Quanex Building Products CORP 10-Q

Item 1. Financial Statements QUANEX BUILDING PRODUCTS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) January 31, 2022 October 31, 2021 (In thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents $ 31,719 $ 40,061 Accounts receivable, net of allowance for credit losses of $ 521 and $ 340 99,355 108,309 Inventories, net 117,384 92,529 Prepaid and other current assets 11,621 8,148 Total current assets 260,079 249,047 Property, plant and equipment, net of accumulated depreciation of $ 340,120 and $ 336,493 175,294 178,630 Operating lease right-of-use assets 50,700 52,708 Goodwill 147,793 149,205 Intangible assets, net 78,750 82,410 Other assets 5,656 5,323 Total assets $ 718,272 $ 717,323 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 75,457 $ 86,765 Accrued liabilities 39,564 56,156 Income taxes payable 7,473 6,038 Current maturities of long-term debt 836 846 Current operating lease liabilities 8,298 8,196 Total current liabilities 131,628 158,001 Long-term debt 76,691 52,094 Noncurrent operating lease liabilities 43,415 45,367 Deferred pension and postretirement benefits 4,658 4,737 Deferred income taxes 22,597 21,965 Other liabilities 14,784 15,377 Total liabilities 293,773 297,541 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 37,212,391 and 37,273,510 , respectively; outstanding 33,388,735 and 33,274,785 , respectively 373 373 Additional paid-in-capital 250,204 254,162 Retained earnings 268,370 259,718 Accumulated other comprehensive loss ( 24,929 ) ( 21,770 ) Less: Treasury stock at cost, 3,823,656 and 3,998,725 shares, respectively ( 69,519 ) ( 72,701 ) Total stockholders’ equity 424,499 419,782 Total liabilities and stockholders' equity $ 718,272 $ 717,323 The accompanying notes are an integral part of the financial statements. 1 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended January 31, 2022 2021 (In thousands, except per share amounts) Net sales $ 267,040 $ 230,147 Cost and expenses: Cost of sales (excluding depreciation and amortization) 211,834 176,397 Selling, general and administrative 30,823 30,861 Restructuring charges — 39 Depreciation and amortization 10,257 11,015 Operating income 14,126 11,835 Non-operating (expense) income: Interest expense ( 523 ) ( 751 ) Other, net 54 192 Income before income taxes 13,657 11,276 Income tax expense ( 2,418 ) ( 3,424 ) Net income $ 11,239 $ 7,852 Basic earnings per common share $ 0.34 $ 0.24 Diluted earnings per common share $ 0.34 $ 0.24 Weighted-average common shares outstanding: Basic 33,124 32,872 Diluted 33,298 33,212 Cash dividends per share $ 0.08 $ 0.08 The accompanying notes are an integral part of the financial statements. 2 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended January 31, 2022 2021 (In thousands) Net income $ 11,239 $ 7,852 Other comprehensive (loss)income: Foreign currency translation (loss) gain ( 3,159 ) 8,600 Other comprehensive (loss) income ( 3,159 ) 8,600 Comprehensive income $ 8,080 $ 16,452 The accompanying notes are an integral part of the financial statements. 3 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended January 31, 2022 2021 (In thousands) Operating activities: Net income $ 11,239 $ 7,852 Adjustments to reconcile net income to cash used for operating activities: Depreciation and amortization 10,257 11,015 Stock-based compensation 552 523 Deferred income tax 854 1,925 Other, net 1,218 3,189 Changes in assets and liabilities: Decrease in accounts receivable 8,340 7,103 Increase in inventory ( 25,318 ) ( 14,061 ) Increase in other current assets ( 3,534 ) ( 873 ) Decrease in accounts payable ( 8,391 ) ( 14,577 ) Decrease in accrued liabilities ( 18,248 ) ( 2,692 ) Increase (decrease) in income taxes payable 1,391 ( 2,790 ) Decrease in deferred pension and postretirement benefits ( 80 ) ( 52 ) Increase (decrease) in other long-term liabilities 404 ( 399 ) Other, net ( 335 ) 442 Cash used for operating activities ( 21,651 ) ( 3,395 ) Investing activities: Capital expenditures ( 7,370 ) ( 5,246 ) Proceeds from disposition of capital assets 10 64 Cash used for investing activities ( 7,360 ) ( 5,182 ) Financing activities: Borrowings under credit facilities 28,000 — Repayments of credit facility borrowings ( 3,000 ) ( 5,000 ) Repayments of other long-term debt ( 228 ) ( 541 ) Common stock dividends paid ( 2,587 ) ( 2,637 ) Issuance of common stock 55 10,030 Payroll tax paid to settle shares forfeited upon vesting of stock ( 1,383 ) ( 492 ) Purchase of treasury stock — ( 1,927 ) Cash provided by (used for) financing activities 20,857 ( 567 ) Effect of exchange rate changes on cash and cash equivalents ( 188 ) 949 Decrease in cash and cash equivalents ( 8,342 ) ( 8,195 ) Cash and cash equivalents at beginning of period 40,061 51,621 Cash and cash equivalents at end of period $ 31,719 $ 43,426 The accompanying notes are an integral part of the financial statements. 4 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Three Months Ended January 31, 2022 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity (In thousands, no per share amounts shown except in verbiage) Balance at October 31, 2021 $ 373 $ 254,162 $ 259,718 $ ( 21,770 ) $ ( 72,701 ) $ 419,782 Net income — — 11,239 — — 11,239 Foreign currency translation adjustment — — — ( 3,159 ) — ( 3,159 ) Common dividends ($ 0.08 per share) — — ( 2,587 ) — — ( 2,587 ) Stock-based compensation activity: Expense related to stock-based compensation — 552 — — — 552 Stock options exercised — 5 — — 50 55 Restricted stock awards granted — ( 1,534 ) — — 1,534 — Performance restricted stock units vested — ( 1,598 ) — — 1,598 — Other — ( 1,383 ) — — — ( 1,383 ) Balance at January 31, 2022 $ 373 $ 250,204 $ 268,370 $ ( 24,929 ) $ ( 69,519 ) $ 424,499 Three Months Ended January 31, 2021 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity (In thousands, no per share amounts shown except in verbiage) Balance at October 31, 2020 $ 373 $ 253,458 $ 213,517 $ ( 33,024 ) $ ( 78,565 ) $ 355,759 Net income — — 7,852 — — 7,852 Foreign currency translation adjustment — — — 8,600 — 8,600 Common dividends ($0.08 per share) — — ( 2,637 ) — — ( 2,637 ) Treasury shares purchased, at cost — — — — ( 1,927 ) ( 1,927 ) Stock-based compensation activity: Expense related to stock-based compensation — 523 — — — 523 Stock options exercised — 635 — — 9,395 10,030 Restricted stock awards granted — ( 1,282 ) — — 1,282 — Performance restricted stock units vested — ( 565 ) — — 565 — Other — ( 492 ) — — — ( 492 ) Balance at January 31, 2021 $ 373 $ 252,277 $ 218,732 $ ( 24,424 ) $ ( 69,250 ) $ 377,708 The accompanying notes are an integral part of the financial statements. 5 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations and Basis of Presentation 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, vinyl fencing, water retention barriers, and conservatory roof components. We have organized our business into three reportable business segments. For additional discussion of our reportable business segments, see Note 11, “Segment Information.” We use low-cost, short lead-time 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. The accompanying interim unaudited condensed consolidated financial statements include the accounts of Quanex Building Products Corporation. All intercompany accounts and transactions have been eliminated in consolidation. These financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of October 31, 2021 was derived from audited financial information but does not include all disclosures required by U.S. GAAP. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. In our opinion, the accompanying financial statements contain all adjustments (which consist of normal recurring adjustments, except as disclosed herein) necessary to fairly present our financial position, results of operations and cash flows for the interim periods. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year or for any future periods. 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 on-going basis, including those related to impairment of long-lived assets and goodwill, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates. 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. Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to account for product returns related to general returns and product nonconformance. 6 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 incentives Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts. Shipping and handling costs 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 condensed 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 window 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. 7 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table summarizes our product sales for the three months ended January 31, 2022 and 2021 into groupings by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. For further details regarding our results by segment, refer to Note 11, “Segment Information”. Three Months Ended January 31, 2022 2021 (In thousands) North American Fenestration: United States - fenestration $ 128,367 $ 112,300 International - fenestration 9,136 7,778 United States - non-fenestration 6,716 5,398 International - non-fenestration 2,412 2,640 $ 146,631 $ 128,116 European Fenestration: International - fenestration $ 44,621 41,354 International - non-fenestration 14,293 7,737 $ 58,914 $ 49,091 North American Cabinet Components: United States - fenestration $ 3,765 $ 2,974 United States - non-fenestration 57,767 50,502 International - non-fenestration 821 518 $ 62,353 $ 53,994 Unallocated Corporate & Other Eliminations $ ( 858 ) $ ( 1,054 ) $ ( 858 ) $ ( 1,054 ) Net sales $ 267,040 $ 230,147 Allowance for Credit Losses We have established an allowance for credit losses to estimate the risk of losses, which represents an estimate of expected losses over the remaining contractual life of our receivables. The allowance is determined using two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, a specific reserve is established for individual accounts where information indicates the customers may have an inability to meet financial obligations. Second, a reserve is determined for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection rates, write-off experience, and forecasts of future economic conditions. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful. Related Parties N et sales for the three months ended January 31, 2022 included approximately $ 0.4 million of transactions with a customer which is a related party with one of our non-employee directors. We performed a review of these transactions, of which no single transaction or series of related transactions exceeded $ 120,000 in amount, and determined that these transactions were enacted independently of each other in fair transactions. We are not aware of any other related party transactions with any of our current non-employee directors or officers outside of their normal business functions or expected contractual duties. 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, including negative impacts to the global supply chain and increased inflation. Measures providing for business shutdowns generally exclude certain essential services commonly including critical infrastructure such as 8 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. 2. Inventories Inventories consisted of the following at January 31, 2022 and October 31, 2021 (in thousands): January 31, 2022 October 31, 2021 Raw materials $ 65,492 $ 49,867 Finished goods and work in process 51,932 43,499 Supplies and other 2,486 2,099 Total 119,910 95,465 Less: Inventory reserves 2,526 2,936 Inventories, net $ 117,384 $ 92,529 Fixed costs related to excess manufacturing capacity, if any, have been expensed in the period they were incurred and, therefore, are not capitalized into inventory. 3. Goodwill and Intangible Assets Goodwill The change in the carrying amount of goodwill for the three months ended January 31, 2022 was as follows (in thousands): Three Months Ended January 31, 2022 Beginning balance as of November 1, 2021 $ 149,205 Foreign currency translation adjustment ( 1,412 ) Balance as of the end of the period $ 147,793 At our last annual test date, August 31, 2021, we evaluated the recoverability of goodwill at each of our five reporting units with goodwill balances and determined that our goodwill was no t impaired. We evaluated for indicators of impairment during the three months ended January 31, 2022 and determined that there were no triggering events. For a summary of the change in the carrying amount of goodwill by segment, see Note 11, “Segment Information.” 9 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Identifiable Intangible Assets Amortizable intangible assets consisted of the following as of January 31, 2022 and October 31, 2021 (in thousands): January 31, 2022 October 31, 2021 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Customer relationships $ 145,485 $ 83,345 $ 146,207 $ 81,086 Trademarks and trade names 56,213 39,998 56,437 39,589 Patents and other technology 22,504 22,109 22,525 22,084 Total $ 224,202 $ 145,452 $ 225,169 $ 142,759 We had aggregate amortization expense related to intangible assets for the three months ended January 31, 2022 of $ 3.0 million and $ 3.4 million for the comparable prior year period. Estimated remaining amortization expense, based on current intangible balances, for each of the fiscal years ending October 31, is as follows (in thousands): Estimated Amortization Expense 2022 (remaining nine months) $ 9,049 2023 11,324 2024 10,573 2025 9,347 2026 9,277 Thereafter 29,180 Total $ 78,750 4. Debt and Finance Lease Obligations Long-term debt consisted of the following at January 31, 2022 and October 31, 2021 (in thousands): January 31, 2022 October 31, 2021 Revolving Credit Facility $ 63,000 $ 38,000 Finance lease obligations and other 15,048 15,537 Unamortized deferred financing fees ( 521 ) ( 597 ) Total debt $ 77,527 $ 52,940 Less: Current maturities of long-term debt 836 846 Long-term debt $ 76,691 $ 52,094 Revolving Credit Facility As more fully described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021, on October 18, 2018, we amended and extended our prior credit facility by entering into a $ 325.0 million revolving credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A. serving as Syndication Agent. The Credit Facility has a five-year term, maturing on October 18, 2023. On December 28, 2021, we entered into a second amendment (the “Amendment”) of the Credit Facility. Pursuant to the Amendment, (a) the definition of “Capital Lease” was modified and clarified to provide an exclusion of certain agreed leases of the Company and its subsidiaries from the Credit Facility’s financial covenants and other provisions and (b) secured overnight financing rate, interest rate mechanics and interest rate reference benchmark replacement provisions were implemented to effectuate the transition from LIBOR as a reference interest rate. We will, however, continue to use the One Month LIBOR Rate plus applicable margin for the Credit Facility until June of 2023 when One Month LIBOR will no longer be available. 10 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Following the Amendment, interest payments are calculated, at our election and depending upon the Consolidated Leverage Ratio, at a Base Rate plus an applicable margin or at the same rate as One Month LIBOR for domestic borrowings, Eurocurrency Rate Loan, Transitioned RFR Loan or RFR Loan plus an applicable margin. 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, Eurocurrency Rate Loans and Transitioned RFR Loans Initial RFR Loans Base Rate Loans I Less than or equal to 1.50 to 1.00 0.200 % 1.25 % 1.2826 % 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 % 1.5326 % 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 % 1.7826 % 0.75 % IV Greater than 3.00 to 1.00 0.300 % 2.00 % 2.0326 % 1.00 % In the event of default, outstanding borrowings would accrue interest at the Default Rate, as defined, whereby the obligations will bear interest at a per annum rate equal to 2 % above the total per annum rate otherwise applicable. The Credit Facility provides for incremental revolving credit commitments for a minimum principal amount of $ 10.0 million, up to an aggregate amount of $ 150.0 million, subject to the lender's discretion to elect or decline the incremental increase. We can also borrow up to the lesser of $ 15.0 million or the revolving credit commitment, as defined, under a Swingline feature of the Credit Facility. The Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than 2.25 to 1.00, and (2) Consolidated Leverage Ratio requirement, whereby we must not permit the Consolidated Leverage Ratio, as defined, to 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, are used as collateral for the Credit Agreement. As of January 31, 2022, we ha d $ 63.0 million of borrowings outstanding under the Credit Facility (reduced by unamortized debt issuance costs of $0.5 million), $ 4.5 million of outstanding letters of credit and $ 15.0 million outstanding primarily under finance leases and other debt. We had $ 257.5 million available for use under the 2018 Credit Facility at January 31, 2022. Outstanding borrowings under the 2018 Credit Facility accrue interest at 1.36 % per annum. Our weighted average borrowing rate for borrowings outstanding during the three months ended January 31, 2022 and 2021 was 1.35 % and 1.56 %, respectively. We were in compliance with our debt covenants as of January 31, 2022. 11 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Retirement Plans Pension Plan Our non-contributory, single employer defined benefit pension plan covers certain of our employees in the U.S. The net periodic pension cost for this plan for the three months ended January 31, 2022 and 2021 was as follows (in thousands): Three Months Ended January 31, 2022 2021 Service cost $ 216 $ 212 Interest cost 202 189 Expected return on plan assets ( 498 ) ( 490 ) Amortization of net loss 1 36 Net periodic pension benefit $ ( 79 ) $ ( 53 ) During September 2021, we contributed $ 0.5 million to fund our plan. 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. Other Plans We also have a supplemental benefit plan covering certain executive officers and key employees and a non-qualified deferred compensation plan covering members of the Board of Directors and certain key employees. As of January 31, 2022 and October 31, 2021, our liability under the supplemental benefit plan was approximat ely $ 2.9 million. As of January 31, 2022 and October 31, 2021, the liability associated with the deferred compensation plan was approximately $ 3.4 million. We record the current portion of liabilities as sociated with these plans under the caption “Accrued Liabilities,” and the long-term portion under the caption “Other Liabilities” in the accompanying condensed consolidated balance sheets. 6. Income Taxes To determine our income tax expense or benefit for interim periods, consistent with accounting standards, we apply the estimated annual effective income tax rate to year-to-date results, adjusted for any applicable discrete items. Our estimated annual effective tax rates from continuing operations for the three months ended January 31, 2022 and 2021 were 25.3 % and 26.0 % , respectively. The difference between our effective income tax rate and the U.S. federal statutory rate of 21 % principally results from discrete tax items, U.S. state tax, non-U.S. tax rate differential and other permanent differences. The primary discrete items affecting the 2022 effective rate were a charge of $ 0.5 million related to the vesting or exercise of equity-based compensation awards and a benefit of $ 0.3 million for the true-up of our acc ruals and related deferred taxes from prior year. The 2021 effective tax rate was primarily impacted by a discrete benefit of $ 0.5 million related to the vesting or exercise of equity-based compensation awards and a charge of $ 0.8 million for the true-up of our deferred taxes from prior year filings. As of January 31, 2022 , our liability for uncertain tax positions (UTP) of $ 1.4 million relates to certain U.S. federal and state tax items regarding the interpretation of tax laws and regulations, including a minimal amount of interest and penalties. 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. Our total unrecognized tax benefits, if recognized, would not materially affect our effective tax rate. We do not believe that the recorded amount of unrecognized tax benefits will decrease significantly within the next twelve months. We evaluate the likelihood of realization of our deferred tax assets by considering both positive and negative evidence. We maintain a valuation allowance for certain state net operating losses which totaled $ 1.3 million as of January 31, 2022 and October 31, 2021. 12 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. Contingencies 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 fiscal 2022. While 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. 8. Fair Value Measurement 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 data 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 by correlation or other means. • Level 3 - Inputs that are both significant to the fair value measurement and unobservable. Carrying amounts reported on the balance sheet for cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Our outstanding debt is variable rate debt that re- 13 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) prices frequently, thereby limiting our exposure to significant change in interest rate risk. As a result, the fair value of our debt instrument approximates carrying value at January 31, 2022, and October 31, 2021 (Level 2 measurement). Our performance share awards are marked-to-market on a quarterly basis during a three-year vesting period based on market data (Level 2 measurement). For further information, refer to Note 9, “Stock-Based Compensation - Performance Share Awards.” 9. 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 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, restricted stock units, 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 the restricted stock award is entitled to all of the rights of a shareholder, except that the award is nontransferable during the vesting period. The fair value of the restricted stock award is established on the grant date and then expensed over the vesting period resulting in an increase in additional paid-in-capital. Shares are generally issued from treasury stock at the time of grant. A summary of non-vested restricted stock awards activity during the three months ended January 31, 2022 is presented below: Restricted Stock Awards Weighted Average Grant Date Fair Value per Share Non-vested at October 31, 2021 216,400 $ 17.28 Granted 84,400 22.54 Forfeited — — Vested ( 84,200 ) 13.63 Non-vested at January 31, 2022 216,600 $ 20.75 The total weighted average grant-date fair value of restricted stock awards that vested during each of the three months ended January 31, 2022 and 2021 was $ 1.1 million and $ 0.9 million, respectively. As of January 31, 2022, total unrecognized compensation cost related to unamortized restricted stock awards was $ 3.0 million. We expect to recognize this expense over the remaining weighted average vesting period of 2.4 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 and performance shares as further described below. As a result, the final stock options were granted during the fiscal year ended October 31, 2017. Stock options typically vested ratably over a three-year period with service and continued employment as the vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of the stock options was determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital. For employees who were nearing retirement-eligibility, we recognized stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date. 14 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) We use a Black-Scholes pricing model to estimate the fair value of stock options. A description of the methodology for the valuation assumptions was disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. The following table summarizes our stock option activity for the three months ended January 31, 2022: Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (000s) Outstanding at October 31, 2021 218,304 $ 19.37 Granted — $ — Exercised ( 2,750 ) 20.01 Forfeited/Expired ( 500 ) 18.22 Outstanding at January 31, 2022 215,054 $ 19.37 3.2 $ 520 Vested at January 31, 2022 215,054 $ 19.37 3.2 $ 520 Exercisable at January 31, 2022 215,054 $ 19.37 3.2 $ 520 Intrinsic value is the amount by which the market price of the common stock on the date of exercise exceeds the exercise price of the stock option. The total intrinsic value of stock options exercised during the three months ended January 31, 2022 and 2021 was less than $ 0.1 million and $ 2.3 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 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 three months ended January 31, 2022 and 2021, non-employee directors received 33,579 and 28,826 restricted stock units, respectively, at a grant date fair value of $ 22.54 per share and $ 18.79 per share, respectively, which vested immediately. As of January 31, 2022, there were 21,774 non-vested restricted stock units, which were awarded in January 2020 to key employees at a weighted average grant date fair value of $ 17.08 . During the three months ended January 31, 2022 and January 31, 2021, we paid $ 0.1 million to settle vested restricted stock units. Performance Share Awards We have awarded annual grants of performance shares to key employees and officers. Performance share awards vest with return on net assets (RONA) as the vesting condition and pay out 100 % in cash, and are accounted for as liability. The expected cash settlement of the performance share award is recorded as a liability and is being marked to market over the three-year term of the award and can fluctuate depending on the number of shares ultimately expected to vest. Depending on the achievement of the performance conditions, 0 % to 200 % of the awarded performance shares may ultimately vest. The following table summarizes our performance share grants and the grant date fair value for the RONA performance metrics: Grant Date Shares Awarded Grant Date Fair Value Shares Forfeited December 5, 2019 55,900 $ 19.40 5,300 December 2, 2020 65,300 $ 20.68 — December 9, 2021 80,900 $ 22.54 — 15 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) In December 2021, 183,000 shares vested pursuant to the December 2018 grant, which were settled with a cash payment of $3.8 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 award performance restricted stock units to key employees and officers. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of shares earned is variable depending on the metric achieved, and the settlement method is 100 % in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the shares had been outstanding throughout the performance period. To value the performance restricted stock units, we used a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. 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, 2019 35,000 $ 19.40 — December 2, 2020 38,400 $ 20.68 — December 9, 2021 50,900 $ 21.06 — During the three months ended January 31, 2022 , 87,919 performance restricted stock units vested. The performance restricted stock units are not considered outstanding shares, do not have voting rights, and are exclud ed from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares. As of January 31, 2022, we have de emed 33,093 shares related to the December 2019 grant of performance restricted stock units as probable to vest. 16 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table summarizes amounts expensed as selling, general and administrative expense related to restricted stock awards, stock options, restricted stock units, performance share awards and performance restricted stock units for the three months ended January 31, 2022 and 2021 (in thousands): Three Months Ended January 31, 2021 2020 Restricted stock awards $ 348 $ 302 Stock options — — Restricted stock units 994 1,284 Performance share awards 1,340 2,685 Performance restricted stock units 204 171 Total compensation expense $ 2,886 $ 4,442 Treasury Shares 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. There were no charges to retained earnings during the three months ended January 31, 2022. The following table summarizes the treasury stock activity during the three months ended January 31, 2022: Three Months Ended January 31, 2022 Beginning Balance as of November 1, 2021 3,998,725 Restricted stock awards granted ( 84,400 ) Performance restricted stock units vested ( 87,919 ) Stock options exercised ( 2,750 ) Balance at January 31, 2022 3,823,656 10. Other, net Other, net on the condensed consolidated statements of income consisted of the following for the three months ended January 31, 2022 and 2021 (in thousands): Three Months Ended January 31, 2022 2021 Foreign currency transaction losses $ ( 41 ) $ ( 78 ) Pension service benefit 295 265 Interest income 15 3 Other ( 215 ) 2 Other, net $ 54 $ 192 17 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. 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 operations. We maintain an Unallocated Corporate & Other which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance, legal, and other costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. Other general and administrative costs associated with the corporate office are allocated to the reportable segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The accounting polic ies of our operating segments are the same as those used to prepare the accompanying condensed consolidated financial statements. Corporate general and administrative expense allocated during the three month period ended January 31, 2022 was $ 5.8 million, and $ 5.2 million for the comparable prior year period. ASC Topic 280-10-50, “Segment Reporting” (ASC 280) permits aggregation of operating segments based on factors including, but not limited to: (1) similar nature of products serving the building products industry, primarily the fenestration business; (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. Segment information for the three months ended January 31, 2022 and 2021, and total assets as of January 31, 2022 and October 31, 2021 are summarized in the following table (in thousands): NA Fenestration EU Fenestration NA Cabinet Comp. Unallocated Corp. & Other Total Three Months Ended January 31, 2022 Net sales $ 146,631 $ 58,914 $ 62,353 $ ( 858 ) $ 267,040 Depreciation and amortization 4,139 2,569 3,463 86 10,257 Operating income (loss) 12,151 7,815 ( 1,453 ) ( 4,387 ) 14,126 Capital expenditures 5,305 954 1,073 38 7,370 Three Months Ended January 31, 2021 Net sales $ 128,116 $ 49,091 $ 53,994 $ ( 1,054 ) $ 230,147 Depreciation and amortization 5,111 2,518 3,270 116 11,015 Operating income (loss) 11,203 8,187 ( 13 ) ( 7,542 ) 11,835 Capital expenditures 2,820 472 1,953 1 5,246 As of January 31, 2022 Total assets $ 282,033 $ 229,515 $ 179,410 $ 27,314 $ 718,272 As of October 31, 2021 Total assets $ 268,773 $ 236,755 $ 178,671 $ 33,124 $ 717,323 18 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table summarizes the change in the carrying amount of goodwill by reportable business segment for the three months ended January 31, 2022 (in thousands): NA Fenestration EU Fenestration NA Cabinet Comp. Unallocated Corp. & Other Total Balance as of October 31, 2021 $ 38,712 $ 71,346 $ 39,147 $ — $ 149,205 Foreign currency translation adjustment — ( 1,412 ) — — ( 1,412 ) Balance as of January 31, 2022 $ 38,712 $ 69,934 $ 39,147 $ — $ 147,793 For further details of Goodwill, see Note 3, “Goodwill & Intangible Assets”, located herewith. We did not allocate non-operating loss or income tax benefit to the reportable segments. The following table reconciles operating income as reported above to net income for the three months ended January 31, 2022 and 2021 (in thousands): Three Months Ended January 31, 2022 2021 Operating income $ 14,126 $ 11,835 Interest expense ( 523 ) ( 751 ) Other, net 54 192 Income tax expense ( 2,418 ) ( 3,424 ) Net income $ 11,239 $ 7,852 12. Earnings Per Share We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common shares include the weighted average of additional shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock as determined using the treasury stock method prescribed by U.S. GAAP and contingent shares associated with performance share awards, if dilutive. Basic and diluted earnings per share for the three months ended January 31, 2022 and 2021 were calculated as follows (in thousands, except per share data): Net Income Weighted Average Shares Per Share Three Months Ended January 31, 2022 Basic earnings per common share $ 11,239 33,124 $ 0.34 Effect of dilutive securities: Stock options — 34 — Restricted stock awards — 107 — Performance restricted stock units — 33 — Diluted earnings per common share $ 11,239 33,298 $ 0.34 Three Months Ended January 31, 2021 Basic earnings per common share $ 7,852 32,872 $ 0.24 Effect of dilutive securities: Stock options — 164 — Restricted stock awards — 105 — Performance restricted stock units — 71 — Diluted earnings per common share $ 7,852 33,212 $ 0.24 19 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) We do not include equity instruments in our calculation of diluted earnings per share if those instruments would be anti-dilutive. 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. There were no anti-dilutive instruments for the three months ended January 31, 2022 and 2021. 13. New Accounting Guidance From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standards setting bodies that we adopt as of the specified effective date. We did not adopt any new accounting pronouncements during the three months ended January 31, 2022. As of January 31, 2022, we believe the impact of any recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our condensed consolidated financial statements upon adoption. 20 Table of Contents 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. Cautionary Note Regarding Forward-Looking Statements Certain of the statements contained in this document and in documents incorporated by reference herein, including those made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking” statements as defined under the Private Securities Litigation Reform Act of 1995. Generally, the words “expect,” “believe,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. Forward looking statements are (1) all statements which address future operating performance, (2) events or developments that we expect or anticipate will occur in the future, including statements relating to volume, sales, operating income and earnings per share, and (3) statements expressing general outlook about future operating results. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our current projections or expectations. As and when made, we believe that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made and there can be no assurance that such forward-looking statements will occur. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to the following: • impacts from public health issues (including pandemics, such as the recent COVID-19 pandemic and quarantines) on the economy, demand for our products or our operations, including the responses of governmental authorities to contain such public health issues; • changes in market conditio ns, particularly in the new home construction, and residential remodeling and replacement (R&R) activity markets in the United States, United Kingdom, Germany and elsewhere; • changes in non-pass-through raw material costs; • changes in domestic and international economic conditions; • changes in availability and prices of raw material including inflationary pressures and supply chain challenges, which could be exacerbated by political or global unrest such as the current situation in Ukraine; • our ability to attract and retain skilled labor; • changes in purchases by our principal customers; • fluctuations in foreign currency exchange rates; • our ability to maintain an effective system of internal controls; • our ability to successfully implement our internal operating plans and acquisition strategies; • our ability to successfully implement our plans with respect to information technology (IT) systems and processes; • our ability to control costs and increase profitability; • changes in environmental laws and regulations; • changes in warranty obligations; • changes in energy costs; • changes in tax laws, and interpretations thereof; • changes in interest rates; • our ability to service our debt facilities and remain in good standing with our lenders; • changes in the availability or applicability of our insurance coverage; • our ability to maintain good relationships with our suppliers, subcontractors, and key customers; and • the resolution of litigation and other legal proceedings. For information on additional factors that could cause actual results to differ materially, please refer to the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. About Third-Party Information In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industry publications, U.S. government sources and other third parties. Although we believe this 21 Table of Contents information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it. 22 Table of Contents