as the vesting conditions.

Restricted stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

employment as the vesting conditions.

Restricted stock units are not considered outstanding shares and do not have voting rights, although the holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares.

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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 nine months ended July 31, 2020 and 2019, non-employee directors received 25,326 and 29,065 restricted stock units, respectively, at a grant date fair value of $ 19.02 per share and $ 15.29 per share, respectively, which vested immediately.

As of July 31, 2020, there were 26,390 non-vested restricted stock units, which were awarded in June 2019 and January 2020 to key employees at a weighted average grant date fair value of $ 17.01 .

During the nine months ended July 31, 2019, we paid approximately $ 0.4 million to settle previously vested restricted stock units;

there were no corresponding payments to settle vested restricted stock units during the nine months ended July 31, 2020.

During the three months ended January 31, 2021 and 2020, non-employee directors received 28,826 and 25,326 restricted stock units, respectively, at a grant date fair value of $ 18.79 per share and $ 19.02 per share, respectively, which vested immediately.

As of January 31, 2021, there were 21,774 non-vested restricted stock units, which were awarded in January 2020 to key employees at a weighted average grant date fair value of $ 17.08 .

During the three months ended January 31, 2021 we paid $ 0.1 million to settle vested restricted stock units.

There were no corresponding payments to settle vested restricted stock during the three months ended January 31, 2020.

Performance Share Awards

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

These awards cliff vest after a three-year period.

Performance share awards issued prior to fiscal 2019 vest with service and performance measures (relative total shareholder return (R-TSR) and earnings per share (EPS) growth), as vesting conditions.

The number of shares earned is variable depending on the metrics achieved, and the settlement method is 50 % in cash and 50 % in our common stock.

Performance share awards issued during fiscal 2019 and 2020 vest with return on net assets (RONA) as the vesting condition and pay out 100% in cash.

To account for these awards, we have bifurcated the portion subject to a market condition (R-TSR) and the portion subject to an internal performance measure (EPS or RONA).

We have further bifurcated these awards based on the settlement method, as the portion expected to settle in stock (equity component) and the portion expected to settle in cash (liability component).

To value the shares subject to the market condition, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value.

This amount will be expensed over the three-year term of the award with a credit to additional paid-in-capital.

To value the shares subject to the EPS and RONA performance measures, we used the value of our common stock on the date of grant as the grant-date fair value per share.

This amount is being expensed over the three-year term of the award, with a credit to additional paid-in-capital, and could fluctuate depending on the number of shares ultimately expected to vest based on our assessment of the probability that the performance conditions will be achieved.

The portion of the awards expected to settle in cash is recorded as a liability and is being marked to market over the three-year term of the award, and can fluctuate depending on the number of shares ultimately expected to vest.

Beginning with the fiscal year ended October 31, 2019, performance share awards issued vest with return on net assets (RONA) as the vesting condition and pay out 100 % in cash, and are accounted for as liability.

The expected cash settlement of the performance share award is recorded as a liability and is being marked to market over the three-year term of the award and can fluctuate depending on the number of shares ultimately expected to vest.

Depending on the achievement of the performance conditions, 0 % to 200 % of the awarded performance shares may ultimately vest.

The following table summarizes our performance share grants and the grant date fair value for the EPS, R-TSR and RONA performance metrics:

Grant Date Fair Value

Grant Date Shares Awarded EPS R-TSR RONA Shares Forfeited

The following table summarizes our performance share grants and the grant date fair value for the RONA performance metrics:

Grant Date Shares Awarded Return on Net Assets Shares Forfeited

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

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December 2, 2020 65,300 $ 20.68 —

On November 30, 2019, a total of 56,103 shares vested pursuant to the November 2016 grant, which were settled with 28,051 shares of common stock and a cash payment of $ 0.6 million.

We recorded compensation expense of $0.1 million for the three months ended July 31, 2020 and a decrease in compensation expense of $ 0.3 million for the nine months ended July 31,

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2020 related to the expected payout of our performance share awards that are outstanding as of July 31, 2020.

For each of the three and nine months ended July 31, 2019, we recorded compensation expense of $ 0.5 million related to the expected payouts of performance share awards that were outstanding as of July 31, 2019.

In December 2020, the December 2017 grant vested, however, no shares were awarded as performance criteria were not met.

We recorded compensation expense of $ 2.7 million for the three months ended January 31, 2021 related to the expected payout of our performance share awards that were outstanding as of January 31, 2021.

We recorded a decrease in compensation expense of $ 0.5 million for the three months ended January 31, 2020 related to the expected payout of our performance share awards that were outstanding as of January 31, 2020.

Performance share awards are not considered outstanding shares and do not have voting rights, although dividends are accrued over the performance period and will be payable in cash based upon the number of performance shares ultimately earned.

The performance shares are excluded from the diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares.

As of July 31, 2020, we have deemed 17,342 shares related to the December 2017 grants of performance shares as probable to vest.

Performance Restricted Stock Units

We awarded performance restricted stock units to key employees and officers beginning in December 2017.

We award performance restricted stock units to key employees and officers.

These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria.

The number of shares earned is variable depending on the metric achieved, and the settlement method is 100% in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the shares had been outstanding throughout the performance period.

To value the performance restricted stock units, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value.

To value the performance restricted stock units, we used a Monte Carlo simulation model to arrive at a grant-date fair value.

This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital.

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Specifically, the awards vest on a continuum with the following Absolute Total Shareholder Return (A-TSR) milestones:

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Vesting Level Vesting Criteria Percentage of Award Vested

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December 2, 2020 38,400 $ 20.68 —

During the three and nine months ended July 31, 2020, we recorded compensation expense of approximately $ 0.1 million and $ 0.4 million, respectively, and $ 0.2 million and $ 0.6 million, respectively, for the comparable prior year period related to our performance share restricted units.

Similar to performance shares, the performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares.

As of July 31, 2020, we have deemed 24,673 shares related to the December 2017 grants of performance restricted stock units as probable to vest.

During the three months ended January 31, 2021, 32,322 performance restricted stock units vested.

We recorded compensation expense of approximately $ 0.2 million and $ 0.1 million, respectively, for the three months ending January 31, 2021 and 2020 related to our performance restricted stock units.

The performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares.

As of January 31, 2021, we have deemed 71,484 shares related to the December 2018 grant of performance restricted stock units as probable to vest.

Treasury Shares

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On the subsequent issuance of treasury shares, we record proceeds in excess of cost as an increase in additional paid in capital.

A deficiency of such proceeds relative to costs would be applied to reduce paid-in-capital associated with prior issuances to the extent available,

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with the remainder recorded as a charge to retained earnings.

We recorded a charge to retained earnings of $ 0.1 million during the nine months ended July 31, 2020.

The following table summarizes the treasury stock activity during the nine months ended July 31, 2020:

Nine Months Ended

July 31, 2020

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.

There were no charges to retained earnings during the three months ended January 31, 2021.

The following table summarizes the treasury stock activity during the three months ended January 31, 2021:

Three Months Ended

January 31, 2021

Beginning Balance as of November 1, 2020 4,491,429

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Treasury stock repurchases 76,495

Balance at April 30, 2020 4,502,628

Other (loss) income, included under the caption "Other, net" on the accompanying condensed consolidated statements of income (loss), consisted of the following for the three and nine months ended July 31, 2020 and 2019:

Three Months Ended Nine Months Ended

July 31, July 31,

2020 2019 2020 2019

(In thousands)

Foreign currency transaction (losses) gains $ ( 458 ) $ 101 $ ( 375 ) $ 75

Balance at January 31, 2021 3,925,741

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other income, included under the caption "Other, net" on the accompanying condensed consolidated statements of income, consisted of the following for the three months ended January 31, 2021 and 2020 (in thousands):

Three Months Ended

Foreign currency transaction losses $ ( 78 ) $ ( 49 )

Foreign currency derivative gains (losses) — ( 11 )

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Interest income 3 5

Other 1 2 33 7

Other, net $ 192 $ 36

Segment Information

We present three reportable business segments in accordance with ASC Topic 280-10-50, "Segment Reporting" (ASC 280):

(1) North American Fenestration segment (NA Fenestration), comprising three operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens & other fenestration components;

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

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

We maintain an Unallocated Corporate & Other grouping which includes corporate office charges, and inter-segment eliminations, less an allocation of a portion of the general and administrative costs associated with the corporate office which have been allocated to the reportable business segments, based upon relative share of revenue, in order to more accurately reflect each reportable business segment's administrative cost.

Certain costs are not allocated to the reportable operating segments, but remain in Unallocated Corporate & Other, including transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance and legal costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes, inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process.

We present three reportable business segments (1) NA Fenestration, comprising three operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens & other fenestration components;

(2) 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.

We maintain an 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, legal, and other 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.

Other general and administrative costs associated with the corporate office are allocated to the reportable segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs.

We allocate corporate expenses to businesses acquired mid-year from the date of acquisition.

The accounting policies of our operating segments are the same as those used to prepare the accompanying condensed consolidated financial statements.

Corporate general and administrative expense allocated during the three and nine month period ended July 31, 2020 was $ 5.2 million and $ 15.4 million, respectively, and $ 4.8 million and $ 14.6 million for the comparable prior year periods.

ASC 280 permits aggregation of operating segments based on factors including, but not limited to:

Corporate general and administrative expense allocated during the three month period ended January 31, 2021 was $ 5.2 million and $ 5.5 million for the comparable prior year period.

ASC Topic 280-10-50, “Segment Reporting” (ASC 280) permits aggregation of operating segments based on factors including, but not limited to:

(1) similar nature of products serving the building products industry, primarily the fenestration business;

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(3) similar types or classes of customers, namely the primary OEMs;

(4) similar distribution methods for product delivery, although the extent of the use of third-party

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distributors will vary amongst the businesses;

(4) similar distribution methods for product delivery, although the extent of the use of third-party distributors will vary amongst the businesses;

(5) similar regulatory environment;

and (6) converging long-term economic similarities.

Segment information for the three and nine months ended July 31, 2020 and 2019, and total assets as of July 31, 2020 and October 31, 2019 are summarized in the following table (in thousands):

Segment information for the three months ended January 31, 2021 and 2020, and total assets as of January 31, 2021 and October 31, 2020 are summarized in the following table (in thousands):

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NA Fenestration EU Fenestration NA Cabinet Comp.

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& Other Total

Three Months Ended July 31, 2020

Net sales $ 122,386 $ 38,265 $ 51,925 $ ( 480 ) $ 212,096

Depreciation and amortization 5,371 2,307 3,264 118 11,060

Operating income (loss) 12,383 5,365 ( 193 ) ( 992 ) 16,563

Capital expenditures 1,963 1,787 602 8 4,360

Three Months Ended July 31, 2019

Net sales $ 136,259 $ 44,326 $ 58,689 $ ( 813 ) $ 238,461

Depreciation and amortization 6,578 2,213 3,258 133 12,182

Operating income (loss) 15,944 5,367 1,558 ( 3,759 ) 19,110

Capital expenditures 2,299 485 942 236 3,962

Nine Months Ended July 31, 2020

Three Months Ended January 31, 2021

Net sales $ 128,116 $ 49,091 $ 53,994 $ ( 1,054 ) $ 230,147

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Capital expenditures 2,820 472 1,953 1 5,246

Nine Months Ended July 31, 2019

Three Months Ended January 31, 2020

Net sales $ 110,452 $ 36,766 $ 50,044 $ ( 665 ) $ 196,597

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Capital expenditures 6,928 1,219 1,075 90 9,312

As of July 31, 2020

As of January 31, 2021

Total assets $ 250,683 $ 227,164 $ 177,577 $ 38,847 $ 694,271

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

The following table summarizes the change in the carrying amount of goodwill by reportable business segment for the nine months ended July 31, 2020 (in thousands):

The following table summarizes the change in the carrying amount of goodwill by reportable business segment for the three months ended January 31, 2021 (in thousands):

NA Fenestration EU Fenestration NA Cabinet Comp.

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Foreign currency translation adjustment — 3,787 — — 3,787

Balance as of July 31, 2020 $ 38,712 $ 69,073 $ 39,147 $ — $ 146,932

Balance as of January 31, 2021 $ 38,712 $ 72,082 $ 39,147 $ — $ 149,941

For further details of Goodwill, see Note 3, "Goodwill & Intangible Assets", located herewith.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The following table reconciles operating income (loss) as reported above to net income (loss) for the three and nine months ended July 31, 2020 and 2019:

Three Months Ended Nine Months Ended

July 31, July 31,

2020 2019 2020 2019

(In thousands)

Operating income (loss) $ 16,563 $ 19,110 $ 27,436 $ ( 2,703 )

The following table reconciles operating income as reported above to net income for the three months ended January 31, 2021 and 2020 (in thousands):

Three Months Ended

Operating income $ 11,835 $ 1,980

Interest expense ( 751 ) ( 1,582 )

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Income tax expense ( 3,424 ) ( 424 )

Net income (loss) $ 10,833 $ 11,841 $ 16,344 $ ( 15,782 )

Net income $ 7,852 $ 10

Earnings Per Share

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

We compute basic earnings per share by dividing net income 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.

GAAP and contingent shares associated with performance share awards, if dilutive.

Basic and diluted earnings (loss) per share for the three and nine months ended July 31, 2020 and 2019 were calculated as follows (in thousands, except per share data):

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Net Income (Loss) Weighted Average Shares Per Share

Three Months Ended July 31, 2020

Basic and diluted earnings per share for the three months ended January 31, 2021 and 2020 were calculated as follows (in thousands, except per share data):

Net Income Weighted Average Shares Per Share

Three Months Ended January 31, 2021

Basic earnings per common share $ 7,852 32,872 $ 0.24

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Restricted stock awards — 105 —

Performance shares 17

Performance restricted stock units — 71 —

Diluted earnings per common share $ 7,852 33,212 $ 0.24

Three Months Ended July 31, 2019

Basic loss per common share $ 11,841 32,899 $ 0.36

Effect of dilutive securities:

Stock options 77

Restricted stock awards 118

Performance shares 68

Diluted loss per common share $ 11,841 33,162 $ 0.36

Nine Months Ended July 31, 2020

Three Months Ended January 31, 2020

Basic earnings per common share $ 10 32,861 $ —

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Diluted earnings per common share $ 10 33,078 $ —

Nine Months Ended July 31, 2019

Basic loss per common share $ ( 15,782 ) 32,984 $ ( 0.48 )

Diluted loss per common share $ ( 15,782 ) 32,984 $ ( 0.48 )

Excluded effect of dilutive securities (1) :

Stock options 31

Restricted stock awards 121

Performance shares 68

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

This is always the case when an entity incurs a net loss.

We had common stock equivalents that were potentially dilutive in future earnings per share calculations of 1,139,419 and 1,106,891 for the three and nine months ended July 31, 2020, respectively, and 1,155,941 and 1,419,408 , respectively, for the comparable prior year periods.

We also had 50,700 restricted stock award equivalents that were potentially dilutive in future earnings per calculations for the three and nine months ended July 31, 2020, respectively, and no corresponding equivalents for the corresponding prior year.

We had no common stock equivalents that were potentially dilutive in future earnings per share calculations for the three months ended January 31, 2021 and 772,756 for the comparable prior year period.

We also had no restricted stock award equivalents that were potentially dilutive in future earnings per calculations for the three months ended January 31, 2021 and 56,000 corresponding equivalents for the corresponding prior year period.

Such dilution will be dependent on the excess of the market price of our stock over the exercise price and other components of the treasury stock method.

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Accounting Standards Recently Adopted

Effective November 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), using the modified retrospective approach and did not have a cumulative-effect adjustment in retained earnings as a result of the

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Topic 842 significantly changes accounting for leases by requiring that lessees recognize a liability representing the obligation to make lease payments and a related right-of-use (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 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 Topic 842 did not materially change our consolidated statements of income or consolidated statements of cash flows.

See Note 2, "Leases" for further discussion.

Accounting Standards Not Yet Adopted

In June 2016, the Financial Accounting Standards Board issued ASU No.

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 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.

This ASU sets forth a "current expected credit loss" model, which requires the measurement of all expected credit losses for financial instruments or other assets (e.g., trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts.

We adopted this amendment on November 1, 2020, with no material impact on our condensed consolidated financial statements.

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Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to the following:

• impacts from public health issues (including pandemics, such as the recent COVID-19 pandemic and quarantines) on the economy, demand for our products or our operations, including the responses of governmental authorities to contain such public health issues;

• changes in market conditions, particularly in the new home construction, and residential remodeling and replacement (R&R) activity markets in the U.S., U.K.

• impacts from public health issues (including pandemics, such as the current COVID-19 pandemic and quarantines) on the economy, demand for our products or our operations, including the responses of governmental authorities to contain such public health issues;

• changes in market conditions, particularly in the new home construction, and residential remodeling and replacement (R&R) activity markets in the United States, United Kingdom, Germany and elsewhere;

• changes in non-pass-through raw material costs;

• changes in domestic and international economic conditions, including impacts from public health issues, including the COVID-19 pandemic;

• changes in domestic and international economic conditions;

• changes in purchases by our principal customers;

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government sources and other third parties.

Although we believe this

information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.

Although we believe this information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.

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-Q

Item 1. Financial Statements