Quanex Building Products CORP 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Quanex Building Products Corporation Page Reports of Independent Registered Public Accounting Firm 34 Management's Annual Report on Internal Control over Financial Reporting 37 Consolidated Financial Statements Consolidated Balance Sheets 38 Consolidated Statements of Income (Loss) 39 Consolidated Statements of Comprehensive Income (Loss) 40 Consolidated Statement of Stockholders’ Equity 41 Consolidated Statements of Cash Flow 42 Notes to Consolidated Financial Statements 43 33 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Quanex Building Products Corporation 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, 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. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters 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 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 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 this reporting unit 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, cash flows and WACC. 34 Table of Contents • 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, 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 We have served as the Company's auditor since 2014. Houston, Texas December 17, 2021 35 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Quanex Building Products Corporation Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Quanex Building Products Corporation (a Delaware corporation) and subsidiaries (the “Company”) 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”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended October 31, 2021, and our report dated December 17, 2021 expressed an unqualified opinion on those financial statements. 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 Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Houston, Texas December 17, 2021 36 Table of Contents MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the Company, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system was designed to provide reasonable assurance to management and the Company’s Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may become inadequate over time because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2021 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on this assessment, management has concluded that, as of October 31, 2021, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles based on such criteria. Grant Thornton LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. 37 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONSOLIDATED BALANCE SHEETS As of October 31, 2021 and 2020 October 31, 2021 2020 (In thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents $ 40,061 $ 51,621 Accounts receivable, net of allowance for credit losses of $ 340 and $ 161 108,309 88,287 Inventories, net 92,529 61,181 Prepaid and other current assets 8,148 6,217 Total current assets 249,047 207,306 Property, plant and equipment, net of accumulated depreciation of $ 336,493 and $ 340,144 178,630 184,104 Operating lease right-of-use assets 52,708 51,824 Goodwill 149,205 146,154 Intangible assets, net 82,410 93,068 Other assets 5,323 9,129 Total assets $ 717,323 $ 691,585 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 86,765 $ 77,335 Accrued liabilities 56,156 38,289 Income taxes payable 6,038 6,465 Current maturities of long-term debt 846 692 Current operating lease liabilities 8,196 7,459 Total current liabilities 158,001 130,240 Long-term debt 52,094 116,728 Noncurrent operating lease liabilities 45,367 44,873 Deferred pension and postretirement benefits 4,737 10,923 Deferred income taxes 21,965 19,116 Liability for uncertain tax positions 1,388 522 Other liabilities 13,989 13,424 Total liabilities 297,541 335,826 Commitments and contingencies Stockholders’ equity: Preferred stock, no par value, shares authorized 1,000,000 issued and outstanding - none — — Common stock, $ 0.01 par value, shares authorized 125,000,000 issued 37,273,510 and 37,296,166 respectively; outstanding 33,274,785 and 32,804,737 , respectively 373 373 Additional paid-in-capital 254,162 253,458 Retained earnings 259,718 213,517 Accumulated other comprehensive loss ( 21,770 ) ( 33,024 ) Less: Treasury stock at cost, 3,998,725 and 4,491,429 shares, respectively ( 72,701 ) ( 78,565 ) Total stockholders’ equity 419,782 355,759 Total liabilities and stockholders' equity $ 717,323 $ 691,585 See notes to consolidated financial statements. 38 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (LOSS) For the Years Ended October 31, 2021, 2020 and 2019 Year Ended October 31, 2021 2020 2019 (In thousands, except per share amounts) Net sales $ 1,072,149 $ 851,573 $ 893,841 Cost and expenses: Cost of sales (excluding depreciation and amortization) 831,541 658,750 694,420 Selling, general and administrative 115,967 89,707 101,292 Restructuring charges 39 622 370 Depreciation and amortization 42,732 47,229 49,586 Asset impairment charges — — 74,600 Operating income (loss) 81,870 55,265 ( 26,427 ) Non-operating income (expense): Interest expense ( 2,530 ) ( 5,245 ) ( 9,643 ) Other, net 754 280 116 Income (loss) before income taxes 80,094 50,300 ( 35,954 ) Income tax expense ( 23,114 ) ( 11,804 ) ( 10,776 ) Net income (loss) $ 56,980 $ 38,496 $ ( 46,730 ) Basic earnings (loss) per common share $ 1.72 $ 1.18 $ ( 1.42 ) Diluted earnings (loss) per common share $ 1.70 $ 1.17 $ ( 1.42 ) Weighted-average common shares outstanding: Basic 33,193 32,689 32,960 Diluted 33,495 32,821 32,960 Cash dividends per share $ 0.32 $ 0.32 $ 0.32 See notes to consolidated financial statements. 39 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the Years Ended October 31, 2021, 2020 and 2019 Year Ended October 31, 2021 2020 2019 (In thousands) Net income (loss) $ 56,980 $ 38,496 $ ( 46,730 ) Other comprehensive income (loss): 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 ) Comprehensive income (loss) $ 68,234 $ 39,289 $ ( 49,842 ) See notes to consolidated financial statements. 40 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY For the Years Ended October 31, 2021, 2020 and 2019 Common Stock Accumulated Treasury Stock Total Shares Amount Additional Paid-in Capital Retained Earnings Other Comprehensive Loss Shares Amount Stockholders’ Equity (In thousands, except share amounts) Balance at October 31, 2018 37,433,817 $ 374 $ 254,678 $ 243,904 $ ( 30,705 ) ( 4,094,785 ) $ ( 73,029 ) $ 395,222 Net loss — — — ( 46,730 ) — — — ( 46,730 ) Foreign currency translation adjustments — — — — 1,864 — — 1,864 Change in pension from net unamortized loss (net of tax benefit of $ 1,596 ) — — — — ( 4,976 ) — — ( 4,976 ) Common dividends ($ 0.32 per share) — — — ( 10,644 ) — — — ( 10,644 ) Treasury shares purchased, at cost — — — — — ( 583,398 ) ( 9,551 ) ( 9,551 ) Expense related to stock-based compensation — — 2,045 — — — — 2,045 Stock options exercised — 1 — ( 322 ) — 204,770 3,609 3,288 Restricted stock awards granted — — ( 1,720 ) ( 505 ) — 124,800 2,225 — Other ( 63,415 ) ( 1 ) ( 330 ) — — — — ( 331 ) Balance at October 31, 2019 37,370,402 $ 374 $ 254,673 $ 185,703 $ ( 33,817 ) ( 4,348,613 ) $ ( 76,746 ) $ 330,187 Net income — — — 38,496 — — — 38,496 Foreign currency translation adjustments — — — — 1,078 — — 1,078 Change in pension from net unamortized loss (net of tax of benefit of $ 91 ) — — — — ( 285 ) — — ( 285 ) Common dividends ($ 0.32 per share) — — — ( 10,534 ) — — — ( 10,534 ) Expense related to stock-based compensation — — 879 — — — 879 Treasury shares purchased, at cost — — — — — ( 450,000 ) ( 7,233 ) ( 7,233 ) Stock options exercised — — 66 ( 242 ) — 215,733 3,801 3,625 Restricted stock awards granted — — ( 1,212 ) 94 — 63,400 1,118 — Performance share awards vested — — ( 495 ) — — 28,051 495 — Other ( 74,236 ) ( 1 ) ( 453 ) — — — — ( 454 ) Balance at October 31, 2020 37,296,166 $ 373 $ 253,458 $ 213,517 $ ( 33,024 ) ( 4,491,429 ) $ ( 78,565 ) $ 355,759 Net income — — — 56,980 — — — 56,980 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 Common dividends ($ 0.32 per share) — — — ( 10,779 ) — — — ( 10,779 ) Treasury shares purchased, at cost — — — — — ( 478,311 ) ( 11,182 ) ( 11,182 ) Expense related to stock-based compensation — — 1,970 — — — 1,970 Stock options exercised — — 1,073 — — 865,393 15,199 16,272 Restricted stock awards granted — — ( 1,282 ) — — 73,300 1,282 — Performance share awards vested — — ( 565 ) — — 32,322 565 — Other ( 22,656 ) — ( 492 ) — — — — ( 492 ) Balance at October 31, 2021 37,273,510 $ 373 $ 254,162 $ 259,718 $ ( 21,770 ) ( 3,998,725 ) $ ( 72,701 ) $ 419,782 See notes to consolidated financial statements. 41 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW For the Years Ended October 31, 2021, 2020 and 2019 Year Ended October 31, 2021 2020 2019 (In thousands) Operating activities: Net income (loss) $ 56,980 $ 38,496 $ ( 46,730 ) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 42,732 47,229 49,586 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 Asset impairment charges — — 74,600 Other, net 2,126 1,689 2,176 Changes in assets and liabilities: (Increase) decrease in accounts receivable ( 19,017 ) ( 5,766 ) 574 (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 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 Increase (decrease) in other long-term liabilities 477 ( 236 ) 513 Other, net ( 528 ) ( 549 ) 522 Cash provided by operating activities 78,588 100,796 96,372 Investing activities: Capital expenditures ( 24,008 ) ( 25,726 ) ( 24,883 ) Proceeds from disposition of capital assets 5,300 502 1,324 Cash used for investing activities ( 18,708 ) ( 25,224 ) ( 23,559 ) Financing activities: Borrowings under credit facility — 114,500 83,500 Repayments of credit facility borrowings ( 65,000 ) ( 154,000 ) ( 136,000 ) Repayments of other long-term debt ( 680 ) ( 1,027 ) ( 1,526 ) Common stock dividends paid ( 10,779 ) ( 10,534 ) ( 10,644 ) Issuance of common stock 16,272 3,626 3,287 Payroll tax paid to settle shares forfeited upon vesting of stock ( 492 ) ( 454 ) ( 330 ) Purchase of treasury stock ( 11,182 ) ( 7,233 ) ( 9,551 ) Cash used for financing activities ( 71,861 ) ( 55,122 ) ( 71,264 ) Effect of exchange rate changes on cash and cash equivalents 421 303 316 (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 Cash and cash equivalents at end of period $ 40,061 $ 51,621 $ 30,868 See notes to consolidated financial statements. 42 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations, Basis of Presentation and Significant Accounting Policies Nature of Operations Quanex Building Products Corporation is a component supplier to original equipment manufacturers (OEMs) in the building products industry. These components can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of fenestration components include: (1) energy-efficient flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, and (4) precision-formed metal and wood products. We also manufacture cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, fencing, water retention barriers, and conservatory roof components. We have organized our business into three reportable business segments: (1) North American Fenestration (NA Fenestration), (2) European Fenestration (EU Fenestration) and (3) North American Cabinet Components (NA Cabinet Components). For additional discussion of our reportable business segments, see Note 16, “Segment Information.” We use low-cost production processes and engineering expertise to provide our customers with specialized products for their specific window, door, and cabinet applications. We believe these capabilities provide us with unique competitive advantages. We serve a primary customer base in North America and the United Kingdom (U.K.), and also serve customers in international markets through our operating plants in the U.K. and Germany, as well as through sales and marketing efforts in other countries. Unless the context indicates otherwise, references to “Quanex”, the “Company”, “we”, “us” and “our” refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries. Basis of Presentation and Principles of Consolidation Our consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). We consolidate our wholly-owned subsidiaries and eliminate intercompany sales and transactions. We have no cost or equity investments in companies that are not wholly-owned. In our opinion, these audited financial statements contain all adjustments necessary to fairly present our financial position, results of operations and cash flows for the periods presented. Use of Estimates In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. We review our estimates on an ongoing basis, including those related to impairment of long lived assets and goodwill, pension and retirement liabilities, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates. A summary of our significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: Revenue from Contracts with Customers Revenue recognition We recognize revenue that reflects the consideration we expect to receive for product sales upon transfer to customers. Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we are entitled to consideration in exchange for such transfer. We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those products, and when collectability of the consideration due is probable. Performance obligations A performance obligation is a promise to provide the customer with a good or service. Our performance obligations include product sales, with each product included in a customer contract being recognized as a separate performance obligation. For contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable. 43 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment. 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 We account for shipping and handling services as fulfillment services; accordingly, freight revenue is combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in cost of sales in the accompanying consolidated statements of income. Contract assets and liabilities Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration. Disaggregation of revenue We produce a wide variety of products that are used in the fenestration industry, including insulating glass spacer systems; extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we produce certain non-fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other products. The following table summarizes our product sales for the three years ended October 31, 2021, 2020, and 2019 into groupings by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. For further details regarding our results by segment, refer to Note 16, “Segment Information.” 44 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Year Ended October 31, 2021 2020 2019 (in thousands) NA Fenestration: United States - fenestration $ 507,634 $ 427,616 $ 439,536 International - fenestration 34,610 28,585 31,106 United States - non-fenestration 24,534 19,279 17,061 International - non-fenestration 11,554 7,935 16,134 $ 578,332 $ 483,415 $ 503,837 EU Fenestration: International - fenestration $ 199,511 $ 134,432 $ 139,638 International - non-fenestration 52,088 26,622 25,359 $ 251,599 $ 161,054 $ 164,997 NA Cabinet Components: United States - fenestration $ 13,326 $ 11,842 $ 13,144 United States - non-fenestration 230,559 196,479 214,211 International - non-fenestration 2,190 1,778 2,289 $ 246,075 $ 210,099 $ 229,644 Unallocated Corporate & Other: Eliminations $ ( 3,857 ) $ ( 2,995 ) $ ( 4,637 ) $ ( 3,857 ) $ ( 2,995 ) $ ( 4,637 ) Net sales $ 1,072,149 $ 851,573 $ 893,841 Cash and Cash Equivalents Cash equivalents include all highly liquid investments with an original maturity of three months or less. Such securities with an original maturity which exceeds three months are deemed to be short-term investments. We maintain cash and cash equivalents at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. 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 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, 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: (a) historical trends of write-offs, recoveries and credit losses; (b) the credit quality of our customers; and (c) projected economic and market conditions. 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. 45 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Business Combinations We apply the acquisition method of accounting for business combinations in accordance with U.S. 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 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. 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. Inventory We record inventory at the lower of cost or net realizable value. Inventories are valued using the first-in first-out (FIFO) method. Fixed costs related to excess manufacturing capacity are evaluated and expensed in the period, to insure that inventory is properly capitalized. Inventory quantities are regularly reviewed and provisions for excess or obsolete inventory are recorded primarily based on our forecast of future demand and our estimates regarding current and future market conditions. Significant unanticipated variances to our forecasts could require a change in the provision for excess or obsolete inventory, resulting in a charge to net income during the period of the change. Long-Lived Assets Property, Plant and Equipment and Intangible Assets with Defined Lives We make judgments and estimates related to the carrying value of property, plant and equipment, intangible assets with defined lives, and long-lived assets, which include determining when to capitalize costs, the depreciation and amortization methods to use and the useful lives of these assets. We evaluate these assets for impairment when there are indicators that the carrying values of these assets might not be recoverable. Such indicators of impairment may include changes in technology, significant market fluctuations, historical losses or loss of a significant customer, or other changes in circumstance that could affect the assets’ ability to generate future cash flows. When we evaluate these assets for impairment, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset to its carrying value. If the carrying value exceeds the sum of the undiscounted cash flows, and there is no alternative use for the asset, we determine that the asset is impaired. To measure the impairment charge, we compare the carrying amount of the long-lived asset to its fair value, as determined by quoted market prices in active markets, if available, or by discounting the projected future cash flows. This calculation of fair value requires us to develop and employ long-term forecasts of future operating results related to these assets. These forecasts are based on assumptions about demand for our products and future market conditions. Future events and unanticipated changes to these assumptions could require a provision for impairment, resulting in a charge to net income during the period of the change. We monitor relevant circumstances, including industry trends, general economic conditions, and the potential impact that such circumstances might have on the valuation of our identifiable intangible assets with finite lives. 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 to allow a patent to lapse. Such events could negatively impact the fair value of our identifiable intangible assets. In such circumstances, we may evaluate the underlying assumptions and estimates made by us in order to assess the appropriate valuation of these identifiable intangible assets and compare to the carrying value of the assets. We may be required to write down these identifiable intangible assets and record a non-cash impairment charge. When we originally value our intangible assets, we use a variety of techniques to establish the carrying value of the assets, including the relief from royalty method, excess current year earnings method and income method. Changes in market conditions throughout 2019 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 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 46 Table of Contents 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. 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. We cease capitalization of software costs when the software is substantially complete and is ready for its intended use. The software is then amortized over its estimated useful life. When events or circumstances indicate the carrying value of internal use software might not be recoverable, we assess the recoverability of these assets by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated from the asset’s use, consistent with the methodology to test other property, plant and equipment for impairment. Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. We capitalize betterments which extend the useful lives or significantly improve the operational efficiency of assets. We expense repair and maintenance costs as incurred. The estimated useful lives of our primary asset categories at October 31, 2021 were as follows: Useful Life (in Years) Land improvements 7 to 25 Buildings 25 to 40 Building improvements 5 to 20 Machinery and equipment 2 to 15 Leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the lease. Goodwill We use the acquisition method to account for business combinations and, to the extent that the purchase price exceeds the fair value of the net assets acquired, we record goodwill. In accordance with U.S. GAAP, we are required to evaluate our goodwill at least annually. We perform our annual goodwill assessment as of August 31, or more frequently if indicators of impairment exist. Qualitative factors that indicate impairment could include, but are not limited to, (i) macroeconomic conditions, (ii) industry and market considerations, (iii) cost factors, (iv) overall financial performance of the reporting unit, and (v) other relevant entity-specific events. The first step in our annual goodwill assessment is to perform the optional qualitative assessment allowed by ASC Topic 350 “Intangibles - Goodwill and Other” (ASC 350). In our qualitative assessment, we evaluate relevant events or circumstances to determine whether it is more likely than not (i.e., greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, ASC 350 requires us to compare the fair value of such reporting unit to its carrying value including goodwill. To determine the fair value of our reporting units, we use multiple valuation techniques including a discounted cash flow analysis, using the applicable weighted average cost of capital, in combination with a market approach that uses market multiples and a selection of guideline public companies. This test requires us to make assumptions about the future growth of our business and the market in general, as well as other variables such as the level of investment in capital expenditure, growth in working capital requirements and the terminal or residual value of our reporting units beyond the periods of estimated annual cash flows. We use a third-party valuation firm to assist us with this analysis. If the fair value of each reporting unit exceeds its carrying value, no action is required. Otherwise, an impairment loss is recorded to the extent that the carrying amount of the reporting unit including goodwill exceeds the fair value of that reporting unit. We believe the estimates and assumptions used in our impairment assessment are reasonable based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated during current or future periods. 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. 47 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) At our annual testing date, August 31, 2021, we had five reporting units with goodwill balances: two reporting units included in our NA Fenestration operating segment, two reporting units included in our EU Fenestration operating segment, and one reporting unit included in our NA Cabinet Components operating segment. We performed a qualitative assessment of the two reporting units in the NA Fenestration segment and one of the reporting units in the EU Fenestration segment. This review included an analysis of historical goodwill test results, operating results relative to forecast, projected results over the next five years, and other measures and concluded that there were no indicators of potential impairment associated with these reporting units. Therefore, no additional testing was deemed necessary for these three reporting units. Also, at our annual testing date, we performed a quantitative assessment of the reporting unit in our NA Cabinet Components segment primarily due to the recent impairment of goodwill during the second and fourth quarters of 2019 and the history of a narrow margin of fair value above carrying value in quantitative assessments performed in prior years. We also elected to update the quantitative assessment of the other reportable unit in the EU Fenestration operating segment. We determined that the fair value of these reporting units exceeded their carrying values by approximate ly 17.6 % and 113.6 %, respectively. We concluded that no impairment was necessary. Restructuring We accrue one-time severance costs pursuant to an approved plan of restructuring at the communication date, when affected employees have been notified of the potential severance and sufficient information has been provided for the employee to calculate severance benefits, in the event the employee is involuntarily terminated. In addition, we accrue costs associated with the termination of contractual commitments including leases at the time the lease is terminated pursuant to the lease provisions or in accordance with another agreement with the landlord. Otherwise, we continue to recognize lease expense through the cease-use date. After the cease-use date, we determine if our operating lease payments are at market. We assume sublet of the facility at the market rate. To the extent our lease obligations exceed the fair value rentals, we discount to arrive at the present value and record a liability. If the facility is not sublet, we expense the amount of the assumed sublet in the current period. For other costs directly related to the restructuring effort, such as equipment moving costs, we expense in the period incurred. COVID-19 Impact On March 11, 2020, the World Health Organization (WHO) declared the outbreak of COVID-19 as a global pandemic and advised aggressive containment action. The COVID-19 pandemic and its impacts are continuing to have an adverse effect on many sectors of the economy. Measures providing for business shutdowns generally exclude certain essential services commonly including critical infrastructure such as construction and the businesses that support that critical infrastructure. To date, we have not experienced significant challenges or expenses implementing crisis management plans intended for containment and prevention. 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. Insurance 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. We record undiscounted liabilities associated with our portion of these exposures, which we estimate by considering various factors such as our historical claims experience, severity factors and estimated claims incurred but not reported, for which we have developed loss development factors, which are estimates as to how claims will develop over time until closed. While we consider a number of factors in preparing the estimates, sensitive assumptions using significant judgment are made in determining the amounts that are accrued in the financial statements. Actual claims could differ significantly from these estimated liabilities, depending on future claims experience. We do not record insurance recoveries until any contingencies relating to the claim have been resolved. 48 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Retirement Plans We sponsor a defined benefit pension plan and an unfunded postretirement plan that provides health care and life insurance benefits for a limited pool of eligible retirees and dependents. To measure our liabilities associated with these plans, we make assumptions related to future events, including expected return on plan assets, rate of compensation increases, and healthcare cost trend rates. The discount rate reflects the rate at which benefits could be effectively settled on the measurement date. We determine our discount rate using a RATE: Link Model whereby target yields are developed from bonds across a range of maturity points, and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the curve and used to discount benefit payments associated with each future year. Actual pension plan asset investment performance, as well as other economic experience such as discount rate and demographic experience, will either reduce or increase unamortized pension losses at the end of any fiscal year, which ultimately affects future pension costs. Warranty Obligations We accrue warranty obligations when we recognize revenue for certain products. Our provision for warranty obligations is based on historical costs incurred for such obligations and is adjusted, where appropriate, based on current conditions and factors. Our ability to estimate our warranty obligations is subject to significant uncertainties, including changes in product design and our overall product sales mix. Income Taxes We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and the amounts reported in our consolidated balance sheets, as well as net operating losses and tax credit carry forwards. We evaluate the carrying value of the net deferred tax assets and determine whether we will be able to generate sufficient future taxable income to realize our deferred tax assets. We perform this review for recoverability on a jurisdictional basis, whereby we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence can be objectively verified. Cumulative losses in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. 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 believe we will fully realize our deferred tax assets, net of a recorded valuation allowance. We project future taxable income using the same forecasts used to test long-lived assets and intangibles for impairment, scheduling out the future reversal of existing taxable temporary differences and reviewing our most recent financial operations. 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 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 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. Final regulations were published by the Internal Revenue Service regarding Uniform Capitalization (UNICAP) that became effective during fiscal 2020. 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 We have historically used financial and commodity-based derivative contracts to manage our exposure to fluctuations in foreign currency exchange rates and aluminum prices. All derivatives are measured at fair value on a recurring basis. We have not designated the derivative instruments we use as cash flow hedges under ASC Topic 815 “Derivatives and Hedging” (ASC 815). Therefore, all gains and losses, both realized and unrealized, are recognized in the consolidated statements of income (loss) in the period of the change as the underlying assets and liabilities are marked-to-market. We do not enter into derivative instruments for speculative or trading purposes. As such, these instruments are considered economic hedges, and are reflected in the operating activities section of the consolidated statements of cash flow. 49 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Foreign Currency Translation Our consolidated financial statements are presented in our reporting currency, the United States Dollar. Our German and U.K. operations are measured using the local currency as the functional currency. The assets and liabilities of our foreign operations which are denominated in other currencies are translated to United States Dollars using the prevailing exchange rates as of the balance sheet date. Revenues and expenses are translated at the average exchange rates for the applicable period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss on the consolidated balance sheets. Occasionally, we enter into transactions that are denominated in currencies other than our functional currency. At each balance sheet date, we translate these asset or liability accounts to our functional currency and record unrealized transaction gains or losses. When these assets or liabilities settle, we record realized transaction gains or losses. These realized and unrealized gains or losses are included in the accompanying consolidated statements of income (loss) under the caption, “Other, net.” Stock–Based Compensation We have issued stock-based compensation in the form of stock options to directors, employees and officers, and non-vested restricted stock awards to certain key employees and officers. We apply the provisions of ASC Topic 718 “Compensation - Stock Compensation” (ASC 718), to determine the fair value of stock option awards on the date of grant using the Black-Scholes valuation model. We recognize the fair value as compensation expense on a straight-line basis over the requisite service period of the award based on awards ultimately expected to vest. Stock options granted to directors vest immediately while the stock options granted to our employees and officers typically vest ratably over a three-year period with service and continued employment as the vesting conditions. For new option grants to retirement-eligible employees, we recognize expense and vest immediately upon grant, consistent with the retirement vesting acceleration provisions of these grants. For employees near retirement age, we amortize such grants over the period from the grant date to the retirement-eligibility date if such period is shorter than the standard vesting schedule. For grants of non-vested restricted stock, we calculate the compensation expense at the grant date as the number of shares granted multiplied by the closing stock price of our common stock on the date of grant. This expense is recognized ratably over the vesting period. Our non-vested restricted stock grants to officers and employees cliff vest over a three-year period with service and continued employment as the only vesting criteria. Our fair value determination of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behavior over the expected term, our dividend rate, risk-free rate and expectation with regards to forfeitures. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, the valuation models may not provide an accurate measure of the fair value of our employee stock options. Accordingly, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. 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. The value of these awards fluctuates with changes in our stock price, with the resulting gains or losses reflected in the period of the change. We have recorded current and non-current liabilities related to these awards reflected in the accompanying consolidated balance sheets at October 31, 2021 and 2020. See Note 13, “Stock-based Compensation.” 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. 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 50 Table of Contents 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 We use the cost method to record treasury stock purchases whereby the entire cost of the acquired shares of our common stock is recorded as treasury stock (at cost). When we subsequently reissue these shares, proceeds in excess of cost upon the issuance of treasury shares are credited to additional paid-in-capital, while any deficiency is charged to retained earnings. Earnings per Share Data We calculate basic earnings per share based on the weighted average number of our common shares outstanding for the applicable period. We calculate diluted earnings per share based on the weighted average number of our common shares outstanding for the period plus all potentially dilutive securities using the treasury stock method, whereby we assume that all such shares are converted into common shares at the beginning of the period, if deemed to be dilutive. If we incur a loss from continuing operations, the effects of potentially dilutive common stock equivalents (stock options and unvested restricted stock awards) are excluded from the calculation of diluted earnings per share because the effect would be anti-dilutive. Performance shares and performance restricted stock units are excluded from contingent shares for purposes of calculating diluted weighted average shares until the performance measure criteria is probable and shares are likely to be issued. Supplemental Cash Flow Information The following table summarizes our supplemental cash flow information for the years ended October 31, 2021, 2020 and 2019 (in thousands): Year Ended October 31, 2021 2020 2019 Cash paid for interest $ 1,993 $ 4,715 $ 9,020 Cash paid for income taxes 22,160 12,118 5,081 Cash received from income tax refunds 381 352 1,020 Noncash investing and financing activities: Increase in capitalized expenditures in accounts payable and accrued liabilities $ 1,124 $ 2,370 $ 2,897 Related Party Transactions We did no t participate in any related party transactions during the years ended October 31, 3021, 2020 and 2019. Subsequent Events We have evaluated events occurring after the balance sheet date for possible disclosure as a subsequent event through the date the financial statements were issued. 51 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Accounts Receivable and Allowance for Credit Losses Accounts receivable consisted of the following as of October 31, 2021 and 2020 (in thousands): October 31, 2021 2020 Trade receivables $ 107,725 $ 88,287 Other 924 161 Total 108,649 88,448 Less: Allowance for credit losses 340 161 Accounts receivable, net $ 108,309 $ 88,287 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, 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, 2021, 2020 and 2019 $ 340 $ 161 $ 393 3. Inventories Inventories consisted of the following at October 31, 2021 and 2020 (in thousands): October 31, 2021 2020 Raw materials $ 49,867 $ 33,298 Finished goods and work in process 43,499 32,347 Supplies and other 2,099 2,020 Total 95,465 67,665 Less: Inventory reserves 2,936 6,484 Inventories, net $ 92,529 $ 61,181 The changes in our inventory reserve accounts were as follows (in thousands): Year Ended October 31, 2021 2020 2019 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 Write-offs ( 3,060 ) — ( 939 ) Other 80 ( 19 ) 13 Balance as of October 31, 2021, 2020 and 2019 $ 2,936 $ 6,484 $ 3,790 52 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Property, Plant and Equipment Property, plant and equipment consisted of the following at October 31, 2021 and 2020 (in thousands): October 31, 2021 2020 Land and land improvements $ 10,285 $ 10,298 Buildings and building improvements 101,740 100,576 Machinery and equipment 386,996 398,950 Construction in progress 16,102 14,424 Property, plant and equipment, gross 515,123 524,248 Less: Accumulated depreciation 336,493 340,144 Property, plant and equipment, net $ 178,630 $ 184,104 Depreciation expense for the years ended October 31, 2021, 2020, and 2019 was $ 28.8 million , $ 31.8 million and $ 34.3 million, respectively. If there are indicators of potential impairment, we evaluate our property, plant and equipment for recoverability over the remaining useful lives of the assets. We did not incur impairment losses associated with these assets for the years ended October 31, 2021, 2020, and 2019. 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.” 5. Leases We recognize a right-of-use (ROU) asset and lease liability for each operating and finance lease with a contractual term greater than 12 months at the time of lease inception. We include ROU assets and lease liabilities for leases that exist within other contracts. Leases with an original term of 12 months or less are not recognized on the balance sheet, and the rent expense related to those short-term leases is recognized over the lease term. We do not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class. We lease certain manufacturing plants, warehouses, office space, vehicles and equipment under finance and operating leases. Lease commencement occurs on the date we take possession or control of the property or equipment. Original terms for our real estate-related leases are generally between five and twenty years . Original terms for equipment-related leases, primarily manufacturing equipment and vehicles, are generally between one and ten years . Some of our leases also include rental escalation clauses. Renewal options are included in the determination of lease payments when management determines the options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital. If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of our leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable, our estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on information available at lease commencement. Total lease costs recorded include fixed operating lease costs and variable lease costs. Most of our real estate leases require we pay certain expenses, such as common area maintenance costs, of which the fixed portion is included in operating lease costs. We recognize operating lease costs on a straight-line basis over the lease term. In addition to the above costs, variable lease costs are recognized when probable and are not included in determining the present value of our lease liability. The ROU asset is measured at the initial amount of the lease liability (calculated as the present value of lease payments over the term of the lease) adjusted for lease payments made at or before the lease commencement date and initial direct costs. For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each finance lease liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as 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. 53 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The table below presents the lease-related assets and liabilities recorded on the balance sheet at October 31, 2021 and 2020 (in thousands): October 31, Leases Classification 2021 2020 Assets Operating lease assets Operating lease right-of-use assets $ 52,708 $ 51,824 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 Liabilities Current Operating Current operating lease liabilities $ 8,196 $ 7,459 Finance Current maturities of long-term debt 1,114 962 Noncurrent Operating Noncurrent operating lease liabilities 45,367 44,873 Finance Long-term debt 14,335 14,236 Total lease liabilities $ 69,012 $ 67,530 The table below presents the components of lease costs for the year ended October 31, 2021 and 2020 (in thousands): Year Ended October 31, 2021 2020 Operating lease cost $ 10,125 $ 8,866 Finance lease cost Amortization of leased assets 1,165 1,181 Interest on lease liabilities 561 557 Variable lease costs 983 748 Total lease cost $ 12,834 $ 11,352 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, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Finance leases - financing cash flows $ 1,003 $ 1,092 Finance leases - operating cash flows $ 561 $ 557 Operating leases - operating cash flows $ 9,621 $ 8,681 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 8,737 $ 19,559 Finance leases $ 469 $ 398 54 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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: October 31, 2021 2020 Weighted average remaining lease term (in years) Operating leases 7.7 7.8 Financing leases 15.1 15.3 Weighted average discount rate Operating leases 3.23 % 3.52 % Financing leases 3.72 % 3.62 % The table below presents the maturity of the lease liabilities as of October 31, 2021 (in thousands): Operating Leases Finance Leases 2022 $ 9,747 $ 1,638 2023 9,337 1,549 2024 8,594 1,466 2025 7,129 1,402 2026 6,140 1,305 Thereafter 19,340 12,311 Total lease payments 60,287 19,671 Less: present value discount 6,724 4,222 Total lease liabilities $ 53,563 $ 15,449 6. Goodwill and Intangible Assets Goodwill The change in the carrying amount of goodwill for the years ended October 31, 2021 and 2020 was as follows (in thousands): Year Ended October 31, 2021 2020 Beginning balance as of November 1, 2021 and 2020 $ 146,154 $ 145,563 Foreign currency translation adjustment 3,051 591 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 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.” 55 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Identifiable Intangible Assets Amortizable intangible assets consisted of the following as of October 31, 2021 and 2020 (in thousands): October 31, 2021 October 31, 2021 October 31, 2020 Remaining Weighted Average Useful Life Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Customer relationships 9 years $ 146,207 $ 81,086 $ 154,004 $ 80,441 Trademarks and trade names 8 years 56,437 39,589 55,745 37,314 Patents and other technology 6 years 22,525 22,084 22,386 21,312 Total $ 225,169 $ 142,759 $ 232,135 $ 139,067 We do not estimate a residual value associated with these intangible assets. 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. 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): Estimated Amortization Expense 2022 $ 12,134 2023 11,376 2024 10,626 2025 9,399 2026 9,329 Thereafter 29,546 Total $ 82,410 We did no t incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2021, 2020, and 2019. 56 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. Accrued Liabilities Accrued liabilities consisted of the following at October 31, 2021 and 2020 (in thousands): October 31, 2021 2020 Payroll, payroll taxes and employee benefits $ 30,039 $ 16,000 Accrued insurance and workers compensation 6,340 5,108 Sales allowances 8,590 6,297 Deferred compensation (current portion) 395 192 Deferred revenue 627 763 Warranties 77 81 Audit, legal, and other professional fees 1,886 1,562 Accrued taxes 3,258 4,000 Other 4,944 4,286 Accrued liabilities $ 56,156 $ 38,289 8. Debt Long-term debt consisted of the following at October 31, 2021 and 2020 (in thousands): October 31, 2021 2020 Revolving Credit Facility $ 38,000 $ 103,000 Finance lease obligations and other 15,537 15,321 Unamortized deferred financing fees ( 597 ) ( 901 ) Total debt 52,940 117,420 Less: Current maturities of long-term debt 846 692 Long-term debt $ 52,094 $ 116,728 Revolving Credit Facility 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. 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. The applicable margin and commitment fees are outlined in the following table: Pricing Level Consolidated Leverage Ratio Commitment Fee LIBOR Rate Loans Base Rate Loans I Less than or equal to 1.50 to 1.00 0.200 % 1.25 % 0.25 % II Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00 0.225 % 1.50 % 0.50 % III Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00 0.250 % 1.75 % 0.75 % IV Greater than 3.00 to 1.00 0.300 % 2.00 % 1.00 % In the event of default, outstanding borrowings accrue interest at the Default Rate, as defined, whereby the obligations will bear interest at a per annum rate equal to 2 % above the total per annum rate otherwise applicable. 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 57 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) increase. We can also borrow up to the lesser of $ 15.0 million or the revolving credit commitment, as defined, under a Swingline feature of the Credit 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 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. Some of these limitations, however, do not take effect so long as total leverage is less than or equal to 2.75 to 1.00 and available liquidity exceeds $ 25.0 million. Substantially all of our domestic assets, with the exception of real property were used as collateral for the Credit Agreement. Our initial borrowings from the 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. We maintain certain finance lease obligations related to equipment purchases, vehicles, and warehouse space. Refer to Note 5 “Leases” for further information regarding our finance leases. The table below presents the scheduled maturity dates of our long-term debt outstanding (excluding deferred financing fees of $ 0.6 million) at October 31, 2021 (in thousands): Revolving Credit Facility Finance Leases and Other Obligations Aggregate Maturities 2022 $ — $ 1,671 $ 1,671 2023 38,000 1,582 39,582 2024 — 1,489 1,489 2025 — 1,402 1,402 2026 — 1,305 1,305 Thereafter — 12,310 12,310 Total debt payments 38,000 19,759 57,759 Less: present value discount of finance leases — ( 4,222 ) ( 4,222 ) Total $ 38,000 $ 15,537 $ 53,537 9. Retirement Plans We have a number of retirement plans covering substantially all employees. We provide both defined benefit and defined contribution plans. In general, an employee’s coverage for retirement benefits depends on the location of employment. 58 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Defined Benefit Plan 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. 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). This remeasurement is included in the tables below, which reflect the full impact of pension plan results and accounting measurements for the year ended October 31, 2020. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law on December 8, 2003. This Act introduces a Medicare prescription-drug benefit beginning in 2006 as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit at least “actuarially equivalent” to the Medicare benefit. We concluded that our plans are at least “actuarially equivalent” to the Medicare benefit. For those who are otherwise eligible for the subsidy, we have not included this subsidy per the Act in our benefit calculations. The impact to net periodic benefit cost and to benefits paid did not have a material impact on the consolidated financial statements. Funded Status and Net periodic Benefit Cost The changes in benefit obligation and plan assets, and our funded status (reported in deferred pension and postretirement benefits on the consolidated balance sheets) were as follows (in thousands): October 31, Change in Benefit Obligation: 2021 2020 Beginning balance as of November 1, 2020 and 2019 $ 44,825 $ 44,323 Service cost 850 1,262 Interest cost 756 1,139 Actuarial loss ( 849 ) 2,823 Benefits paid ( 359 ) ( 712 ) Administrative expenses ( 732 ) ( 785 ) Curtailments — ( 1,141 ) Settlements ( 2,112 ) ( 2,084 ) Projected benefit obligation at October 31, 2021 and 2020 $ 42,379 $ 44,825 Change in Plan Assets: Beginning balance as of November 1, 2020 and 2019 $ 34,120 $ 31,212 Actual return on plan assets 6,225 2,789 Employer contributions 500 3,700 Benefits paid ( 359 ) ( 712 ) Administrative expenses ( 732 ) ( 785 ) Settlements ( 2,112 ) ( 2,084 ) Fair value of plan assets at October 31, 2021 and 2020 $ 37,642 $ 34,120 Noncurrent liability - Funded Status $ ( 4,737 ) $ ( 10,705 ) As of October 31, 2021 and 2020, included in our accumulated comprehensive loss was a net actuarial loss of $ 4.5 million and $ 9.9 million, respectively. There were no net prior service costs or transition obligations for the years ended October 31, 2021 and 2020. 59 Table of Contents 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. The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date, and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. The net periodic benefit cost for the years ended October 31, 2021, 2020 and 2019, was as follows (in thousands): Year Ended October 31, 2021 2020 2019 Service cost $ 850 $ 1,262 $ 3,629 Interest cost 756 1,139 1,456 Expected return on plan assets ( 1,960 ) ( 2,006 ) ( 1,977 ) Amortization of net loss 143 162 125 Settlements 222 462 — Net periodic benefit cost $ 11 $ 1,019 $ 3,233 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): Year Ended October 31, 2021 2020 2019 Net (gain) loss arising during the period $ ( 5,112 ) $ 2,141 $ 6,697 Less: Amortization of net loss 143 162 125 Less: Curtailments — 1,141 — Less: Settlements 222 462 — Total recognized in other comprehensive (income) loss $ ( 5,477 ) $ 376 $ 6,572 Measurement Date and Assumptions We generally determine our actuarial assumptions on an annual basis, with a measurement date of October 31. The following table presents our assumptions for pension benefit calculations for the years ended October 31, 2021, 2020 and 2019: For the Year Ended October 31, 2021 2020 2019 2021 2020 2019 Weighted Average Assumptions: Benefit Obligation Net Periodic Benefit Cost Discount rate 2.77 % 3.22 % 3.10 % 2.60 % 3.10 % 4.44 % Rate of compensation increase — % — % 3.00 % — % — % 3.00 % Expected return on plan assets n/a n/a n/a 6.00 % 6.50 % 6.50 % The discount rate was used to calculate the present value of the projected benefit obligation for pension benefits. The rate reflects the amount at which benefits could be effectively settled on the measurement date. We used a RATE: Link Model whereby target yields are developed from bonds across a range of maturity points, and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the curve and used to discount benefit payments associated with each future year. This model assumes spot rates will remain level beyond the 30-year point. We determine the present value of plan benefits by applying the discount rates to projected benefit cash flows. The expected return on plan assets was used to determine net periodic pension expense. The rate of return assumptions were based on projected long-term market returns for the various asset classes in which the plans were invested, weighted by the target asset allocations. We review the return assumption at least annually. The rate of compensation increase represents the long-term assumption for expected increases in salaries. 60 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Plan Assets 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: Target Allocation Actual Allocation October 31, 2021 October 31, 2021 October 31, 2020 Equity securities 60.0 % 51.0 % 60.0 % Fixed income 40.0 % 49.0 % 40.0 % Fair Value Measurements at October 31, 2021 October 31, 2020 (In thousands) Money market fund $ 300 $ 3,532 Large capitalization 8,231 7,954 Small capitalization 1,493 2,407 International equity 6,992 6,130 Other 2,236 1,853 Equity securities $ 18,952 $ 18,344 High-quality core bond 13,787 9,743 High-quality government bond 2,301 1,249 High-yield bond 2,302 1,252 Fixed income $ 18,390 $ 12,244 Total securities (1) $ 37,642 $ 34,120 (1) Quoted prices in active markets for identical assets (Level 1). Inputs and valuation techniques used to measure the fair value of plan assets vary according to the type of security being valued. All of the equity and debt securities held directly by the plans were actively traded and fair values were determined based on quoted market prices. Our investment objective for defined benefit plan assets is to meet the plans’ benefit obligations, while minimizing the potential for future required plan contributions. The investment strategies focus on asset class diversification, liquidity to meet benefit payments and an appropriate balance of long-term investment return and risk. Target ranges for asset allocations are determined by matching the actuarial projections of the plans’ future liabilities and benefit payments with expected long-term rates of return on the assets, taking into account investment return volatility and correlations across asset classes. Plan assets are diversified across several investment managers and are generally invested in liquid funds that are selected to track broad market equity and bond indices. Investment risk is carefully controlled with plan assets rebalanced to target allocations on a periodic basis and monitoring of performance of investment managers relative to the investment guidelines established with each investment manager. Expected Benefit Payments and Funding Our pension funding policy is to make the minimum annual contributions required pursuant to the plan. 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. In addition, we consider the cash requirements of our business investment opportunities. Accordingly, actual funding amounts and the timing of such funding may differ from current estimates. 61 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table presents the total benefit payments expected to be paid to participants by year, which includes payments funded from our assets, as well as payments paid from the plan for the year ended October 31, (in thousands): Pension Benefits 2022 $ 2,899 2023 2,506 2024 2,411 2025 2,427 2026 2,363 2027 - 2031 10,430 Total $ 23,036 Defined Contribution Plan We also sponsor two defined contribution plans into which we and our employees make contributions. As of January 1, 2020, we match 100 % up to the first 5 % of employee annual salary deferrals under our plan for all employees excluding NA Cabinet Components participants, who receive a 100 % match up to 4 % of employee annual salary deferrals. Between January 1, 2018 and January 1, 2020, we matched 50 % up to the first 5 % of employee salary deferrals. We do not offer our common stock as a direct investment option under these plans. 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. Other Plans 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. 10. Income Taxes 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 for the years ended October 31, 2021, 2020 and 2019 (in thousands): Year Ended October 31, 2021 2020 2019 Current Federal $ 10,993 $ 6,043 $ 3,338 State and local 3,447 1,505 299 Non-United States 6,889 4,445 3,879 Total current 21,329 11,993 7,516 Deferred Federal ( 842 ) ( 64 ) 1,497 State and local ( 277 ) ( 315 ) 1,087 Non-United States 2,904 190 676 Total deferred 1,785 ( 189 ) 3,260 Total income tax expense $ 23,114 $ 11,804 $ 10,776 62 Table of Contents 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): Year Ended October 31, 2021 2020 2019 Domestic $ 36,879 $ 26,229 $ ( 58,247 ) Foreign 43,215 24,071 22,293 Total income (loss) before income taxes $ 80,094 $ 50,300 $ ( 35,954 ) The following table reconciles our effective income tax rate to the federal statutory rate for the years ended October 31, 2021, 2020 and 2019: Year Ended October 31, 2021 2020 2019 United States tax at statutory rate 21.0 % 21.0 % 21.0 % State and local income tax 3.1 % 1.7 % 1.6 % Non-United States income tax 2.3 % 1.2 % 1.2 % U.K. patent box benefit ( 1.4 ) % ( 2.0 ) % ( 1.7 ) % U.S. income tax credits ( 4.2 ) % ( 2.3 ) % ( 4.7 ) % Foreign tax positions under the Act (GILTI and FDII) 4.2 % 2.5 % 3.3 % Impact of deemed repatriation — % — % ( 1.1 ) % Asset impairment charges — % — % ( 50.7 ) % 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, 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 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. The October 31, 2019 effective rate was primarily impacted by a net charge of $ 1.2 million related to GILTI and FDII, as well as discrete charge of $ 0.4 million for the adjustment of the one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings and $ 0.6 million related to the vesting or exercise of equity-based compensation awards. Additionally, during the year ended October 31, 2019, we recorded a $ 74.6 million asset impairment charge, which was primarily non-deductible, in the NA Cabinet Components segment, as further explained in Note 6, “Goodwill and Intangible Assets.” Given the significance of the Tax Cuts and Jobs Act, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period.” As of October 31, 2019, we have completed the accounting for the tax effects of the Act. In light of the Tax Cuts and Jobs Act, we repatriated $ 28.4 million and $ 31.9 million of foreign earnings from our international operations during the years ended October 31, 2021 and 2020, respectively. This was repatriation of excess cash that was a portion of the one-time mandatory transition tax discussed above. We will continue to evaluate our foreign cash position and may repatriate additional foreign earnings in the future. 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. 63 Table of Contents 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): October 31, 2021 2020 Deferred tax assets: Employee benefit obligations $ 7,591 $ 6,634 Accrued liabilities and reserves 1,425 1,471 Pension and other benefit obligations 1,934 3,303 Inventory 894 471 Loss and tax credit carry forwards 1,857 2,331 Other 107 103 Total gross deferred tax assets 13,808 14,313 Less: Valuation allowance 1,174 1,493 Total deferred tax assets, net of valuation allowance 12,634 12,820 Deferred tax liabilities: Property, plant and equipment 11,187 10,465 Goodwill and intangibles 23,412 21,471 Total deferred tax liabilities 34,599 31,936 Net deferred tax liabilities $ 21,965 $ 19,116 At October 31, 2021, state operating loss carry forwards totaled $ 28.0 million. The majority of these losses begin to expire in 2025. 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, 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. 64 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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): Unrecognized Income Tax Benefits Balance at October 31, 2018 $ 606 Additions for tax positions related to the current year — Additions for tax positions related to the prior year 16 Reassessment of position ( 66 ) Balance at October 31, 2019 $ 556 Additions for tax positions related to the current year — Additions for tax positions related to the prior year 15 Reassessment of position ( 49 ) Balance at October 31, 2020 $ 522 Additions for tax positions related to the current year — Additions for tax positions related to the prior year 953 Reassessment of position ( 87 ) Balance at October 31, 2021 $ 1,388 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 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. and various state jurisdictions as well as in the U.K., Germany and Canada. In certain jurisdictions, the statute of limitations has not yet expired. We generally remain subject to examination of our U.S. income tax returns for 2017 and subsequent years. We generally remain subject to examination of our various state and foreign income tax returns for a period of four to five years from the date the return was filed. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the state of the federal change. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. The final outcome of the future tax consequences of legal proceedings, if any, as well as the outcome of competent authority proceedings, changes in regulatory tax laws, or interpretation of those tax laws could impact our financial statements. We are subject to the effect of these matters occurring in various jurisdictions. We do not believe any of the UTB at October 31, 2021 will be recognized within the next twelve months. 65 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. 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 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 $ 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 We maintain an asset retirement obligation associated with a leased facility in Kent, Washington. We have estimated our future cash flows associated with this asset retirement obligation and recorded an asset and corresponding liability. 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. Remediation and Environmental Compliance Costs Under applicable state and federal laws, we may be responsible for, among other things, all or part of the costs required to remove or remediate wastes or hazardous substances at locations we, or our predecessors, have owned or operated. From time to time, we also have been alleged to be liable for all or part of the costs incurred to clean up third-party sites where there might have been an alleged improper disposal of hazardous substances. At present, we are not involved in any such matters. 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 fi scal 2022. 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. Litigation From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal injury, environmental matters, product performance or warranties, product liability, insurance coverage and personnel and employment disputes. We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks to the extent deemed prudent by our management and to the extent such insurance is available. However, there is no assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations. We have been and are currently party to multiple claims, some of which are in litigation, relating to alleged defects in a commercial sealant product that was manufactured and sold during the 2000's. While we believe that our product was not defective and that we would prevail in these commercial sealant product claims if taken to trial, the timing, ultimate resolution and potential impact of these claims is not currently determinable. Nevertheless, after taking into account all currently available information, including our defenses, the advice of our counsel, and the extent and currently-expected availability of our existing insurance coverage, we believe that the eventual outcome of these commercial sealant claims will not have a material adverse effect on our overall financial condition, results of operations or cash flows, and we have not recorded any accrual with regard to these claims. 66 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Fair Value Measurements of Assets and Liabilities Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to Level 1 and the lowest priority to Level 3. The three levels of the fair value hierarchy are described below: • Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. • Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly including quoted prices for similar assets or liabilities in active markets; 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 b y correlation or other means. • Level 3 - Inputs that are both significant to the fair value measurement and unobservable. 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). 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. Stock-Based Compensation - Performance Share Awards. 13. Stock-Based Compensation We have established and maintain an Omnibus Incentive Plan (2020 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards, performance restricted stock units, and other stock-based and cash-based awards. The 2020 Plan is administered by the Compensation and Management Development Committee of the Board of Directors. The aggregate number of shares of common stock authorized for grant under the 2020 Plan is 3,139,895 as approved by the shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 2020 Plan. We grant restricted stock units to non-employee directors on the first business day of each fiscal year. As approved by the Compensation & Management Development Committee of our Board of Directors annually, we grant a mix of restricted stock awards, performance shares and/or performance restricted stock units to officers, management and key employees. We also historically granted stock options to certain officers, directors and key employees. Occasionally, we may make additional grants to key employees at other times during the year. Restricted Stock Awards Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a three-year period with service and continued employment as the only vesting criteria. The recipient of a restricted stock award is entitled to all of the rights of a shareholder, except that the awards are nontransferable during the vesting period. The fair value of the restricted stock award is established on the grant date and then expensed over the vesting period resulting in an increase in additional paid-in-capital. Shares are generally issued from treasury stock at the time of grant. 67 Table of Contents 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: Restricted Stock Awards Weighted Average Grant Date Fair Value per Share Non-vested at October 31, 2018 217,200 $ 19.76 Granted 124,800 13.78 Vested ( 69,400 ) 19.19 Forfeited ( 42,500 ) 17.87 Non-vested at October 31, 2019 230,100 17.02 Granted 63,400 18.82 Vested ( 55,000 ) 19.45 Forfeited ( 51,000 ) 17.30 Non-vested at October 31, 2020 187,500 16.82 Granted 73,300 20.68 Vested ( 44,400 ) 20.70 Forfeited — — Non-vested at October 31, 2021 216,400 $ 17.28 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. Stock Options Historically, stock options have been awarded to key employees, officers and non-employee directors. In December 2017, the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted stock units as further described below. As a result, stock options were not granted during the years ended October 31, 2020, 2019, and 2018. Stock options typically vested ratably over a three-year period with service and continued employment as the vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of the stock options was determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital. We used the Black-Scholes pricing model to estimate the grant date fair value. The inputs to this model included expected volatility, expected term, a risk-free rate and expected dividend rate at the time of grant. For employees who were nearing retirement-eligibility, we recognized stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date. 68 Table of Contents 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. Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (000s) Outstanding at October 31, 2018 1,753,656 $ 18.47 5.0 $ 51 Granted — — Exercised ( 204,770 ) 15.76 Forfeited/Expired ( 132,700 ) 20.01 Outstanding at October 31, 2019 1,416,186 $ 18.71 4.2 $ 1,449 Granted — — Exercised ( 215,733 ) 17.09 Forfeited/Expired ( 105,124 ) 20.28 Outstanding at October 31, 2020 1,095,329 $ 18.88 3.6 $ 561 Granted — — Exercised ( 865,393 ) 18.80 Forfeited/Expired ( 11,632 ) 18.22 Outstanding at October 31, 2021 218,304 $ 19.37 3.4 $ 297 Vested at October 31, 2021 218,304 $ 19.37 3.4 $ 297 Exercisable at October 31, 2021 218,304 $ 19.37 3.4 $ 297 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, 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 Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee directors. The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date. Restricted stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued employment as the vesting conditions. Restricted stock units are not considered outstanding shares and do not have voting rights, although the holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares. Once the vesting criteria is met, each restricted stock unit is payable to the holder in cash based on the market value of one share of our common stock. Accordingly, we record a liability for the restricted stock units on our balance sheet and recognize any changes in the market value during each reporting period as compensation expense. During the years ended October 31, 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, 2021 there were 21,774 unvested restricted stock units from the fiscal 2020 grant. 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. 69 Table of Contents 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. 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 RONA performance metric: Grant Date Shares Awarded Grant Date Fair Value Shares Forfeited December 5, 2018 132,400 $ 13.63 40,900 December 5, 2019 55,900 $ 19.40 5,300 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. 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. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of 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 utilized a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Depending on the achievement of the performance conditions, a minimum of 0 % and a maximum of 150 % of the awarded performance restricted stock units may vest. Specifically, the awards vest on a continuum with the following Absolute Total Shareholder Return (A-TSR) milestones: Vesting Level Vesting Criteria Percentage of Award Vested Level 1 A-TSR greater than or equal to 50% 150 % Level 2 A-TSR less than 50% and greater than or equal to 20% 100 % Level 3 A-TSR less than 20% and greater than or equal to -20% 50 % Level 4 A-TSR less than -20% — % The following table summarizes our performance restricted stock unit grants and the grant date fair value for the A-TSR performance metric: Grant Date Shares Awarded Grant Date Fair Value Shares Forfeited December 5, 2018 89,200 $ 13.63 25,500 December 5, 2019 35,000 $ 19.40 — December 2, 2020 38,400 $ 20.68 — 70 Table of Contents 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): Year Ended October 31, 2021 2020 2019 Restricted stock awards $ 1,235 $ 625 $ 1,018 Stock options — 10 158 Restricted stock units 1,197 186 950 Performance share awards 4,039 ( 170 ) 1,131 Performance restricted stock units 729 515 708 Total compensation expense 7,200 1,166 3,965 Income tax effect 2,078 274 997 Net compensation expense $ 5,122 $ 892 $ 2,968 14. Stockholders' Equity As of October 31, 2021, our authorized capital stock consists of 125,000,000 shares of common stock, at par value of $ 0.01 per share, and 1,000,000 shares of preferred stock, with no par value. As of October 31, 2021 and 2020, we had 37,273,510 and 37,296,166 shares of common stock issued, respectively, and 33,274,785 and 32,804,737 shares of common stock outstanding, respectively. There were no shares of preferred stock issued or outstanding at October 31, 2021 and 2020. Stock Repurchase Program and Treasury Stock On August 30, 2018, our Board of Directors approved a stock repurchase program that authorized the repurchase of up to $ 60.0 million worth of shares of our common stock. Repurchases under the new program will be made in open market transactions or privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. 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, 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. Shares are generally issued from treasury stock at the time of grant of restricted stock awards, upon the exercise of stock options, and upon the vesting of performance shares and performance restricted stock units. On the subsequent issuance of treasury shares, we record proceeds in excess of cost as an increase in additional paid-in-capital. A deficiency of such proceeds relative to costs would be applied to reduce paid-in-capital associated with prior issuances to the extent available, with the remainder recorded as a charge to retained earnings. 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. 71 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. Other, net Other income included under the caption “Other, net” on the accompanying consolidated statements of income (loss), consisted of the following (in thousands): Year Ended October 31, 2021 2020 2019 Foreign currency transaction losses $ ( 98 ) $ ( 42 ) $ ( 187 ) Foreign currency exchange derivative losses — ( 15 ) ( 197 ) Pension service benefit 839 243 396 Interest income 5 28 63 Other 8 66 41 Other income $ 754 $ 280 $ 116 16. Segment Information We present three reportable business segments: (1) NA Fenestration, comprising three operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens & other fenestration components; (2) EU Fenestration, comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles & conservatories, and the European insulating glass business manufacturing insulating glass spacers; and (3) NA Cabinet Components, comprising our cabinet door and components segment. We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance and legal costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. Other general and administrative costs associated with the corporate office are allocated to the reportable segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as those used to prepare the accompanying consolidated financial statements. Corporate general and administrative expenses allocated during the years ended October 31, 2021, 2020 and 2019 were $ 21.6 million , $ 21.7 million and $ 18.3 million, respectively. ASC Topic 280-10-50, “Segment Reporting” (ASC 280) permits aggregation of operating segments based on factors including, but not limited to: (1) similar nature of products serving the building products industry, primarily the fenestration business; (2) similar production processes, although there are some differences in the amount of automation amongst operating plants; (3) similar types or classes of customers, namely the primary OEMs; (4) similar distribution methods for product delivery, although the extent of the use of third-party distributors will vary amongst the businesses; (5) similar regulatory environment; and (6) converging long-term economic similarities. 72 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Segment information for the years ended October 31, 2021, 2020 and 2019 was as follows (in thousands): NA Fenestration EU Fenestration NA Cabinet Comp. Unallocated Corp. & Other Total Year Ended October 31, 2021 Net sales $ 578,332 $ 251,599 $ 246,075 $ ( 3,857 ) $ 1,072,149 Depreciation and amortization 18,730 10,373 13,263 366 42,732 Operating income (loss) 56,248 39,299 896 ( 14,573 ) 81,870 Capital expenditures 9,966 8,155 5,559 328 24,008 Total assets $ 268,773 $ 236,755 $ 178,671 $ 33,124 $ 717,323 Year Ended October 31, 2020 Net sales $ 483,415 $ 161,054 $ 210,099 $ ( 2,995 ) $ 851,573 Depreciation and amortization 23,555 9,468 13,732 474 47,229 Operating income (loss) 39,909 20,076 ( 2,502 ) ( 2,218 ) 55,265 Capital expenditures 15,761 5,435 4,423 107 25,726 Total assets $ 252,703 $ 223,248 $ 174,713 $ 40,921 $ 691,585 Year Ended October 31, 2019 Net sales $ 503,837 $ 164,997 $ 229,644 $ ( 4,637 ) $ 893,841 Depreciation and amortization 27,054 8,845 13,178 509 49,586 Operating income (loss) 39,765 19,040 ( 74,236 ) ( 10,996 ) ( 26,427 ) Capital expenditures $ 12,984 $ 6,365 $ 5,383 $ 151 $ 24,883 The following table summarizes the change in the carrying amount of goodwill by segment for the years ended October 31, 2021 and 2020 (in thousands): NA Fenestration EU Fenestration NA Cabinet Comp. Unallocated Corp. & Other Total Balance as of October 31, 2019 $ 38,712 $ 67,704 $ 39,147 $ — $ 145,563 Foreign currency translation adjustment — 591 — — 591 Balance as of October 31, 2020 $ 38,712 $ 68,295 $ 39,147 $ — $ 146,154 Foreign currency translation adjustment — 3,051 — — 3,051 Balance as of October 31, 2021 $ 38,712 $ 71,346 $ 39,147 $ — $ 149,205 For further details of Goodwill, see Note 6, “Goodwill and Intangible Assets”, located herewith. We did not allocate non-operating expense or income tax expense to the reportable segments. The following table reconciles operating income (loss) as reported above to net income (loss) for the years ended October 31, 2021, 2020 and 2019 (in thousands): Year Ended October 31, 2021 2020 2019 Operating income (loss) $ 81,870 $ 55,265 $ ( 26,427 ) Interest expense ( 2,530 ) ( 5,245 ) ( 9,643 ) Other, net 754 280 116 Income tax expense ( 23,114 ) ( 11,804 ) ( 10,776 ) Net income (loss) $ 56,980 $ 38,496 $ ( 46,730 ) 73 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Geographic Information Our manufacturing facilities and all long-lived assets are located in the U.S., U.K. and Germany. We attribute our net sales to a geographic region based on the location of the customer. The following tables provide information concerning our net sales for the years ended October 31, 2021, 2020 and 2019, and our long-lived assets as of October 31, 2021 and 2020 (in thousands): Year Ended October 31, Net sales 2021 2020 2019 United States $ 778,486 $ 654,802 $ 683,204 Europe 244,308 158,831 162,106 Canada 25,007 18,213 20,088 Asia 18,445 11,504 18,360 Other foreign countries 5,903 8,223 10,083 Total net sales $ 1,072,149 $ 851,573 $ 893,841 October 31, Long-lived assets, net 2021 2020 United States $ 291,282 $ 307,534 Germany 25,513 25,519 United Kingdom 146,158 142,097 Total long-lived assets, net $ 462,953 $ 475,150 Long-lived assets, net includes: property, plant and equipment, net; goodwill, intangible assets, net, and operating leases. 74 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. Earnings Per Share We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common shares include the weighted average of additional shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock as determined using the treasury stock method prescribed by U.S. GAAP and contingent shares associated with performance share awards, if dilutive. The computation of basic and diluted earnings per share for the years ended October 31, 2021, 2020 and 2019 follows (in thousands, except per share data): Year Ended October 31, 2021 Net Income (Loss) Weighted Average Shares Per Share Basic earnings per common share $ 56,980 33,193 $ 1.72 Effect of dilutive securities: Stock options 82 Restricted stock awards 132 Performance restricted stock units 88 Diluted earnings per common share $ 56,980 33,495 $ 1.70 Year Ended October 31, 2020 Basic earnings per common share $ 38,496 32,689 $ 1.18 Effect of dilutive securities: Stock options 10 Restricted stock 90 Performance restricted stock units 32 Diluted earnings per common share $ 38,496 32,821 $ 1.17 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 75 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 18. Unaudited Quarterly Data 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 Net sales $ 230,147 $ 270,357 $ 279,877 $ 291,768 Cost of sales (excluding depreciation and amortization) 176,397 208,460 219,866 226,818 Depreciation and amortization 11,015 10,845 10,683 10,189 Operating income 11,835 21,380 21,562 27,093 Net income 7,852 14,551 13,679 20,898 Basic earnings per share 0.24 0.44 0.41 0.63 Diluted earnings per share 0.24 0.43 0.41 0.62 Cash dividends paid per common share 0.08 0.08 0.08 0.08 For the Quarter Ended January 31, 2020 April 30, 2020 July 31, 2020 October 31, 2020 Net sales $ 196,597 $ 187,475 $ 212,096 $ 255,405 Cost of sales (excluding depreciation and amortization) 157,427 149,732 162,427 189,164 Depreciation and amortization 12,905 11,886 11,060 11,378 Operating 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 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. 19. New Accounting Guidance Accounting Standards Recently Adopted In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) . 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. 76 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.