What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-12-17 compared with 2020-12-11 · 249 added, 348 removed, 1143 unchanged (34% of the section changed)

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Opinion on the financial statements

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

We have audited the accompanying consolidated balance sheets of Quanex Building Products Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of October 31, 2021 and 2020, the related consolidated statements of income (loss), comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of October 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated December 17, 2021 expressed an unqualified opinion.

Change in accounting principle

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

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

Basis for opinion

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

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

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

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

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Critical audit matters

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

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

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

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

Qualitative goodwill impairment assessment

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

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

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

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

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

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

assessment was necessary.

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

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

As disclosed by management, qualitative factors may include, but are not limited to, (i) macroeconomic conditions, (ii) industry and market considerations, (iii) cost factors, (iv) overall financial performance of the reporting unit and (v) other relevant entity-specific events.

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

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

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

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

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

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

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

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

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

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

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

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

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

We identified the estimation of the fair value of this reporting unit as a critical audit matter.

The principal considerations for our determination that the estimation of the fair value of this reporting unit is a critical audit matter relates to the income approach which is one method management uses to estimate the fair value of the reporting unit.

Auditing the fair value of the reporting unit involved a high degree of auditor judgment, subjectivity and audit effort in evaluating management’s significant assumptions, including future cash flows related to the reporting unit and the weighted average cost of capital (WACC).

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

Our audit procedures related to the estimation of the fair value of the reporting unit included in the NA Cabinets Components operating segment included the following, among others.

• We tested the effectiveness of controls over goodwill impairment including those over the determination of fair value, including controls relating to management’s development of forecasts of future revenues, earnings and cash flows, discount rates, market multiples and selection of guideline public companies.

Our audit procedures related to the estimation of the fair value of this reporting unit included the following, among others.

• We evaluated management’s ability to accurately forecast revenues, earnings and cash flows by comparing actual results to management’s historical forecasts.

• We evaluated the reasonableness of management’s forecasts of revenues, earnings and cash flows by comparing the forecasts to historical revenues, earnings and cash flows, communications to the Board of Directors, press releases and industry reports.

• We utilized our valuation specialists to evaluate:

◦ The discount rate, including the testing of underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management.

◦ Market multiples by evaluating the selected comparable publicly traded companies and the adjustments made for difference in growth prospects and risk profiles between the reporting unit and the comparable publicly traded companies.

We tested the underlying source information and mathematical accuracy of calculations.

• We evaluated the reasonableness of management’s forecasts of revenues, earnings and cash flows by comparing the forecasts to historical revenues, earnings and cash flows, current budgets, our understanding of the current business strategy, communications to the Board of Directors, press releases and industry reports.

• We utilized our valuation specialists to evaluate the reasonableness of the WACC used by management, including the testing of underlying source information and developing a range of independent estimates and comparing those to the rate selected by management.

/s/ GRANT THORNTON LLP

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Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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Cash and cash equivalents $ 40,061 $ 51,621

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

Accounts receivable, net of allowance for credit losses of $ 340 and $ 161

108,309 88,287

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Income (loss) before income taxes 80,094 50,300 ( 35,954 )

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

Income tax expense ( 23,114 ) ( 11,804 ) ( 10,776 )

Net income (loss) $ 56,980 $ 38,496 $ ( 46,730 )

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Other comprehensive income (loss):

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

Change in pension from net unamortized (loss) gain (pretax) ( 376 ) ( 6,572 ) 2,253

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

Foreign currency translation adjustments gain 7,152 1,078 1,864

Change in pension from net unamortized gain (loss) (pretax) 5,477 ( 376 ) ( 6,572 )

Change in pension from net unamortized gain (loss) tax (expense) benefit ( 1,375 ) 91 1,596

Total other comprehensive income (loss), net of tax 11,254 793 ( 3,112 )

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

Net income — — — 26,553 — — — 26,553

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

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

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

Foreign currency translation adjustments — — — — 1,864 — — 1,864

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

— — — — ( 4,976 ) — — ( 4,976 )

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

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

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

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

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

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

Net income — — — 38,496 — — — 38,496

Foreign currency translation adjustments — — — — 1,078 — — 1,078

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

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

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

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

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Net income — — — 56,980 — — — 56,980

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

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

Foreign currency translation adjustments — — — — 7,152 — — 7,152

Change in pension from net unamortized loss (net of tax expense of $ 1,375 )

— — — — 4,102 — — 4,102

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Depreciation and amortization 42,732 47,229 49,586

Loss (gain) on disposition of capital assets — 732 ( 142 )

Loss on disposition of capital assets 3,039 — 732

Stock-based compensation 1,970 879 2,045

Deferred income tax 1,785 ( 189 ) 3,260

Charge for deferred loan costs and debt discount — — 1,064

Asset impairment charges — — 74,600

Other, net 2,126 1,689 2,176

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

Changes in assets and liabilities:

(Increase) decrease in accounts receivable ( 19,017 ) ( 5,766 ) 574

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

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

(Increase) decrease in inventory ( 31,382 ) 6,119 3,797

(Increase) decrease in other current assets ( 1,817 ) 2,896 ( 2,014 )

Increase in accounts payable 7,097 15,922 8,124

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

Increase in income taxes payable 237 3,416 676

Increase (decrease) in accrued liabilities 16,212 ( 3,156 ) ( 6,760 )

(Decrease) increase in income taxes payable ( 378 ) 237 3,416

(Decrease) increase in deferred pension and postretirement benefits ( 708 ) ( 2,775 ) 2,531

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

Increase (decrease) in other long-term liabilities 477 ( 236 ) 513

Other, net ( 528 ) ( 549 ) 522

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Repayments of credit facility borrowings ( 65,000 ) ( 154,000 ) ( 136,000 )

Debt issuance costs — — ( 1,001 )

Repayments of other long-term debt ( 680 ) ( 1,027 ) ( 1,526 )

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Effect of exchange rate changes on cash and cash equivalents 421 303 316

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

(Decrease) increase in cash and cash equivalents ( 11,560 ) 20,753 1,865

Cash and cash equivalents at beginning of period 51,621 30,868 29,003

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Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

During the year ended October 31, 2018, we recorded a change in estimate related to certain assets involved in restructuring activities, as more fully described under the caption "Restructuring."

A summary of our significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

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

We estimate a provision for sales returns and warranty allowances to account for product returns related to general returns and product nonconformance.

Pricing and sales incentives

Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts.

Practical expedients and exemptions

We estimate a provision for sales returns and warranty allowances to acc ount for product returns related to general returns and product nonconformance.

We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year.

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

Pricing and sales i ncentives

Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts.

Shipping and handling cost s

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We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts.

Concentration of Credit Risk and Allowance for Doubtful Accounts

Concentration of Credit Risk and Allowance for Credit Losses

Certain of our businesses or product lines are largely dependent on a relatively few large customers.

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

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

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

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

For the year ended October 31, 2021, no customers provided more than 10 % of our consolidated net sales.

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

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

Our policy for determining the allowance is based on factors that affect collectability, including:

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and (c) projected economic and market conditions.

We believe our allowance is adequate to absorb any known or probable losses as of October 31, 2020.

We believe our allowance is adequate to absorb any known or probable lo sses as of October 31, 2021.

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Business Combinations

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GAAP, which requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets and liabilities acquired.

We account for contingent assets and liabilities at fair value on the acquisition date, and record changes to fair value associated with these assets and liabilities as a period cost as incurred.

We account for contingent assets and liabilities at fair value on the acquisition date, and record changes to fair value associated with these asse ts and liabilities as a period cost as incurred.

We use established valuation techniques and engage reputable valuation specialists to assist us with these valuations.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

To the extent these items stem from contingencies that existed at the balance sheet date, but are contingent upon the realization of future events, the cost is charged to expense at the time the future event becomes known.

We record inventory at the lower of cost or net realizable value.

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Events and changes in circumstance that may cause a triggering event and necessitate such a review include, but are not limited to:

a decrease in sales for certain customers, improvements or changes in technology, and/or a decision to discontinue the use of a trademark or trade name, or allow a patent to lapse.

a decrease in sales for certain customers, improvements or changes in technology, and/or a decision to discontinue the use of a trademark or trade name, or to allow a patent to lapse.

Such events could negatively impact the fair value of our identifiable intangible assets.

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

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

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

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

The World Health Organization's (WHO), declaration of COVID-19 as a global pandemic also created significant changes in market conditions throughout 2020 that have continued into 2021.

We determined that these conditions were indicators of a triggering event in 2019 and 2020 which necessitated an evaluation of certain long-term assets used in these businesses for potential impairment.

We compared the projected undiscounted cash flows we expected to realize associated with these assets over the remaining useful lives of the

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

primary operating assets to the net book value of the long-term assets, including goodwill, and determined that these assets were not impaired.

There were no corresponding indicators of a triggering event in 2021.

Therefore, we did not record an impairment charge related to property, plant and equipment or intangible assets with defined lives during the years ended October 31, 2021, 2020 and 2019.

There were no indicators of triggering events noted for the year ended October 31, 2018.

Software development costs, including costs incurred to purchase third-party software, are capitalized when we have determined that the technology is capable of meeting our performance requirements, and we have authorized funding for the project.

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

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

lives of the assets.

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

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

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

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

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

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

QUANEX BUILDING PRODUCTS CORPORATION

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

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

We determined that the fair value of these reporting units exceeded their carrying values by approximate ly 17.6 % and 113.6 %, respectively.

We concluded that no impairment was necessary.

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COVID-19 Impact

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

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

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

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 to meet government requirements for containment and prevention.

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

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

However, the duration and severity of the COVID-19 pandemic, the actions to contain the pandemic and treat its impacts, and the effects on our operations are highly uncertain and cannot be predicted at this time.

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

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

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

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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 report any COVID-19 symptoms to ensure safety as infection surges dictate.

We continue to assess and refine these measures on an ongoing basis as public health guidance and applicable laws and regulations continue to evolve.

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.

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

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Retirement Plans

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

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

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

We believe we will fully realize our deferred tax assets, net of a recorded valuation allowance.

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In the event the estimates and assumptions indicate we will not generate sufficient future taxable income to realize our deferred tax assets, we record a valuation allowance against a portion of our deferred tax assets.

We evaluate our on-going tax positions to determine if it is more-likely-than-not we will be successful in defending such positions if challenged by taxing authorities.

We evaluate our ongoing tax positions to determine if it is more-likely-than-not we will be successful in defending such positions if challenged by taxing authorities.

To the extent that our tax positions do not meet the more-likely-than-not criteria, we record a liability for uncertain tax positions.

We have recorded a liability for uncertain tax positions which stem from certain state tax items related to the interpretation of tax laws and regulations.

We have recorded a liability for uncertain tax positions which stem from certain federal and state tax items related to the interpretation of tax laws and regulations.

We continue to evaluate our positions regarding various state tax interpretations at each reporting date, until the applicable statute of limitations lapse.

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

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

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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 and the American Rescue Plan Act of 2021 (American Rescue Plan) was signed into law on March 11, 2021.

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

Derivative Instruments

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As such, these instruments are considered economic hedges, and are reflected in the operating activities section of the consolidated statements of cash flow.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Foreign Currency Translation

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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See Note 13, “Stock-based Compensation.”

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

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

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

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

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

In addition, we have granted performance share awards which use return on net assets as the vesting condition and the awards settle in cash.

We use a Monte Carlo simulation model to value the market condition and our stock price on the date of grant to value the internal performance condition and recognize expense ratably over the vesting period of three years .

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

As of October 31, 2021 , we have deemed 183,000 performance share awards related to the December 2018 grants as probable to vest.

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

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

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

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

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

To value the performance restricted stock units, we use a Monte Carlo simulation model to

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

arrive at a grant-date fair value.

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

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

As of October 31, 2021, we have deemed 87,919 shares related to the December 2018 grants of performance restricted stock units as probable to vest.

Treasury Stock

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Related Party Transactions

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

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

We did no t participate in any related party transactions during the years ended October 31, 3021, 2020 and 2019.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Subsequent Events

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

Accounts Receivable and Allowance for Doubtful Accounts

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Accounts Receivable and Allowance for Credit Losses

Accounts receivable consisted of the following as of October 31, 2021 and 2020 (in thousands):

2 unchanged sentences

Total 108,649 88,448

Allowance for doubtful accounts 161 393

Allowance for credit losses 340 161

Accounts receivable, net $ 108,309 $ 88,287

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

The changes in our allowance for credit losses were as follows (in thousands):

Year Ended October 31,

2021 2020 2019

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

Bad debt expense 262 700 46

Beginning balance as of November 1, 2020, 2019 and 2018 $ 161 $ 393 $ 325

Current period provision for expected credit

losses 267 262 700

Amounts written off ( 88 ) ( 494 ) ( 916 )

Recoveries — — 284

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

Balance as of October 31, 2021, 2020 and 2019 $ 340 $ 161 $ 393

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

8 unchanged sentences

2021 2020 2019

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

Beginning balance as of November 1, 2020, 2019 and 2018 $ 6,484 $ 3,790 $ 4,375

Charged to cost of sales ( 568 ) 2,713 341

1 unchanged sentence

Other 80 ( 19 ) 13

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

Balance as of October 31, 2021, 2020 and 2019 $ 2,936 $ 6,484 $ 3,790

QUANEX BUILDING PRODUCTS CORPORATION

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

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

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

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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

ROU assets are tested for impairment in the same manner as long-lived assets and we determined there have been no triggering events for impairment.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

long-lived assets.

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

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

Leases Classification October 31, 2020

The table below presents the lease-related assets and liabilities recorded on the balance sheet at October 31, 2021 and 2020 (in thousands):

Leases Classification 2021 2020

Operating lease assets Operating lease right-of-use assets $ 52,708 $ 51,824

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

Finance lease assets Property, plant and equipment (less accumulated depreciation of $ 2,300 and $ 1,089 )

16,921 15,609

Total lease assets $ 69,629 $ 67,433

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Total lease liabilities $ 69,012 $ 67,530

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

Components of lease costs Year Ended October 31, 2020

The table below presents the components of lease costs for the year ended October 31, 2021 and 2020 (in thousands):

Year Ended October 31,

Operating lease cost

$ 10,125 $ 8,866

Finance lease cost

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Total lease cost $ 12,834 $ 11,352

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

Supplemental Cash Flow Information Year Ended October 31, 2020

The table below presents supplemental cash flow information related to leases for the year ended October 31, 2021 and 2020 (in thousands):

Year Ended October 31,

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

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Finance leases $ 469 $ 398

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Year Ended October 31, 2020

The table below presents the weighted average remaining lease terms and weighted average discount rates for the Company's leases as of October 31, 2021 and 2020:

Weighted average remaining lease term (in years)

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Total lease liabilities $ 53,563 $ 15,449

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

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

Commitments as of October 31, 2019 were as follows (in thousands):

Operating Leases Finance Leases

2020 $ 9,121 $ 1,020

2021 6,981 810

2022 6,012 815

2023 5,506 973

2024 4,699 713

Thereafter 15,220 11,392

Total $ 47,539 $ 15,723

amount representing interest 5,064

Present value of minimum lease payments $ 10,659

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Goodwill and Intangible Assets

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Beginning balance as of November 1, 2021 and 2020

Goodwill impairment charge — ( 74,600 )

$ 146,154 $ 145,563

Foreign currency translation adjustment 3,051 591

Balance as of October 31, 2020 $ 146,154 $ 145,563

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

Balance as of October 31, 2021 and 2020

$ 149,205 $ 146,154

At our annual testing date, August 31, 2021, we ha d five reporting units with goodwill balances.

Two of these units were included in our NA Fenestration segment and had goodwill balances of $ 35.9 million and $ 2.8 million, two units were included in our EU Fenestration segment with goodwill balances of $ 53.8 million and $ 17.5 million, and our NA Cabinet Components segment had one unit with a goodwill balance of $ 39.2 million.

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

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

The details of the impairment charges, as well as the results of our goodwill assessments during the year ended October 31, 2021 are more fully described at Note 1, “Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Goodwill.” For a summary of the change in the carrying amount of goodwill by segment, see Note 16, “Segment Information.”

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Identifiable Intangible Assets

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

During the years ended October 31, 2021 and 2020, we retired fully amortized identifiable intangible assets of $ 9.9 million and $ 0.3 million, respectively, related to customer relationships.

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

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

The aggregate amortization expense associated with identifiable intangible assets for the years ended October 31, 2021, 2020, and 2019 was $ 12.8 million , $ 14.3 million and $ 15.3 million, respectively.

Estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for future fiscal years ending October 31, 2021 is as follows (in thousands):

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amortization Expense

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We did no t incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2021, 2020, and 2019.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Accrued Liabilities

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Revolving Credit Facility

On July 29, 2016, we entered into a $ 450.0 million credit agreement comprising a $ 150.0 million Term Loan A and a $ 300.0 million revolving credit facility (collectively, the “2016 Credit Agreement”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A.

serving as Syndication Agent.

The 2016 Credit Agreement had a five-year term, maturing on July 29, 2021, and required interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin ( 0.50 % to 1.25 %) or the LIBOR Rate plus an applicable margin ( 1.50 % to 2.25 %).

At the time of the initial borrowing, the applicable rate was LIBOR + 2.00 %.

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On October 18, 2018, we amended and extended the 2016 Credit Agreement by entering into a $ 325.0 million revolving credit facility (the “2018 Credit Facility”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A.

On October 18, 2018, we entered into a $ 325.0 million revolving credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A.

serving as Syndication Agent.

The Credit Facility has a five-year term, maturing on October 18, 2023, and requires interest payments calculated, at our election and depending upon our Consolidated Leverage Ratio, at either a Base Rate plus an applicable margin or the LIBOR Rate plus an applicable margin.

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

As of October 31, 2021, the applicable rate was LIBOR + 1.25 %.

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

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

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.

The 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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 Agreement.

The Credit Facility contains a:

(1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than 2.25 to 1.00, and (2) Consolidated Leverage Ratio requirement whereby we must not permit the Consolidated Leverage Ratio, as defined, must be greater than 3.25 to 1.00.

(1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than 2.25 to 1.00, and (2) Consolidated Leverage Ratio requirement whereby the Consolidated Leverage Ratio, as defined, must be greater than 3.25 to 1.00.

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

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

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

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

As of October 31, 2020, we had $ 103.0 million of borrowings outstanding under the 2018 Credit Facility (reduced by unamortized debt issuance costs of $ 0.9 million), $ 4.8 million of outstanding letters of credit and $ 15.3 million outstanding under finance leases.

We had $ 217.2 million available for use under the 2018 Credit Facility at October 31, 2020.

The borrowings outstanding as of October 31, 2020 under the 2018 Credit Facility accrue interest at 3.30 % per annum, and our weighted average borrowing rate for borrowings outstanding during the years ended October 31, 2020 and 2019 was 2.45 % and 4.07 %, respectively.

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

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

As of October 31, 2021, we had $ 38.0 million of borrowings outstanding under the Credit Facility (reduced by unamortized debt issuance costs o f $ 0.6 million), $ 4.5 million of outstanding letters of credit and $ 15.5 million outstanding under finance leases.

We had $ 282.5 million avail able for use under the Credit Facility at October 31, 2021.

The borrowings outstanding as of October 31, 2021 under the Credit Facility accrue interes t at 1.34 % per annum, and our weighted average borrowing rate for borrowings outstanding during the years ended October 31, 2021 and 2020 was 1.42 % and 2.45 %, respectively.

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

1 unchanged sentence

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

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The table below presents the scheduled maturity dates of our long-term debt outstanding (excluding deferred financing fees of $ 0.6 million) at October 31, 2021 (in thousands):

Revolving Credit Facility Finance Leases and Other Obligations Aggregate Maturities

12 unchanged sentences

In general, an employee’s coverage for retirement benefits depends on the location of employment.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Defined Benefit Plan

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

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

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

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

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

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

The majority our pension plan participants have their benefit determined pursuant to the cash balance formula.

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

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

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The impact to net periodic benefit cost and to benefits paid did not have a material impact on the consolidated financial statements.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Funded Status and Net periodic Benefit Cost

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Change in Benefit Obligation:

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

Beginning balance as of November 1, 2020 and 2019

$ 44,825 $ 44,323

Service cost 850 1,262

5 unchanged sentences

Settlements ( 2,112 ) ( 2,084 )

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

Projected benefit obligation at October 31, 2021 and 2020

$ 42,379 $ 44,825

Change in Plan Assets:

Beginning balance as of November 1, 2019 and 2018, respectively $ 31,212 $ 32,064

Beginning balance as of November 1, 2020 and 2019

$ 34,120 $ 31,212

Actual return on plan assets 6,225 2,789

3 unchanged sentences

Settlements ( 2,112 ) ( 2,084 )

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

Fair value of plan assets at October 31, 2021 and 2020

$ 37,642 $ 34,120

Noncurrent liability - Funded Status $ ( 4,737 ) $ ( 10,705 )

1 unchanged sentence

There were no net prior service costs or transition obligations for the years ended October 31, 2021 and 2020.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of October 31, 2021 and 2020, the accumulated benefit obligation was $ 42.4 million and $ 44.8 million, respectively.

10 unchanged sentences

Net periodic benefit cost $ 11 $ 1,019 $ 3,233

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The changes in plan assets and projected benefit obligations which were recognized in our other comprehensive loss for the years ended October 31, 2021, 2020 and 2019 were as follows (in thousands):

1 unchanged sentence

2021 2020 2019

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

Net (gain) loss arising during the period $ ( 5,112 ) $ 2,141 $ 6,697

Amortization of net loss 143 162 125

1 unchanged sentence

Settlements 222 462 —

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

Total recognized in other comprehensive (income) loss $ ( 5,477 ) $ 376 $ 6,572

Measurement Date and Assumptions

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following tables provide our target allocation for the year ended October 31, 2021, as well as the actual asset allocation by asset category and fair value measurements as of October 31, 2021 and 2020:

3 unchanged sentences

Fixed income 40.0 % 49.0 % 40.0 %

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fair Value Measurements at

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Our pension funding policy is to make the minimum annual contributions required pursuant to the plan.

We accelerated contributions to target a 100 % funding threshold.

Additionally, we consider funding annual requirements early in the fiscal year to potentially maximize the return on assets.

For the fiscal years ended October 31, 2020, 2019 and 2018, we made total pension contributions of $ 3.7 million, $ 0.7 million and $ 0.8 million, respectively.

During fiscal 2021, we expect to contribute approximately $ 0.5 million to the pension plan to reach targeted funding levels and meet minimum contribution requirements.

For the fiscal years ended October 31, 2021, 2020 and 2019, we made total pension contributio ns of $ 0.5 million , $ 3.7 million and $ 0.7 million, respectively.

During fiscal 2022, we do not expect to need to make a contribution to the pension plan to maintain targeted funding levels and meet minimum contribution requirements.

This expected contribution level will be dependent on many variables, including the market value of the assets compared to the obligation, as well as other market or regulatory conditions.

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For the years ended October 31, 2021, 2020 and 2019, we contributed approximately $ 6.3 million , $ 4.8 million and $ 2.7 million for these plans, respectively.

Under our postretirement benefit plan, we provide certain healthcare and life insurance benefits for a small number of eligible retired employees who were employed prior to January 1, 1993.

Certain employees may become eligible for those benefits if they reach normal retirement age while working for us.

We continue to fund benefit costs on a pay-as-you-go basis.

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

October 31, 2020 October 31, 2019

(In thousands)

Accrued liabilities $ 49 $ 49

Deferred pension and postretirement benefits 218 311

Total $ 267 $ 360

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

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

Our liability under the supplemental benefit plan was approximately $ 2.9 million and $ 2.6 million as of October 31, 2021 and 2020, and our liability under the deferred compensation plan was approximately $ 3.4 million and $ 3.3 million, respectively.

As of October 31, 2021 and 2020, the current portion of these liabilities was recorded under the caption “Accrued Liabilities,” and the long-term portion was included under the caption “Other Liabilities” in the accompanying balance sheets.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The provision or benefit for income taxes includes U.S.

federal income taxes (determined on a consolidated return basis), foreign income taxes and state income taxes.

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

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

The following table summarizes the components of income tax expense for the years ended October 31, 2021, 2020 and 2019 (in thousands):

Year Ended October 31,

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Total deferred 1,785 ( 189 ) 3,260

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

Total income tax expense $ 23,114 $ 11,804 $ 10,776

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

For financial reporting purposes, income (loss) before income taxes for the years ended October 31, 2021, 2020 and 2019 includes the following components (in thousands):

10 unchanged sentences

Non-United States income tax 2.3 % 1.2 % 1.2 %

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

Other permanent differences 1.7 % 3.0 % — %

Deferred rate impact of enactment of tax reform — % — % ( 30.5 ) %

patent box benefit ( 1.4 ) % ( 2.0 ) % ( 1.7 ) %

income tax credits ( 4.2 ) % ( 2.3 ) % ( 4.7 ) %

Foreign tax positions under the Act (GILTI and FDII) 4.2 % 2.5 % 3.3 %

1 unchanged sentence

Asset impairment charges — % — % ( 50.7 ) %

Return to actual adjustments ( 0.3 ) % ( 1.9 ) % ( 0.5 ) %

Non-cash compensation 1.9 % ( 0.3 ) % ( 1.6 ) %

Other 2.0 % 1.7 % 2.7 %

Effective tax rate 28.9 % 23.5 % ( 30.0 ) %

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

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

This Act reduced our federal income tax statutory rate from 35.0% to 21.0% for the fiscal years ending October 31, 2021, 2020 and 2019.

This Act also imposed additional tax law changes that became effective during fiscal 2019, which include new requirements for a global intangible low-taxed income provision (GILTI) and a deduction for foreign-derived intangible income (FDII).

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The October 31, 2021 effective tax rate is higher than the U.S.

federal statutory rate of 21% primarily due to state income taxes, GILTI, and non-United States income tax, partially offset by U.S.

foreign tax credits.

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

1 unchanged sentence

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

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

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

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We will continue to evaluate our foreign cash position and may repatriate additional foreign earnings in the future.

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

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

tax liability.

Our earnings from our foreign subsidiaries are not subject to significant withholding taxes upon remittances to the U.S..

As a result, we do not anticipate any significant future tax impacts from any potential repatriation of previously unremitted foreign earnings.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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The majority of these losses begin to expire in 2025.

Tax credits available to offset future tax liabilities totaled $ 0.6 million and are expected to be utilized within the next twelve months.

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

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

In assessing the need for a

We have recorded a valuation allowance for certain state net operating losses as of October 31, 2021 and 2020, totaling $ 1.3 million and $ 1.5 million, respectively ($ 1.0 million and $ 1.2 million, respectively, net of federal taxes).

During the year ended October 31, 2021, we recorded a net $0.2 million decrease in our state valuation allowances.

The valuation allowances can be affected in future periods by changes to tax laws, changes to statutory tax rates, and changes in estimates of future taxable income.

To fully realize these net deferred tax assets, we will need to generate sufficient future taxable income in the countries where these tax attributes exist during the periods in which the attributes can be utilized.

As of each reporting date, management considers the weight of all evidence, both positive and negative, to determine if a valuation allowance is necessary for each jurisdiction’s net deferred tax assets.

We place greater weight on historical evidence over future predictions of our ability to utilize net deferred tax assets.

We consider future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income in prior carryback year(s) if carryback is permitted under applicable law.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The following table shows the change in the unrecognized income tax benefit associated with uncertain tax positions for the years ended October 31, 2021, 2020 and 2019 (in thousands):

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Additions for tax positions related to the prior year 16

Reassessment of position ( 66 )

Balance at October 31, 2019

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Balance at October 31, 2021

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

As of October 31, 2021, our unrecognized tax benefit (UTB) relates to certain federal and state tax items regarding the interpretation of tax laws and regulations.

At October 31, 2021, $ 1.4 million is recorded as a liability for uncertain tax positions.

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

The addition related to the current year ended October 31, 2021 is associated with stock-based compensation tax deductions claimed on a prior U.S.

federal income tax return.

We have accrued an immaterial amount for the payment of interest, net of tax benefits, and penalties as of October 31, 2021, 2020 and 2019, respectively.

We include all interest and penalties related to uncertain tax benefits within our income tax provision account.

To the extent interest and penalties are not assessed with respect to uncertain tax positions or the uncertainty of deductions in the future, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

We, along with our subsidiaries, file income tax returns in the U.S.

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Commitments and Contingencies

Purchase Obligations

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

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

We paid $ 9.9 million and $ 9.0 million pursuant to these arrangements for the years ended October 31, 2021 and 2020, respectively.

These obligations total $ 22.4 million and $ 18.7 million at October 31, 2020 and 2019, respectively, and extend through fiscal 2021.

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

These obligations total $ 23.4 million and $ 22.4 million at October 31, 2021 and 2020, respectively, and extend through fi scal 2022.

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

Asset Retirement Obligation

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Remediation and Environmental Compliance Costs

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From time to time, we incur routine expenses and capital expenditures associated with compliance with existing environmental regulations, including control of air emissions and water discharges, and plant decommissioning costs.

We have not incurred any material expenses or capital expenditures related to environmental matters during the past three fiscal years, and do not expect to incur a material amount of such costs in fiscal 2021.

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

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

Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows.

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

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

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

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

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fair Value Measurements of Assets and Liabilities

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quoted prices for identical or similar assets or liabilities in markets that are not active;

inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

All of our derivative contracts are valued using quoted market prices from brokers or exchanges and are classified within Level 2 of the fair value hierarchy.

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

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

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

As a result, the fair value of our debt instruments approximates carrying value at October 31, 2021 and 2020 (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).

Our restricted stock units and 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 13.

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A summary of non-vested restricted stock award activity during the years ended October 31, 2021, 2020 and 2019, follows:

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Vested ( 44,400 ) 20.70

Cancelled ( 55,000 ) 19.45

Forfeited — —

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

As of October 31, 2020, total unrecognized compensation cost related to unamortized restricted stock awards totaled $ 1.2 million.

The total weighted average grant-date fair value of restricted stock awards that vested during the years ended October 31, 2021, 2020 and 2019 wa s $ 0.9 million, $ 1.1 million and $ 1.3 million, respectively.

As of October 31, 2021, total unrecognized compensation cost related to unamortize d restricted stock awards totaled $ 1.5 million.

We expect to recognize this expense over the remaining weighted average period of 1.8 years.

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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.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes our stock option activity for the years ended October 31, 2021, 2020 and 2019.

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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.

For the years ended October 31, 2020, 2019 and 2018, the total intrinsic value of our stock options that were exercised totaled $ 0.5 million, $ 0.4 million and $ 2.9 million, respectively.

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

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

For the years ended October 31, 2021, 2020 and 2019, the total intrinsic value of our stock options that were exercised to taled $ 4.2 million, $ 0.5 million and $ 0.4 million, respectively.

The total fair value of stock options vested during the years ended October 31, 2021, 2020 and 2019, was zero , $ 0.6 million and $ 1.1 million, respectively.

Restricted Stock Units

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During the years ended October 31, 2021, 2020 and 2019, 28,826 , 25,621 and 34,050 restricted stock units, respectively, were granted with corresponding weighted average grant date fair value of $ 18.79 , $ 18.18 , and $ 15.51 , respectively.

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

As of October 31, 2021 there were 21,774 unvested restricted stock units from the fiscal 2020 grant.

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

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

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

During the years ended October 31, 2021, 2020 and 2019, we paid $ 0.8 million, $ 0.2 million and $ 0.4 million to settle restricted stock units.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Performance Share Award s

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

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

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

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

Performance share awards issued during the years ended October 31, 2020 and October 31, 2019 vest with return on net assets (RONA) as the performance condition, and pay out 100 % in cash.

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

For awards issued during the year ended October 31, 2018, we have further bifurcated these awards based on the settlement method, as the portion expected to settle in stock (equity component) and the portion expected to settle in cash (liability component).

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

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

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 will be 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 marked to market over the three-year term of the award, and could fluctuate depending on the number of shares ultimately expected to vest.

Beginning with the fiscal year ended October 31, 2019, performance share awards vest with return on net assets (RONA) as the vesting condition, 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 could 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 Forfeited

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

Grant Date Shares Awarded Grant Date Fair Value Shares Forfeited

December 5, 2018 132,400 $ 13.63 40,900

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December 2, 2020 65,300 $ 20.68 —

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

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

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

Performance share awards are payable in cash based upon the number of performance shares ultimately earned, and are therefore not considered outstanding shares.

Performance Restricted Stock Units

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

We awarded 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.

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December 2, 2020 38,400 $ 20.68 —

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

The following table summarizes amounts expensed as selling, general and administrative expense related to restricted stock awards, stock options, restricted stock units, performance share awards and performance restricted stock units for the years ended October 31, 2021, 2020 and 2019 (in thousands):

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

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

During the years ended October 31, 2021 and 2020, we pu rchased 478,311 shares and 450,000 shares, respectively, at a cost of $ 11.2 million and $ 7.2 million respectively, under this program.

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

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A deficiency of such proceeds relative to costs would be applied to reduce paid-in-capital associated with prior issuances to the extent available, with the remainder recorded as a charge to retained earnings.

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

We recorded a charge to retained ear nings of zero , $ 0.1 million and $ 0.3 million, in the years ended October 31, 2021, 2020, and 2018, respectively.

For a summary of treasury stock activity for the years ended October 31, 2021, 2020 and 2019, refer to the Consolidated Statement of Stockholders' Equity located elsewhere herein.

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2021 2020 2019

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

Foreign currency transaction losses $ ( 98 ) $ ( 42 ) $ ( 187 )

Foreign currency exchange derivative losses — ( 15 ) ( 197 )

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

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

Foreign currency translation adjustment — 591 — — 591

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Other, net 754 280 116

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

Income tax expense ( 23,114 ) ( 11,804 ) ( 10,776 )

Net income (loss) $ 56,980 $ 38,496 $ ( 46,730 )

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property, plant and equipment, net;

and intangible assets, net.

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

goodwill, intangible assets, net, and operating leases.

QUANEX BUILDING PRODUCTS CORPORATION

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Stock options 82

Restricted stock 90

Restricted stock awards 132

Performance restricted stock units 88

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

Year Ended October 31, 2019

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

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

Effect of anti-dilutive securities:

Stock options 40

Restricted stock 113

Performance share awards 28

Diluted earnings per common share $ 56,980 33,495 $ 1.70

Year Ended October 31, 2020

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Restricted stock 90

Performance restricted stock units 32

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

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

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

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.

Year Ended October 31, 2019

Basic and diluted loss per share $ ( 46,730 ) 32,960 $ ( 1.42 )

We do not include equity instruments in our calculation of diluted earnings per share if those instruments would be antidilutive.

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

The following table shows anti-dilutive instruments for the three years ended October 31, 2021, 2020 and 2019 (shares in thousands):

Year Ended October 31,

2021 2020 2019

Stock options — 1,032 1,307

Restricted stock awards — — 113

Performance share awards — — 28

Total — 1,032 1,448

QUANEX BUILDING PRODUCTS CORPORATION

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Unaudited Quarterly Data

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

Selected quarterly financial data for the years ended October 31, 2021 and 2020 was as follows (amounts in thousands, except per share amounts):

For the Quarter Ended January 31, 2021 April 30, 2021 July 31, 2021 October 31, 2021

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

Operating (loss) income ( 2,450 ) ( 19,363 ) 19,110 ( 23,724 )

Net (loss) income $ ( 3,649 ) $ ( 23,974 ) $ 11,841 $ ( 30,948 )

Basic (loss) earnings per share ( 0.11 ) ( 0.73 ) 0.36 ( 0.94 )

Diluted (loss) earnings per share ( 0.11 ) ( 0.73 ) 0.36 ( 0.94 )

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

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

Basic earnings per share — 0.17 0.33 0.68

Diluted earnings per share — 0.17 0.33 0.68

Cash dividends paid per common share 0.08 0.08 0.08 0.08

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

Qu arterly earnings per share results may not sum to the consolidated earnings per share results on the accompanying consolidated statements of income due to roun ding and changes in weighted average shares during the respective periods.

New Accounting Guidance

Accounting Standards Recently Adopted

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

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

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

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

were properly evaluated under legacy lease accounting guidance;

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

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

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

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

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

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

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

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

"Leases," for further discussion.

QUANEX BUILDING PRODUCTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Accounting Standards Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (FASB) 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.

In August 2018, the FASB issued ASU No.

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

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

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

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

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

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 as pre-existing processes for estimating credit losses for trade receivables aligned with the expected credit loss model.

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

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data