Quanex Building Products CORP 10-Q

Item 1. Financial Statements QUANEX BUILDING PRODUCTS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) April 30, 2023 October 31, 2022 (In thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents $ 43,496 $ 55,093 Accounts receivable, net of allowance for credit losses of $ 398 and $ 289 94,038 96,018 Inventories, net 114,015 120,890 Prepaid and other current assets 12,210 8,664 Total current assets 263,759 280,665 Property, plant and equipment, net of accumulated depreciation of $ 364,437 and $ 348,528 242,521 180,400 Operating lease right-of-use assets 45,725 56,000 Goodwill 185,224 137,855 Intangible assets, net 80,981 65,035 Other assets 3,902 4,662 Total assets $ 822,112 $ 724,617 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 64,477 $ 77,907 Accrued liabilities 44,655 52,114 Income taxes payable — 1,049 Current maturities of long-term debt 2,113 1,046 Current operating lease liabilities 7,403 7,727 Total current liabilities 118,648 139,843 Long-term debt 132,150 29,628 Noncurrent operating lease liabilities 39,215 49,286 Deferred pension benefits — 3,917 Deferred income taxes 23,396 22,277 Other liabilities 15,976 14,831 Total liabilities 329,385 259,782 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 37,187,058 and 37,211,056 , respectively; outstanding 32,962,632 and 33,129,250 , respectively 372 372 Additional paid-in-capital 250,427 251,947 Retained earnings 355,557 337,456 Accumulated other comprehensive loss ( 34,968 ) ( 49,422 ) Less: Treasury stock at cost, 4,224,426 and 4,081,806 shares, respectively ( 78,661 ) ( 75,518 ) Total stockholders’ equity 492,727 464,835 Total liabilities and stockholders' equity $ 822,112 $ 724,617 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 Six Months Ended April 30, April 30, 2023 2022 2023 2022 (In thousands, except per share amounts) Net sales $ 273,535 $ 322,893 $ 535,451 $ 589,933 Cost and expenses: Cost of sales (excluding depreciation and amortization) 206,372 249,651 416,521 461,485 Selling, general and administrative 27,371 28,129 64,115 58,952 Depreciation and amortization 10,456 10,563 21,076 20,820 Operating income 29,336 34,550 33,739 48,676 Non-operating (expense) income: Interest expense ( 2,244 ) ( 602 ) ( 4,503 ) ( 1,125 ) Other, net ( 29 ) 453 189 507 Income before income taxes 27,063 34,401 29,425 48,058 Income tax expense ( 5,551 ) ( 7,879 ) ( 6,004 ) ( 10,297 ) Net income $ 21,512 $ 26,522 $ 23,421 $ 37,761 Basic earnings per common share $ 0.65 $ 0.80 $ 0.71 $ 1.14 Diluted earnings per common share $ 0.65 $ 0.80 $ 0.71 $ 1.13 Weighted-average common shares outstanding: Basic 32,858 33,157 32,905 33,140 Diluted 33,017 33,291 33,070 33,292 Cash dividends per share $ 0.08 $ 0.08 $ 0.16 $ 0.16 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 Six Months Ended April 30, April 30, 2023 2022 2023 2022 (In thousands) Net income 21,512 26,522 $ 23,421 $ 37,761 Other comprehensive income (loss): Foreign currency translation gain (loss) 3,082 ( 11,268 ) 14,454 ( 14,427 ) Other comprehensive income (loss) 3,082 ( 11,268 ) 14,454 ( 14,427 ) Comprehensive income $ 24,594 $ 15,254 $ 37,875 $ 23,334 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) Six Months Ended April 30, 2023 2022 (In thousands) Operating activities: Net income $ 23,421 $ 37,761 Adjustments to reconcile net income to cash provided by (used for) operating activities: Depreciation and amortization 21,076 20,820 Stock-based compensation 1,398 1,124 Deferred income tax 97 583 Other, net 982 1,534 Changes in assets and liabilities: Decrease (increase) in accounts receivable 11,564 ( 13,008 ) Decrease (increase) in inventory 14,799 ( 39,771 ) Increase in other current assets ( 1,746 ) ( 3,541 ) (Decrease) increase in accounts payable ( 19,825 ) 7,381 Decrease in accrued liabilities ( 14,407 ) ( 15,984 ) (Decrease) increase in income taxes payable ( 1,754 ) 1,679 Increase (decrease) in deferred pension benefits 17 ( 159 ) Increase in other long-term liabilities 1,808 443 Other, net 1,030 ( 743 ) Cash provided by (used for) operating activities 38,460 ( 1,881 ) Investing activities: Business acquisition ( 91,302 ) — Capital expenditures ( 15,074 ) ( 13,785 ) Proceeds from disposition of capital assets 101 36 Cash used for investing activities ( 106,275 ) ( 13,749 ) Financing activities: Borrowings under credit facilities 102,000 70,500 Repayments of credit facility borrowings ( 35,000 ) ( 45,500 ) Repayments of other long-term debt ( 1,306 ) ( 432 ) Common stock dividends paid ( 5,320 ) ( 5,258 ) Issuance of common stock 99 173 Payroll tax paid to settle shares forfeited upon vesting of stock ( 567 ) ( 1,412 ) Purchase of treasury stock ( 5,593 ) ( 1,569 ) Cash provided by financing activities 54,313 16,502 Effect of exchange rate changes on cash and cash equivalents 1,905 ( 2,033 ) Decrease in cash and cash equivalents ( 11,597 ) ( 1,161 ) Cash and cash equivalents at beginning of period 55,093 40,061 Cash and cash equivalents at end of period $ 43,496 $ 38,900 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) Six Months Ended April 30, 2023 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, 2022 $ 372 $ 251,947 $ 337,456 $ ( 49,422 ) $ ( 75,518 ) $ 464,835 Net income — — 1,909 — — 1,909 Foreign currency translation adjustment — — — 11,372 — 11,372 Common dividends ($ 0.08 per share) — — ( 2,661 ) — — ( 2,661 ) Stock-based compensation activity: Expense related to stock-based compensation — 679 — — — 679 Stock options exercised — 6 — — 93 99 Restricted stock awards granted — ( 1,752 ) — — 1,752 — Performance restricted stock units vested — ( 605 ) — — 605 — Other — ( 545 ) — — — ( 545 ) Balance at January 31, 2023 $ 372 $ 249,730 $ 336,704 $ ( 38,050 ) $ ( 73,068 ) $ 475,688 Net income — — 21,512 — — 21,512 Foreign currency translation adjustment — — — 3,082 — 3,082 Common dividends ($ 0.08 per share) — — ( 2,659 ) — — ( 2,659 ) Purchase of treasury stock — — — — ( 5,593 ) ( 5,593 ) Stock-based compensation activity: Expense related to stock-based compensation — 719 — — — 719 Other — ( 22 ) — — — ( 22 ) Balance at April 30, 2023 $ 372 $ 250,427 $ 355,557 $ ( 34,968 ) $ ( 78,661 ) $ 492,727 5 Table of Contents Six Months Ended April 30, 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 Net income — — 26,522 — — 26,522 Foreign currency translation adjustment — — — ( 11,268 ) — ( 11,268 ) Common dividends ($ 0.08 per share) — — ( 2,671 ) — — ( 2,671 ) Purchase of treasury stock — — — — ( 1,569 ) ( 1,569 ) Stock-based compensation activity: Expense related to stock-based compensation — 572 — — — 572 Stock options exercised — 9 — — 109 118 Other — ( 29 ) — — — ( 29 ) Balance at April 30, 2022 $ 373 $ 250,756 $ 292,221 $ ( 36,197 ) $ ( 70,979 ) $ 436,174 The accompanying notes are an integral part of the financial statements. 6 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 global, publicly traded manufacturing company primarily serving original equipment manufacturers (OEMs) in the fenestration, cabinetry, solar, refrigeration and outdoor products markets. 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, customized compounds, 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 12, “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. Basis of Presentation and Principles of Consolidation 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, 2022 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, 2022. 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. 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 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. 7 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. 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. 8 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 and six months ended April 30, 2023 and 2022 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 13, “Segment Information”. Three Months Ended Six Months Ended April 30, April 30, 2023 2022 2023 2022 (In thousands) North American Fenestration: United States - fenestration $ 120,756 $ 156,843 $ 241,523 $ 285,210 International - fenestration 8,350 11,094 13,477 20,230 United States - non-fenestration 24,334 7,077 47,400 13,793 International - non-fenestration 3,535 2,894 7,555 5,306 $ 156,975 $ 177,908 $ 309,955 $ 324,539 European Fenestration: International - fenestration $ 47,903 $ 54,863 $ 90,257 $ 99,484 International - non-fenestration 15,860 18,564 28,458 32,857 $ 63,763 $ 73,427 $ 118,715 $ 132,341 North American Cabinet Components: United States - fenestration $ 4,219 $ 4,666 $ 8,127 $ 8,431 United States - non-fenestration 48,526 67,383 98,575 125,150 International - non-fenestration 773 829 1,490 1,650 $ 53,518 $ 72,878 $ 108,192 $ 135,231 Unallocated Corporate & Other Eliminations $ ( 721 ) $ ( 1,320 ) $ ( 1,411 ) $ ( 2,178 ) $ ( 721 ) $ ( 1,320 ) $ ( 1,411 ) $ ( 2,178 ) Net sales $ 273,535 $ 322,893 $ 535,451 $ 589,933 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 include transactions with a customer which is a related party with one of our non-employee directors for the six months ended April 30, 2023 of approxim ately $ 0.6 million and $ 1.1 million for the comparable prior year period . 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. 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. 9 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Acquisition On November 1, 2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with LMI Custom Mixing, LLC (“LMI”) and the equity owners of LMI, Lauren International, Ltd. and Meteor-US-Beteiligungs GMBH. Under the Purchase Agreement, we acquired substantially all of the operating assets comprising LMI’s polymer mixing and rubber compound production business (collectively, the “Purchased Assets”) and also agreed to assume certain liabilities relating to the Purchased Assets (collectively, the “Acquisition”). As consideration for the Purchased Assets, we paid $91.3 million in cash utilizing funds borrowed under our Credit Facility. Subsequent to the Acquisition, we had approximately $ 215 million available for use under t he Credit Facility. For the three and six months ended April 30, 2023, our consolidated operating results included net sales of $ 17.8 million and $ 34.2 million, respectively, and operating income of $ 1.4 million and $ 3.4 million, respectively, associated with LMI. In connection with the Acquisition, we amended our existing financ e lease with Lauren Real Estate Holding LLC for the purpose of adding an additional lease renewal option and increasing rental space by approximately 60,000 square feet of rental space which was added to the 313,595 square feet of rentable area located in Cambridge, Ohio. As of April 30, 2023, we are still determining the purchase price allocation for LMI . A preliminary purchase price allocation of the fair value of the assets acquired and liabilities assumed is included in the table below. These estimates are subject to change and will likely result in an increase or decrease in goodwill, particularly with regard to third-party valuations and our estimates of fixed assets, intangible assets, and inventory, during the measurement period, which may extend up to one year from the acquisition date. During the three months ended April 30, 2023, we reduced both the opening balance of goodwill and consideration paid by $ 0.7 million due to the settlement of the post-closing working capital adjustment with LMI. As of Date of Opening Balance Sheet (In thousands) Net assets acquired: Accounts receivable $ 7,012 Inventories, net 5,684 Other assets 790 Property, plant and equipment, net 35,887 Goodwill 41,393 Intangible assets, net 19,500 Accounts payable ( 4,736 ) Accrued liabilities ( 507 ) Long-term debt (finance leases) ( 13,721 ) Net assets acquired $ 91,302 Consideration: Cash, net of cash and cash equivalents acquired $ 91,302 We used recognized valuation techniques to determine the preliminary fair value of the assets and liabilities, including the excess earnings method for customer relationships and relief from royalty method for trade names and other technology with a discount rate that reflects the risk of the expected future cash flows. The goodwill balance is deductible for tax purposes. LMI is allocated entirely to our North American Fenestration reportable operating segment. Pro Forma Results We calculated the pro forma impact of the LMI acquisitions and the associated debt financing on our operating results for the three months ended April 30, 2022. The following pro forma results give effect to these acquisitions, assuming the transactions occurred on November 1, 2021. 10 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Pro Forma Results For the Three Months Ended For the Six Months Ended April 30, 2022 April 30, 2022 (In thousands, except per share amounts) Net sales $ 339,514 $ 621,872 Net income $ 27,884 $ 40,603 Basic earnings per share $ 0.84 $ 1.23 Diluted earnings per share $ 0.84 $ 1.22 We derived the pro forma results for the LMI acquisition based on historical financial information obtained from the sellers and certain management assumptions. Our pro forma adjustm ents relate to the elimination of LMI intercompany sales to our North American Fenestration reportable segment and related cost of sales, incremental depreciation and amortization expense associated with property, plant and equipment and intangible assets to affect the transactions, assu ming a November 1, 2021 effective date. In addition, we calculated the tax impact of these adjustments at a 25 % effective tax rate. 3. Inventories Inventories consisted of the following at April 30, 2023 and October 31, 2022 (in thousands): April 30, 2023 October 31, 2022 Raw materials $ 63,681 $ 68,455 Finished goods and work in process 51,401 54,013 Supplies and other 1,727 1,551 Total 116,809 124,019 Less: Inventory reserves 2,794 3,129 Inventories, net $ 114,015 $ 120,890 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. 4. 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. 11 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date and initial direct costs. For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each finance lease liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as long-lived assets. Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required. The table below presents the lease-related assets and liabilities recorded on the balance sheet at April 30, 2023 and October 31, 2022 (in thousands): Leases Classification April 30, 2023 October 31, 2022 Assets Operating lease assets Operating lease right-of-use assets $ 45,725 $ 56,000 Finance lease assets Property, plant and equipment (less accumulated depreciation of $ 5,236 and $ 3,726 ) 58,013 22,003 Total lease assets $ 103,738 $ 78,003 Liabilities Current Operating Current operating lease liabilities $ 7,403 $ 7,727 Finance Current maturities of long-term debt 2,409 1,336 Noncurrent Operating Noncurrent operating lease liabilities 39,215 49,286 Finance Long-term debt 53,187 17,816 Total lease liabilities $ 102,214 $ 76,165 The table below presents the components of lease costs for the three and six months ended April 30, 2023 and 2022 was as follows (in thousands): Three Months Ended Six Months Ended April 30, April 30, 2023 2022 2023 2022 Operating lease cost $ 2,239 $ 2,537 $ 4,408 $ 5,074 Finance lease cost Amortization of leased assets 815 294 1,614 592 Interest on lease liabilities 602 128 1,202 261 Variable lease costs 467 257 790 480 Total lease cost $ 4,123 $ 3,216 $ 8,014 $ 6,407 12 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) The table below presents supplemental cash flow information related to leases for the six months ended April 30, 2023 and 2022 was as follows (in thousands): Six Months Ended April 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Finance leases - financing cash flows $ 1,145 $ 553 Finance leases - operating cash flows $ 1,202 $ 261 Operating leases - operating cash flows $ 4,513 $ 5,082 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 2,169 $ 933 Finance leases $ 25,206 $ 167 The table below presents the weighted-average remaining lease terms and weighted-average discount rates for the Company's leases as of April 30, 2023 and October 31, 2022: April 30, 2023 October 31, 2022 Weighted-average remaining lease term (in years) Operating leases 11.0 10.8 Financing leases 19.3 13.7 Weighted-average discount rate Operating leases 3.92 % 3.84 % Financing leases 4.48 % 3.78 % The table below presents the maturity of the lease liabilities as of April 30, 2023 (in thousands): Operating Leases Finance Leases 2023 (remaining six months) $ 4,626 $ 2,403 2024 8,452 4,793 2025 6,649 4,731 2026 5,294 4,614 2027 4,527 4,493 Thereafter 29,472 62,787 Total lease payments 59,020 83,821 Less: present value discount 12,402 28,225 Total lease liabilities $ 46,618 $ 55,596 13 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Goodwill and Intangible Assets Goodwill The change in the carrying amount of goodwill for the six months ended April 30, 2023 was as follows (in thousands): Six Months Ended April 30, 2023 Beginning balance as of November 1, 2022 $ 137,855 LMI acquisition 41,393 Foreign currency translation adjustment 5,976 Balance as of the end of the period $ 185,224 At our last annual test date, August 31, 2022, 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. An additional reporting unit was acquired during the six months ended April 30, 2023. We evaluated for indicators of impairment for all reporting units during the three and six months ended April 30, 2023 and determined that there were no triggering events. For additional discussion of change in reporting units and a summary of the change in the carrying amount of goodwill by segment, see Note 12, “Segment Information.” Identifiable Intangible Assets Amortizable intangible assets consisted of the following as of April 30, 2023 and October 31, 2022 (in thousands): April 30, 2023 October 31, 2022 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Customer relationships $ 158,850 $ 94,866 $ 139,607 $ 88,646 Trademarks and trade names 55,899 42,099 54,389 40,610 Patents and other technology 25,148 21,951 22,390 22,095 Total $ 239,897 $ 158,916 $ 216,386 $ 151,351 In connection to the LMI Acquisition, we added gross carrying intangibles of $ 16.0 million of customer relationships, $ 3.0 million of other technology and $ 0.5 million of trade names. We had aggregate amortization expense related to intangible assets for the three and six months ended April 30, 2023 of $ 3.0 million and $ 6.1 million, respectively, $ 3.0 million and $ 6.0 million for the comparable prior year periods. Estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for future fiscal years as of April 30, 2023 (in thousands): Estimated Amortization Expense 2023 (remaining six months) $ 5,981 2024 11,367 2025 10,139 2026 10,064 2027 10,065 Thereafter 33,365 Total $ 80,981 14 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. Debt and Finance Lease Obligations Long-term debt consisted of the following at April 30, 2023 and October 31, 2022 (in thousands): April 30, 2023 October 31, 2022 Revolving Credit Facility $ 80,000 $ 13,000 Finance lease obligations and other 55,626 19,202 Unamortized deferred financing fees ( 1,363 ) ( 1,528 ) Total debt $ 134,263 $ 30,674 Less: Current maturities of long-term debt 2,113 1,046 Long-term debt $ 132,150 $ 29,628 Revolving Credit Facility On July 6, 2022, we entered into our Second Amended and Restated Credit Agreement (the “Credit Facility”) with Wells Fargo Securities, LLC, as Agent, Swingline Lender and Issuing Lender, and BofA Securities, Inc. serving as Syndication Agent. We capitalized $ 1.2 million of deferred financing fees related to the Credit Facility . This $ 325.0 million revolving credit facility has a five -year term, maturing on July 6, 2027, and replaces our previous credit facility. Our previous credit facility is more fully described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. Interest payments for the Credit Facility are calculated, at our election and depending upon the Consolidated Net Leverage Ratio, at a Base Rate (as defined within the Credit Facility) plus an applicable margin or at the same rate as Risk-Free Rate (“RFR”) Loans for domestic borrowings or Eurocurrency Rate Loans 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 Net Leverage Ratio Commitment Fee Eurocurrency Rate Loans and RFR Loans Base Rate Loans I Less than or equal to 1.50 to 1.00 0.150 % 1.25 % 0.25 % II Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00 0.175 % 1.50 % 0.50 % III Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00 0.200 % 1.75 % 0.75 % IV Greater than 3.00 to 1.00 0.250 % 2.00 % 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 or 100% of Consolidated EBITDA, 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 3.00 to 1.00, and (2) Consolidated Net Leverage Ratio requirement, whereby we must not permit the Consolidated Net 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 $ 25.0 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 Consolidated Net Leverage Ratio 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 April 30, 2023, we ha d $ 80.0 million of borrowings outstanding under the Credit Facility (reduced by unamortized debt issuance costs of $1.4 million), $ 5.1 million of outstanding letters of credit and $ 55.6 million outstanding primarily under finance leases and other debt. We had $ 239.9 million available for use under the Credit Facility at April 30, 2023. Outstanding 15 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) borrowings under the Credit Facility accrue interest at 6.33 % per annum. Our weighted-average borrowing rate for borrowings outstanding during the six months ended April 30, 2023 and 2022 was 5.71 % and 1.48 %, respectively. We were in compliance with our debt covenants as of April 30, 2023. 7. 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 and six months ended April 30, 2023 and 2022 was as follows (in thousands): Three Months Ended Six Months Ended April 30, April 30, 2023 2022 2023 2022 Service cost $ 96 $ 214 $ 192 $ 430 Interest cost 389 201 779 403 Expected return on plan assets ( 367 ) ( 497 ) ( 733 ) ( 995 ) Amortization of net loss 11 2 21 3 Net periodic pension benefit $ 129 $ ( 80 ) $ 259 $ ( 159 ) During the six months ended April 30, 2022 , we made no contributions to fund our plan. During fiscal 2023 , we do not expect to need to make a contribution to the pension plan to maintain targeted funding levels and meet minimum contribution requirements. During the year ended October 31, 2022, we notified participants that our pension plan will be terminated effective November 1, 2022, with final settlement expected to occur in the next twelve months, depending upon the timing of I.R.S. approvals. During the three months ended January 31, 2023, we reclassified the pension obligation of $ 3.9 million from long-term liabilities under the caption “Deferred pension benefits” to current liabilities under the caption “Accrued liabilities” in the accompanying condensed consolidated balance sheets. 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 April 30, 2023 and October 31, 2022, our liability under the supplemental benefit plan was approximately $ 2.0 million and $ 1.9 million, respectively. As of April 30, 2023 and October 31, 2022, the liability associated with the deferred compensation plan was approximately $ 3.4 million and $ 3.3 million, respectively. We record the current portion of liabilities associated with these plans under the caption “Accrued liabilities,” and the long-term portion under the caption “Other liabilities” in the accompanying condensed consolidated balance sheets. 8. 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 t o year-to-date results, plus any applicable discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitations, tax benefits on equity compensation, and increase or decrease in valuation allowances on deferred tax assets. Our annual effective tax rates from continuing operations for the six months ended April 30, 2023 and 2022 were 19.74 % and 25.20 %, 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 2023 effective rate was a benefit of $ 0.2 million related to the rate change on deferred taxes. The primary discrete items affecting the 2022 effective rate were the charge of $ 0.2 million related to the vesting or exercise of equity-based compensation awards and a benefit of $ 1.0 million for the true-up of our accruals and related deferred taxes from prior year filings. As of April 30, 2023, 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. 16 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) As of April 30, 2023, we have an income tax receivable of $ 0.6 million included in current assets under the caption “Prepaid and other current assets” in the accompanying condensed consolidated balance sheets. 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 $ 0.5 million as of April 30, 2023 and October 31, 2022, respectively. On August 16, 2022 the Inflation Reduction Act of 2022 was signed into law. We are evaluating the regulations but do not believe they will result in a material impact to our consolidated financial statements. 9. 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. Currently, 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 2023. 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. 10. 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. 17 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) • 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-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 April 30, 2023, and October 31, 2022 (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 11, “Stock-Based Compensation - Performance Share Awards.” We used recognized valuation techniques to determine the preliminary fair value of the assets and liabilities, including the excess earnings method for customer relationships and relief from royalty method for trade names and other technology with a discount rate that reflects the risk of the expected future cash flows (Level 3 measurement). For further information, refer to Note 2, “Acquisition.” 11. 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, performance shares and 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 and quarterly dividends are not paid until the award vests. 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 six months ended April 30, 2023 is presented below: Restricted Stock Awards Weighted-Average Grant Date Fair Value per Share Non-vested at October 31, 2022 212,100 $ 20.86 Granted 94,700 23.49 Forfeited — — Vested ( 50,700 ) 18.72 Non-vested at April 30, 2023 256,100 $ 22.26 The total weighted-average grant-date fair value of restricted stock awards that vested during each of the six months ended April 30, 2023 and 2022 was $ 0.9 million and $ 1.2 million, respectively. As of April 30, 2023, total unrecognized 18 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) compensation cost related to unamortized restricted stock awards was $ 3.3 million. We expect to recognize this expense over the remaining weighted-average vesting period of 2.1 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 recognize stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date. We use a Black-Scholes pricing model to estimate the fair value of stock options. A description of the methodology for the valuation assumptions was disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. The following table summarizes our stock option activity for the six months ended April 30, 2023: Stock Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (000s) Outstanding at October 31, 2022 175,117 $ 19.39 Granted — — Exercised ( 5,000 ) 19.61 Forfeited/Expired ( 4,000 ) 21.11 Outstanding at April 30, 2023 166,117 $ 19.34 2.6 $ 20 Vested at April 30, 2023 166,117 $ 19.34 2.6 $ 20 Exercisable at April 30, 2023 166,117 $ 19.34 2.6 $ 20 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 six months ended April 30, 2023 and 2022 was less than $ 0.1 million. 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 six months ended April 30, 2023 and 2022, non-employee directors received 38,704 and 36,669 restricted stock units, respectively, at a weighted-average grant date fair value of $ 20.67 per share and $ 22.52 per share, respectively, which vested immediately. During the six months ended April 30, 2023, 21,774 restricted stock units, which were awarded to key employees, vested. D uring the six months ended April 30, 2023, we paid $ 0.4 million and $ 1.0 million for the comparable prior year 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. 19 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 2, 2020 65,300 $ 20.68 — December 9, 2021 80,900 $ 22.54 — December 7, 2022 89,300 $ 23.49 — In December 2022, 101,200 shares vested pursuant to the December 2018 grant, which were settled with a cash payment of $ 2.2 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 2, 2020 38,400 $ 20.68 — December 9, 2021 50,900 $ 21.06 — December 7, 2022 51,500 $ 23.22 — During the six months ended April 30, 2023 , 32,680 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 April 30, 2023, we have de emed 27,882 shares related to the December 2020 grant of performance restricted stock units as probable to vest. 20 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 and six months ended April 30, 2023 and 2022 (in thousands): Three Months Ended Six Months Ended April 30, 2023 April 30, 2023 2023 2022 2023 2022 Restricted stock awards $ 464 $ 360 $ 902 $ 708 Restricted stock units ( 1,062 ) ( 278 ) 429 716 Performance share awards 703 316 3,342 1,656 Performance restricted stock units 255 212 496 416 Total compensation expense $ 360 $ 610 $ 5,169 $ 3,496 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 six months ended April 30, 2023. The following table summarizes the treasury stock activity during the six months ended April 30, 2023: Six Months Ended April 30, 2023 Beginning Balance as of November 1, 2022 4,081,806 Restricted stock awards granted ( 94,700 ) Performance restricted stock units vested ( 32,680 ) Stock options exercised ( 5,000 ) Treasury stock repurchases 275,000 Balance at April 30, 2023 4,224,426 12. Segment Information We present three reportable business segments (1) NA Fenestration, comprising four operating segments in 2023 (compared to three operating segments in 2022) primarily focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens, custom compound mixing, and 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. The additional NA Fenestration operating segment in 2023 is related to the Acquisition of LMI, an advanced polymer solutions provider with a focus on advanced methods for mixing rubber compounds. For additional discussion of our Acquisition of LMI, see Note 2, “Acquisition.” Additionally, 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 p olicies of our operating segments are the same as those used to prepare the accompanying condensed consolidated financial statements. Corporate general and administrative expense allocated during the three and six month period ended April 30, 2023 was $ 6.1 million and $ 10.8 million, respectively, and $ 5.5 million and $ 11.3 million for the comparable prior year periods. 21 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 and six months ended April 30, 2023 and 2022, and total assets as of April 30, 2023 and October 31, 2022 are summarized in the following table (in thousands): NA Fenestration EU Fenestration NA Cabinet Comp. Unallocated Corp. & Other Total Three Months Ended April 30, 2023 Net sales $ 156,975 $ 63,763 $ 53,518 $ ( 721 ) $ 273,535 Depreciation and amortization 5,050 2,353 2,970 83 10,456 Operating income 15,295 12,506 846 689 29,336 Capital expenditures 4,859 1,100 1,481 52 7,492 Three Months Ended April 30, 2022 Net sales $ 177,908 $ 73,427 $ 72,878 $ ( 1,320 ) $ 322,893 Depreciation and amortization 4,038 2,522 3,917 86 10,563 Operating income (loss) 22,221 12,596 568 ( 835 ) 34,550 Capital expenditures 3,632 1,252 1,499 32 6,415 Six Months Ended April 30, 2023 Net sales $ 309,955 $ 118,715 $ 108,192 $ ( 1,411 ) $ 535,451 Depreciation and amortization 10,295 4,701 5,904 176 21,076 Operating income (loss) 25,018 19,902 ( 343 ) ( 10,838 ) 33,739 Capital expenditures 8,472 3,056 3,341 205 15,074 Six Months Ended April 30, 2022 Net sales $ 324,539 $ 132,341 $ 135,231 $ ( 2,178 ) $ 589,933 Depreciation and amortization 8,177 5,091 7,380 172 20,820 Operating income (loss) 34,372 20,411 ( 885 ) ( 5,222 ) 48,676 Capital expenditures 8,937 2,206 2,572 70 13,785 As of April 30, 2023 Total assets $ 385,283 $ 238,604 $ 162,154 $ 36,071 $ 822,112 As of October 31, 2022 Total assets $ 279,139 $ 223,729 $ 176,154 $ 45,595 $ 724,617 The following table summarizes the change in the carrying amount of goodwill by reportable business segment for the six months ended April 30, 2023 (in thousands): NA Fenestration EU Fenestration NA Cabinet Comp. Unallocated Corp. & Other Total Balance as of October 31, 2022 $ 38,712 $ 59,996 $ 39,147 $ — $ 137,855 LMI acquisition 41,393 — — — 41,393 Foreign currency translation adjustment — 5,976 — — 5,976 Balance as of April 30, 2023 $ 80,105 $ 65,972 $ 39,147 $ — $ 185,224 For further details of Goodwill, see Note 5, “Goodwill & Intangible Assets,” located herewith. 22 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) We did not allocate non-operating loss or income tax benefit to the reportable segments. The following table reconciles operating income as reported above to net income for the three and six months ended April 30, 2023 and 2022 (in thousands): Three Months Ended Six Months Ended April 30, April 30, 2023 2022 2023 2022 Operating income $ 29,336 $ 34,550 $ 33,739 $ 48,676 Interest expense ( 2,244 ) ( 602 ) ( 4,503 ) ( 1,125 ) Other, net ( 29 ) 453 189 507 Income tax expense ( 5,551 ) ( 7,879 ) ( 6,004 ) ( 10,297 ) Net income $ 21,512 $ 26,522 $ 23,421 $ 37,761 13. 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. 23 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Basic and diluted earnings per share for the three and six months ended April 30, 2023 and 2022 were calculated as follows (in thousands, except per share data): Net Income Weighted-Average Shares Per Share Three Months Ended April 30, 2023 Basic earnings per common share $ 21,512 32,858 $ 0.65 Effect of dilutive securities: Stock options — 25 — Restricted stock awards — 106 — Performance restricted stock units — 28 — Diluted earnings per common share $ 21,512 33,017 $ 0.65 Three Months Ended April 30, 2022 Basic earnings per common share $ 26,522 33,157 $ 0.80 Effect of dilutive securities: Stock options — 24 — Restricted stock awards — 82 — Performance restricted stock units — 28 — Diluted earnings per common share $ 26,522 33,291 $ 0.80 Six Months Ended April 30, 2023 Basic earnings per common share $ 23,421 32,905 $ 0.71 Effect of dilutive securities: Stock options — 28 — Restricted stock awards — 109 — Performance restricted stock units — 28 — Diluted earnings per common share $ 23,421 33,070 $ 0.71 Six Months Ended April 30, 2022 Basic earnings per common share $ 37,761 33,140 $ 1.14 Effect of dilutive securities: Stock options — 29 — Restricted stock awards — 95 — Performance restricted stock units — 28 — Diluted earnings per common share $ 37,761 33,292 $ 1.13 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 and six months ended April 30, 2023 and 2022. 14. 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 and six months ended April 30, 2023. As of April 30, 2023, 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. 24 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 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 military conflict 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 and the availability of energy; • 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, 2022. 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 information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it. 25 Table of Contents