What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-03-05 compared with 2020-09-04 · 93 added, 215 removed, 142 unchanged (68% of the section changed)

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

The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of July 31, 2020, and for the three and nine months ended July 31, 2020 and 2019, included elsewhere herein.

The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of January 31, 2021, and for the three months ended January 31, 2021 and 2020, included elsewhere herein.

For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

8 unchanged sentences

and Germany, as well as through sales and marketing efforts in other countries.

We continue to invest in organic growth initiatives and we intend to continue evaluating business acquisitions that allow us to expand our existing fenestration and cabinet component footprint, enhance our product offerings, provide new complementary technology, enhance our leadership position within the markets we serve and expand into new markets or service lines.

We have disposed of non-core businesses in the past, and continue to evaluate our business portfolio to ensure that we are investing in markets where we believe there is potential future growth.

We currently have three reportable business segments:

(1) North American Fenestration segment (NA Fenestration), comprising three operating segments primarily focused on the fenestration market in North America manufacturing 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 and 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 a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on performance of our common stock and other factors, certain severance and legal costs not allocable to our operating 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.

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

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

and (3) North American Cabinet Components segment (“NA Cabinet Components”), comprising our North American cabinet door and components business and two wood-manufacturing plants.

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, 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 corporate general and administrative costs have been allocated to the reportable business 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 our accompanying condensed consolidated financial statements.

We continue to invest in organic growth initiatives, enhance our product offerings, provide new complementary technology, enhance our leadership position within the markets we serve, expand into new markets or service lines, and explore strategic acquisitions.

We have disposed of non-core businesses in the past, and continue to evaluate our business portfolio to ensure that we are investing in markets where we believe there is potential future growth.

Recent Transactions and Events

1 unchanged sentence

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

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

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

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

The COVID-19 pandemic and actions taken in response thereto are continuing to have a significant adverse effect on many sectors of the economy, including new home building and remodeling activity and we may be further impacted by our role in that supply chain.

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

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

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

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

plants became operational again during May 2020.

However, local or regional hotspots of the

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

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

• We are taking precautionary measures and adjusting our operational needs, including a reduction of our 2020 capital expenditure plans by approximately 25% to 30%.

However, local or regional hotspots of the pandemic could result in other locations being temporarily idled

due to the need to deep clean areas where an employee who has tested positive for COVID-19 worked or any similar impacts in our supply chain.

We work with our customers to the extent idling affects fulfillment timing.

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

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

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

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.

Market Overview and Outlook

4 unchanged sentences

residential wood cabinet demand.

In July 2020, the NAHB forecasted calendar-year housing starts (excluding manufactured units) to be 1.1 million in 2020, 1.2 million in 2021, and 1.4 million in 2022.

The August 2020, Ducker forecast indicated that window shipments in the R&R market are expected to decrease approximately 5% during the calendar year ended 2020 and increase 2% and 4% in 2021 and 2022, respectively.

Derived from reports published by Ducker, the overall decrease in window shipments for the trailing twelve months ended June 30, 2020 was 9.2%.

During this period, new construction and R&R activities decreased 11.2% and 7.8%, respectively.

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

will decline approximately 10% in 2020 and rebound approximately 2% in 2021.

In January 2021, the NAHB forecasted calendar-year housing starts to be 1.4 million for calendar years 2020, 2021, and 2022.

The February 2021 Ducker forecast indicated that window shipments in the R&R market are expected to increase approximately 2% for calendar year 2020 and approximately 3% for each of the 2021 and 2022 calendar years.

The estimated increase in window shipments for the year ended December 31, 2020 includes an increase in new construction shipments of approximately 3% and an increase in R&R shipments of approximately 2%.

In February 2021, Catalina Research estimated that residential semi-custom cabinet demand in the U.S.

is estimated to decline 2.8% in 2020 but rebound to growth of 3.6% for 2021.

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

We utilize several commodities in our business for which pricing can fluctuate, including polyvinyl resin (PVC), titanium dioxide (TiO2), petroleum products, aluminum and wood.

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

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

2 unchanged sentences

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

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

On June 23, 2016, voters in the U.K.

voted for the U.K.

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

Thus far we have not experienced notable supply or logistics disruptions.

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

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

In October 2019, the U.K.

2 unchanged sentences

on January 31, 2020.

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

negotiate additional arrangements.

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

will continue to apply during the transition period and any new rules will take effect January 1, 2021.

Since the 2016 vote, the primary impact on Quanex’s financial performance has been related to foreign currency fluctuations of the British Pound Sterling.

This fluctuation has driven foreign currency translation impacts, as well as raw material cost increases from upstream suppliers located outside of the U.K.

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

lapsed on December 31, 2020.

In early 2021, the U.K.

agreed on a 100% tariff liberalization trade agreement.

There will be no tariffs or quotas on the movement of goods produced between the U.K.

During this settling in period we could experience extended lead times for raw material imports.

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

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

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

Since we manufacture and sell a majority of our U.K.

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

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

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

The primary focus for our U.K.

The primary risk mitigation focus for our U.K.

operations centers on the availability and pricing of raw materials.

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

In February 2020, the U.K.

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

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

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

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

by strategically managing our inventory levels and logistical channels.

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

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

We continue to monitor our exposure to changes in exchange rates.

Results of Operations

Three Months Ended July 31, 2020 Compared to Three Months Ended July 31, 2019

Three Months Ended July 31,

Three Months Ended January 31, 2021 Compared to Three Months Ended January 31, 2020

Three Months Ended January 31,

2021 2020 Change $ % Variance

13 unchanged sentences

NA Fenestration

Three Months Ended July 31,

2020 2019 $ Change % Variance

(Dollars in millions)

Net sales $ 122.4 $ 136.3 $ (13.9) (10)%

Cost of sales (excluding depreciation and amortization) 92.6 101.7 (9.1) 9%

Selling, general and administrative 11.9 11.9 — —%

Restructuring charges 0.1 0.1 — —%

Depreciation and amortization 5.4 6.6 (1.2) 18%

Operating income $ 12.4 $ 16.0 $ (3.6) (23)%

Operating income margin 10 % 12 %

Net sales decreased $13.9 million, or 10%, for the three months ended July 31, 2020 compared to the same period in 2019, which was driven by a decrease in volumes including the impacts of COVID-19.

Cost of Sales.

The cost of sales decreased $9.1 million when comparing the three months ended July 31, 2020 to the same period in 2019.

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

Selling, General and Administrative.

S elling, general and administrative expenses remained flat when comparing the three months ended July 31, 2020 to the same period in 2019.

Restructuring Charges.

Restructuring charges for each of the three month periods ended July 31, 2020 and 2019 of $0.1 million relate to facility lease expense for a vinyl extrusion plant which was closed in January 2017 in the U.S.

that has not been sublet or otherwise exited as of July 31, 2020.

EU Fenestration

Three Months Ended July 31,

2020 2019 $ Change % Variance

(Dollars in millions)

Net sales $ 38.2 $ 44.3 $ (6.1) (14)%

Cost of sales (excluding depreciation and amortization) 25.8 30.7 (4.9) 16%

Selling, general and administrative 4.8 6.0 (1.2) 20%

Depreciation and amortization 2.3 2.2 0.1 (5)%

Operating income $ 5.3 $ 5.4 $ (0.1) (2)%

Operating income margin 14 % 12 %

Net sales decreased $6.1 million, or 14%, when comparing the three months ended July 31, 2020 to the same period in 2019.

Net sales decreased $5.8 million year-over-year as a result of lower volumes, including the impacts of COVID-19, and $0.4 million due to unfavorable foreign currency rate changes.

These decreases were slightly offset by $0.1 million of base price increases.

Cost of Sales.

The cost of sales decreased $4.9 million for the three months ended July 31, 2020 compared to the same period in 2019.

Cost of sales decreased due to lower volumes during the period, primarily resulting from the impacts of COVID-19 as mentioned above.

Selling, General and Administrative.

Selling, general and administrative expense decreased $1.2 million, or 20%, for the three months ended July 31, 2020 compared to the same period in 2019.

The decrease is due to savings incurred from reduced marketing and other general expenses as a result of COVID-19 restrictions, reimbursements for labor costs in the UK from government aid for COVID-19 furloughs, and lower incentive compensation.

NA Cabinet Components

Three Months Ended July 31,

2020 2019 $ Change Variance %

(Dollars in millions)

Net sales $ 51.9 $ 58.7 $ (6.8) (12)%

Cost of sales (excluding depreciation and amortization) 44.2 49.4 (5.2) 11%

Selling, general and administrative 4.6 4.5 0.1 (2)%

Depreciation and amortization 3.2 3.3 (0.1) 3%

Operating income $ (0.1) $ 1.5 $ (1.6) (107)%

Operating income margin — % 3 %

Net sales decreased $6.8 million for the three months ended July 31, 2020 compared to the same period in 2019.

Approximately $5.0 million of the decrease in sales was due to lower volume related to customer strategic shifts and the impacts of COVID-19.

Raw materials surcharges and price declines reduced sales by an additional $1.8 million.

Cost of Sales .

Cost of sales decreased $5.2 million, or 11%, for the three months ended July 31, 2020 compared with the same period in 2019 primarily as a result of lower volume, including a corresponding decrease in selling expenses as a result of the impacts of COVID-19 as mentioned above.

Selling, General and Administrative .

Selling, general and administrative expense remained relatively flat for the three months ended July 31, 2020 compared to the same period in 2019.

Restructuring Charges .

Restructuring charges incurred during the three months ended July 31, 2020 related to severance, equipment moving and other charges incurred for a plant closure as further described in Note 1, "Nature of Operations and Basis of Presentation - Restructuring " to the accompanying unaudited condensed consolidated financial statements contained elsewhere herein.

Unallocated Corporate & Other

Three Months Ended July 31,

2020 2019 $ Change Variance %

(Dollars in millions)

Net sales $ (0.4) $ (0.8) $ 0.4 50%

Cost of sales (excluding depreciation and amortization) (0.2) (0.4) 0.2 (50)%

Selling, general and administrative 0.7 3.3 (2.6) 79%

Depreciation and amortization 0.1 0.1 — —%

Operating loss $ (1.0) $ (3.8) $ 2.8 (74)%

Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the three months ended July 31, 2020 and 2019.

Cost of Sales .

Cost of sales for Unallocated Corporate & Other consists of the elimination of inter-segment sales, profit in inventory, and other costs.

Selling, General and Administrative .

Selling, general and administrative expenses decreased $2.6 million for the three months ended July 31, 2020 compared to the same period in 2019.

This decrease is attributable to $2.5 million of lower medical expenses due to a lower claims experience during the three months ended July 31, 2020 as compared to the prior year period and $1.2 million of lower executive severance expense year-over-year.

The overall decrease was partially offset by $1.0 million of higher incentive accruals.

Changes related to Non-Operating Items:

Interest Expense .

Interest expense decreased $1.4 million for the three months ended July 31, 2020 compared to the same period in 2019 as a result of lower interest rates during the period.

The decrease in other, net of $0.5 million for the three months ended July 31, 2020 compared to the same period in 2019 relates to foreign currency translation losses, which were partially offset by an increase in the pension service benefit.

Income Taxes .

We recorded income tax expense of $4.4 million on pre-tax income of $15.1 million for the three months ended July 31, 2020, an effective rate of 28.6% and income tax expense of $5.0 million on a pre-tax income of $16.8 million for the three months ended July 31, 2019, an effective rate of 29.5%.

The $0.6 million decrease in income tax expense year-over-year corresponds with the decline in pre-tax income.

Nine Months Ended July 31, 2020 Compared to Nine Months Ended July 31, 2019

Nine Months Ended July 31,

2020 2019 Change $ % Variance

(Dollars in millions)

Net sales $ 596.1 $ 653.4 $ (57.3) (9) %

Cost of sales (excluding depreciation and amortization) 469.6 511.3 (41.7) 8 %

Selling, general and administrative 62.8 77.4 (14.6) 19 %

Restructuring charges 0.5 0.3 0.2 (67) %

Depreciation and amortization 35.8 37.1 (1.3) 4 %

Asset impairment charges — 30.0 (30.0) 100 %

Operating income (loss) $ 27.4 $ (2.7) $ 30.1 1,115 %

Interest expense (4.3) (7.6) 3.3 43 %

Other, net 0.1 0.4 (0.3) (75) %

Income tax expense (6.9) (5.9) (1.0) (17) %

Net income (loss) $ 16.3 $ (15.8) $ 32.1 203 %

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

Changes Related to Operating Income by Reportable Segment:

NA Fenestration

Nine Months Ended July 31,

Three Months Ended January 31,

2021 2020 $ Change % Variance

7 unchanged sentences

Operating income margin 9 % 1 %

Net sales decreased $19.2 million, or 5%, for the nine months ended July 31, 2020 compared to the same period in 2019, which was primarily driven by a decrease in volumes of $20.6 million, which includes the impacts of COVID-19.

The decrease in volume was partially offset by increases in prices and surcharges of $1.4 million.

Net sales increased $17.6 million, or 16%, for the three months ended January 31, 2021 compared to the same period in 2020, which was driven by a $14.8 million increase in volumes and an increase in price and raw material surcharges of $2.8 million.

Cost of Sales.

The cost of sales decreased $12.4 million, or 4%, when comparing the nine months ended July 31, 2020 to the same period in 2019.

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

The cost of sales increased $10.7 million for the three months ended January 31, 2021 compared to the same period in 2020.

Cost of sales increased primarily due to higher volumes during the period.

Selling, General and Administrative.

S elling, general and administrative expenses decreased $2.2 million, or 6%, when comparing the nine months ended July 31, 2020 to the same period in 2019.

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

S elling, general and administrative expenses decreased $0.7 million for the three months ended January 31, 2021 compared to the same period in 2020, primarily due to lower compensation and general expenses year-over-year.

Restructuring Charges.

Restructuring charges for each of the nine month periods ended July 31, 2020 and 2019 relate to facility lease expense for a vinyl extrusion plant which was closed in January 2017 in the U.S.

that has not been sublet or otherwise exited as of July 31, 2020.

Restructuring charges for the three months ended January 31, 2020 relate to facility lease expense for a U.S.

vinyl extrusion plant which was closed in January 2017.

We exited the lease during December 2020.

Depreciation and Amortization.

Depreciation and amortization expense decreased $1.9 million when comparing the nine months ended July 31, 2020 and 2019, reflecting the run-off of depreciation expense related to existing assets and disposals during the period.

Depreciation and amortization expense decreased $1.9 million for the three months ended January 31, 2021 compared to the same period in 2020.

Depreciation and amortization expense associated with property, plant, and equipment placed into service during the trailing twelve months ended January 31, 2021 was more than offset by the run-off of depreciation expense associated with existing assets and disposals during this period.

EU Fenestration

Nine Months Ended July 31,

Three Months Ended January 31,

2021 2020 $ Change % Variance

6 unchanged sentences

Operating income margin 17 % 9 %

Net sales decreased $17.0 million, or 14%, when comparing the nine months ended July 31, 2020 to the same period in 2019.

Net sales volumes decreased $16.4 million year-over-year, which includes of the impacts of COVID-19, and $1.6 million due to unfavorable foreign currency rate changes.

These decreases were slightly offset by $1.0 million of base price increases.

Net sales increased $12.4 million, or 34%, for the three months ended January 31, 2021 compared to the same period in 2020.

Net sales increased $9.6 million as a result of higher volumes, $1.7 million of foreign currency rate changes, and $1.1 million of base price increases.

Cost of Sales.

The cost of sales increased $12.0 million, or 14%, for the nine months ended July 31, 2020 compared to the same period in 2019.

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

The cost of sales increased $6.6 million for the three months ended January 31, 2021 compared to the same period in 2020.

Cost of sales increased primarily due to higher volumes during the period.

Selling, General and Administrative.

Selling, general and administrative expense remained flat for the nine months ended July 31, 2020 compared to the same period in 2019.

The decrease is due to savings incurred from reduced marketing and other

general expenses as a result of COVID-19 restrictions, reimbursements for labor costs in the UK from government aid for COVID-19 furloughs, and lower incentive compensation.

Selling, general and administrative expense increased $0.7 million, or 12%, for the three months ended January 31, 2021 compared to the same period in 2020.

The increase is primarily due to higher general expenses and foreign currency impacts.

NA Cabinet Components

Nine Months Ended July 31,

Three Months Ended January 31,

2021 2020 $ Change Variance %

5 unchanged sentences

Depreciation and amortization 3.3 3.4 (0.1) 3%

Asset impairment charges — 30.0 (30.0) 100%

Operating loss $ (0.1) $ (2.1) $ 2.0 95%

Operating loss margin — % (4) %

Net sales decreased $22.8 million, or 13%, for the nine months ended July 31, 2020 compared to the same period in 2019.

Approximately $18.4 million of the decrease in sales was due to lower volume related to customer strategic shifts and the impacts of COVID-19.

Raw materials surcharges and price declines reduced sales by an additional $4.3 million.

Net sales increased $4.0 million for the three months ended January 31, 2021 compared to the same period in 2020.

Approximately $4.3 million of the increase in sales was due to higher volumes, which was partially offset by lower price and index provisions year-over-year.

Cost of Sales .

Cost of sales decreased $18.7 million, or 12%, for the nine months ended July 31, 2020 compared with the same period in 2019 as a result of lower volume, including a corresponding decrease in selling expenses as a result of the impacts of COVID-19 as mentioned above.

Cost of sales increased $2.1 million, or 5%, for the three months ended January 31, 2021 compared to the same period in 2020 primarily as a result of higher volumes.

Selling, General and Administrative .

Selling, general and administrative expense decreased $0.5 million, or 4%, for the nine months ended July 31, 2020 compared to the same period in 2019, largely driven by lower compensation.

Selling, general and administrative expense remained relatively flat for the three months ended January 31, 2021 compared to the same period in 2020.

Restructuring Charges .

Restructuring charges of $0.3 million in the nine months ended July 31, 2020 related to severance, equipment moving and other charges incurred for a plant closure as further described in Note 1, "Nature of Operations and Basis of Presentation - Restructuring " to the accompanying unaudited condensed consolidated financial statements contained elsewhere herein.

Asset impairment charges.

Asset impairment charges of $30.0 million for the nine months ended July 31, 2019 represent a goodwill impairment which was recorded as a result of an industry-wide shift from custom cabinets to stock cabinets.

Restructuring charges for the three months ended January 31, 2020 related to severance, equipment moving, and other charges incurred for a plant closure.

Unallocated Corporate & Other

Nine Months Ended July 31,

Three Months Ended January 31,

2021 2020 $ Change Variance %

4 unchanged sentences

Depreciation and amortization 0.1 0.1 — —%

Operating income (loss) $ 0.3 $ (10.4) $ 10.7 103%

Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the nine months ended July 31, 2020 and 2019.

Operating loss $ (7.5) $ (0.7) $ (6.8) (971)%

Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the three months ended January 31, 2021 and 2020.

Cost of Sales .

1 unchanged sentence

Selling, General and Administrative .

Selling, general and administrative expenses decreased $10.5 million for the nine months ended July 31, 2020 compared to the same period in 2019.

This decrease is attributable to (i) $6.5 million of lower medical expenses due to a lower claims experience during the nine months ended July 31, 2020 as compared to the prior year period, (ii) $1.9 million of lower compensation expense related to the valuations of our stock based compensation awards and

reductions in incentive accruals, (iii) lower transaction costs of $1.2 million, and (iv) lower executive severance expense of $1.0 million.

Selling, general and administrative expenses increased $6.7 million for the three months ended January 31, 2021 compared to the same period in 2020.

This increase is attributable to $4.5 million of higher compensation expense related to the valuations of our stock based compensation awards, $1.6 million of medical expenses due to a higher claims experience during the three months ended January 31, 2021 as compared to the prior year period, and $1.4 million of expense related to the disposal of a plant.

These increases were partially offset by a reduction in executive severance and transaction charges.

Changes related to Non-Operating Items:

Interest Expense .

Interest expense decreased $3.3 million for the nine months ended July 31, 2020 compared to the same period in 2019 as a result of lower interest rates.

The decrease in other, net of $0.3 million at July 31, 2020 compared to the same period in 2019 relates primarily to foreign currency translation losses.

Interest expense decreased $0.9 million for the three months ended January 31, 2021 compared to the same period in 2020 as a result of lower interest rates and lower borrowings during the period.

The increase in other, net of $0.2 million for the three months ended January 31, 2021 compared to the same period in 2020 primarily to an increase in the pension service benefit.

Income Taxes .

We recorded income tax expense of $6.9 million on pre-tax income of $23.2 million for the nine months ended July 31, 2020, an effective rate of 29.7% and income tax expense of $5.9 million on a pre-tax loss of $9.9 million for the nine months ended July 31, 2019, an effective rate of 60.1%.

The difference in the effective rates between these periods is primarily due to the fact that a majority of the asset impairment charge in the North American Cabinet Components segment recorded during the nine months ended July 31, 2019 did not generate a tax benefit.

We recorded income tax expense of $3.4 million on pre-tax income of $11.3 million for the three months ended January 31, 2021, an effective rate of 30.4% and income tax expense of $0.4 million on pre-tax income of $0.4 million for the three months ended January 31, 2020, an effective rate of 97.7%.

The $3.0 million increase in income tax expense year-over-year corresponds with the increase in pre-tax income.

Liquidity and Capital Resources

1 unchanged sentence

We maintain a $325.0 million revolving credit facility (the Credit Facility) that matures in 2023 (5-year term) and requires interest payments calculated at a variable market rate depending upon our Consolidated Leverage Ratio.

The applicable rate during the nine months ended July 31, 2020 ranged from LIBOR + 1.50% to LIBOR + 1.75%.

The applicable rate during the three months ended January 31, 2021 ranged from LIBOR + 1.50% to LIBOR + 1.25%.

Our cost of capital could increase depending upon the Consolidated Leverage Ratio at the end of any given quarter.

2 unchanged sentences

For further details of the Credit Facility, refer to Note 4, "Debt and Finance Lease Obligations" to the accompanying unaudited condensed consolidated financial statements contained elsewhere herein.

As of July 31, 2020, we had $41.1 million of cash and equivalents, $138.0 million outstanding under the Credit Facility, $4.8 million of outstanding letters of credit and $15.7 million outstanding under finance leases and other debt.

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

We repatriated $12.6 million and $13.9 million of foreign cash during the nine months ended July 31, 2020 and 2019, respectively.

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

As of January 31, 2021, we had $43.4 million of cash and equivalents, $98.0 million outstanding under the Credit Facility, $4.5 million of outstanding letters of credit and $15.6 million outstanding under finance leases and other debt.

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

We repatriated $1.0 million and $3.1 million of foreign cash during the three months ended January 31, 2021 and 2020, respectively.

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

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

1 unchanged sentence

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

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

Analysis of Cash Flow

The following table summarizes our cash flow results for the nine months ended July 31, 2020 and 2019:

Nine Months Ended

The following table summarizes our cash flow results for the three months ended January 31, 2021 and 2020:

Three Months Ended

(In millions)

Cash provided by operating activities $ 47.6 $ 30.0

Cash used for operating activities $ (3.4) $ (3.7)

Cash used for investing activities $ (5.2) $ (9.3)

Cash used for financing activities $ (17.4) $ (30.5)

Cash (used for) provided by financing activities $ (0.6) $ 5.0

Operating Activities .

Cash provided by operating activities for the nine months ended July 31, 2020 increased approximately $17.6 million compared to the nine months ended July 31, 2019.

Cash receipts were favorably impacted by improved working capital, particularly related to inventory.

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

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

Cash used for operating activities for the three months ended January 31, 2021 remained relatively flat compared to the three months ended January 31, 2020.

Improvements in net income were offset by unfavorable working capital impacts.

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

Investing Activities.

Cash used for investing activities increased $3.8 million when comparing the nine months ended July 31, 2020 to the same period in 2019 as a result of higher capital expenditures.

As a result of the outbreak of the COVID-19 pandemic, we reduced capital expenditure plans by approximately 25% to 30% for the year ended October 31, 2020.

We expect to fund our capital expenditures through cash on hand, cash generated from operations, and cash borrowed under our Credit Facility, as necessary.

Cash used for investing activities decreased $4.1 million for the three months ended January 31, 2021 compared to the same period in 2020 as a result of lower capital expenditures.

Financing Activities.

Cash used for financing activities was $17.4 million for the nine months ended July 31, 2020, which included $7.9 million of dividends paid to our shareholders, $6.7 million of treasury stock repurchases, and $5.3 million of net debt repayments.

Cash used for financing activities was $0.6 million for the three months ended January 31, 2021, which included $5.5 million of net debt repayments, $2.6 million of dividends paid to our shareholders, and $1.9 million of treasury stock repurchases.

Our use of cash was partially offset by $10.0 million of proceeds from stock option exercises.

Our net debt repayments of $5.3 million include the borrowing and subsequent repayment of $50.0 million of funds under our credit facility as a precautionary measure to ensure funds were available to meet our obligations during the COVID-19 pandemic.

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.

For the nine months ended July 31, 2019, cash used for financing activities was $30.5 million, primarily attributable to $18.6 million of net repayments of debt, $8.0 million of dividends paid to our shareholders, and $6.3 million related to the purchase of treasury stock, partially offset by $2.7 million of proceeds received from stock option exercises.

Liquidity Requirements

1 unchanged sentence

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

During the nine months ended July 31, 2020 and 2019, we repatriated $12.6 million and $13.9 million, respectively, of foreign earnings from our foreign locations.

We maintain cash balances in foreign countries which total $13.4 million as of July 31, 2020.

During the three months ended January 31, 2021 and 2020, we repatriated $1.0 million and $3.1 million, respectively, of foreign earnings from our foreign locations.

We maintain cash balances in foreign countries which total $11.5 million as of January 31, 2021.

Critical Accounting Policies and Estimates

7 unchanged sentences

For a description of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

During the nine months ended July 31, 2020, we adopted new lease accounting guidance.

For further details of this change, refer to "Part I, Financial Information" of this Quarterly Report on Form 10-Q.

Our critical accounting policies and estimates have not changed materially during the three months ended January 31, 2021.

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

1 unchanged sentence

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standards setting bodies that we adopt as of the specified effective date.

Unless otherwise discussed, we believe the impact of any recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.

In June 2016, the FASB 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.

Refer to our Annual Report on Form 10-K for the year ended October 31, 2019 for additional standards we are currently evaluating.

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.

Refer to our Annual Report on Form 10-K for the fiscal year ended October 31, 2020 for additional standards we are currently evaluating.

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 2. Management’s Discussion and Analysis