Quanex Building Products CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of April 30, 2023, and for the three and six months ended April 30, 2023 and 2022, included elsewhere herein. For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. Our Business We manufacture components for 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, customized compounds, water retention barriers, and conservatory roof components. 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 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. We continue to invest in organic growth initiatives and we intend to continue evaluating business acquisitions that allow us to expand our existing fenestration and cabinet component footprint, enhance our product offerings, provide new complementary technology, enhance our leadership position within the markets we serve and expand into new markets or service lines. We have disposed of non-core businesses in the past, and continue to evaluate our business portfolio to ensure that we are investing in markets where we believe there is potential future growth. We currently have three reportable business segments: (1) North American Fenestration segment (“NA Fenestration”), comprising four operating segments, manufacturing vinyl profiles, IG spacers, screens, custom compound mixing, and other fenestration components; (2) European Fenestration segment (“EU Fenestration”), comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles and conservatories, and the European insulating glass business manufacturing IG spacers; and (3) North American Cabinet Components segment (“NA Cabinet Components”), comprising our North American cabinet door and components business and two wood-manufacturing plants. We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance, legal, and other costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. Other corporate general and administrative costs have been allocated to the reportable business segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as those used to prepare our accompanying condensed consolidated financial statements. Recent Transactions and Events On November 1, 2022, we entered into an Asset Purchase Agreement with 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 and also agreed to assume certain liabilities relating to the Acquisition. As consideration for the Purchased Assets, we paid $91.3 million in cash utilizing funds borrowed under our Credit Facility. In connection with the Acquisition, we amended our existing finance 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. U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the military conflict between Russia and Ukraine. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market or operational disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. Russia, Europe’s largest provider of natural gas, has significantly reduced the export of natural gas compared to the same time last year resulting in the increase in natural gas prices and the potential for natural gas shortages. If this trend continues, this would not only negatively impact our 26 Table of Contents European manufacturing facilities, this may also impact our customers and their demand for our products. We continue to monitor these situations and their impact on our business. The war in Ukraine and the impact on the global economy including inflation and the price of raw materials, supply chain disruptions, and the volatility in interest rates including home mortgage rates are unpredictable and there may be developments outside our control requiring us to adjust our operating plan. Market Overview and Outlook We believe the primary drivers of our operating results continue to be North American new home construction and residential remodeling and replacement (R&R) activity. We believe that housing starts and window shipments are indicators of activity levels in the homebuilding and window industries, and we use this data, as published by or derived from third-party sources, to evaluate the market. We have evaluated the market using data from the National Association of Homebuilders (NAHB) with regard to housing starts, and published reports by Ducker Worldwide, LLC (Ducker), a consulting and research firm, with regard to window shipments in the U.S. We obtain market data from Catalina Research, a consulting and research firm, for insight into the U.S. residential wood cabinet demand. In May 2023 , the NAHB forecasted calendar-year housing starts to be 1.3 million in the 2023 and 2024 calendar-years and 1.5 million in 2025. In May 2023 , the Ducker forecast indicated that total window shipments are expected to decrease 5.9% in calendar-year 2023 and 2.8% in 2024. Several commodities in our business are subject to pricing fluctuations, including polyvinyl resin (PVC), titanium dioxide (TiO2), petroleum products, aluminum and wood. For the majority of our customers and critical suppliers, we have price adjusters in place which effectively share the impact of pass-through price changes for our primary commodities with our customers commensurate with the market at large. Our long -term exposure to these price fluctuations is somewhat mitigated due to the contractual component of the adjuster programs. However, these adjusters are not in place with all customers and for all commodities, and there is a level of exposure to such volatility due to the lag associated with the timing of price updates in accordance with our customer agreements, particularly with regard to hardwoods. In addition, some of these commodities are in high demand, particularly in Europe, which can affect the cost of the raw materials, a portion of which we may not be able to fully recover. The global economy remains uncertain due to currency devaluations, political unrest, terror threats, global pandemics such as COVID-19, and even the political landscape in the U.S. These and other macro-economic factors have impacted the global financial markets, which may have contributed to significant changes in foreign currencies. We continue to monitor our exposure to changes in exchange rates. 27 Table of Contents Results of Operations Three Months Ended April 30, 2023 Compared to Three Months Ended April 30, 2022 Three Months Ended April 30, 2023 2022 Change $ % Variance (Dollars in thousands) Net sales $ 273,535 $ 322,893 $ (49,358) (15) % Cost of sales (excluding depreciation and amortization) 206,372 249,651 (43,279) 17 % Selling, general and administrative 27,371 28,129 (758) 3 % Depreciation and amortization 10,456 10,563 (107) 1 % Operating income 29,336 34,550 (5,214) (15) % Interest expense (2,244) (602) (1,642) (273) % Other, net (29) 453 (482) (106) % Income tax expense (5,551) (7,879) 2,328 30 % Net income $ 21,512 $ 26,522 $ (5,010) (19) % Our period-over-period results by reportable segment follow. Changes Related to Operating Income by Reportable Segment: NA Fenestration Three Months Ended April 30, 2023 2022 $ Change % Variance (Dollars in thousands) Net sales $ 156,975 $ 177,908 $ (20,933) (12)% Cost of sales (excluding depreciation and amortization) 122,472 137,571 (15,099) 11% Selling, general and administrative 14,158 14,078 80 (1)% Depreciation and amortization 5,050 4,038 1,012 (25)% Operating income $ 15,295 $ 22,221 $ (6,926) (31)% Operating income margin 10 % 12 % Net Sales. Net sales decreased $20.9 million, or 12%, for the three months ended April 30, 2023 compared to the same period in 2022, which was primarily driven by a $33.1 million decrease in volumes mainly due to softer market demand, a return to normal seasonality, customer destocking, and a decrease in price and raw material surcharges of $5.6 million, partially offset by a $17.8 million contribution from the addition of LMI in 2023. Cost of Sales. The cost of sales decreased $15.1 million, or 11%, for the three months ended April 30, 2023 compared to the same period in 2022. Cost of sales, including labor, decreased primarily due to lower volumes and deflation of raw materials during the period partially offset by LMI’s cost of sales in 2023. Selling, General and Administrative. S elling, general and administrative expenses increased $0.1 million, or 1%, for the three months ended April 30, 2023 compared to the sam e period in 2022, which was essentially flat year-over-year. Depreciation and Amortization. Depreciation and amortization expense increased $1.0 million, or 25%, for the three months ended April 30, 2023 as compared to the same period in 2022, primarily due to the acquisition of LMI’s property, plant and equipment and intangible assets. 28 Table of Contents EU Fenestration Three Months Ended April 30, 2023 2022 $ Change % Variance (Dollars in thousands) Net sales $ 63,763 $ 73,427 $ (9,664) (13)% Cost of sales (excluding depreciation and amortization) 40,452 49,708 (9,256) 19% Selling, general and administrative 8,452 8,601 (149) 2% Depreciation and amortization 2,353 2,522 (169) 7% Operating income $ 12,506 $ 12,596 $ (90) (1)% Operating income margin 20 % 17 % Net Sales . Net sales decreased $9.7 million, or 13%, for the three months ended April 30, 2023 compared to the same period in 2022, which was primarily driven by a $7.7 million decrease in volumes largely due to softer market demand, a return to normal seasonality, customer destocking, and $4.8 million of foreign currency rate change, partially offset by $2.8 million of base price increases. Cost of Sales. The cost of sales decreased $9.3 million, or 19%, for the three months ended April 30, 2023 compared to the same period in 2022. Cost of sales decreased primarily due to lower volumes and foreign currency rate changes during the period partially offset by inflation of raw materials. Selling, General and Administrative. Selling, general and administrative expense decreased $0.1 million, or 2%, for the three months ended April 30, 2023 compared to the same period in 2022. The decrease is primarily due to a decrease in professional fees, labor costs and foreign currency impacts year-over-year. NA Cabinet Components Three Months Ended April 30, 2023 2022 $ Change Variance % (Dollars in thousands) Net sales $ 53,518 $ 72,878 $ (19,360) (27)% Cost of sales (excluding depreciation and amortization) 43,731 63,175 (19,444) 31% Selling, general and administrative 5,971 5,218 753 (14)% Depreciation and amortization 2,970 3,917 (947) 24% Operating income $ 846 $ 568 $ 278 49% Operating income margin 2 % 1 % Net Sales . N et sales decreased $19.4 million, or 27%, for the three months ended April 30, 2023 compared to the same period in 2022, which was driven by an $18.1 million decrease in volumes due to softer market demand driven by weaker consumer confidence and a $1.3 million decrease in price and raw material indexes. Cost of Sales . Cost of sales decreased $19.4 million, or 31%, for the three months ended April 30, 2023 compared to the same period in 2022. Cost of sales decreased primarily due to lower volumes during the period and lumber price deflation. Selling, General and Administrative . Selling, general and administrative expense increased $0.8 million, or 14%, for the three months ended April 30, 2023 compared to the same period in 2022. The increase is primarily due to a loss on an asset caused by wind damage to a manufacturing facility and an increase in professional fees partially offset by a decrease in labor costs. Depreciation and Amortization. Depreciation and amortization expense decreased $0.9 million , or 24% , for the three months ended April 30, 2023 as compared to the same period in 2022, reflecting the run-off of depreciation expense related to existing assets. 29 Table of Contents Unallocated Corporate & Other Three Months Ended April 30, 2023 2022 $ Change Variance % (Dollars in thousands) Net sales $ (721) $ (1,320) $ 599 45% Cost of sales (excluding depreciation and amortization) (283) (803) 520 (65)% Selling, general and administrative (1,210) 232 (1,442) 622% Depreciation and amortization 83 86 (3) 3% Operating income (loss) $ 689 $ (835) $ 1,524 183% Net Sales . Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the three months ended April 30, 2023 and 2022. Cost of Sales . Cost of sales for Unallocated Corporate & Other consists of the elimination of inter-segment sales, profit in inventory, and other costs. Selling, General and Administrative . Selling, general and administrative expenses decreased $1.4 million, or 622%, for the three months ended April 30, 2023 compared to the same period in 2022. This decrease is primarily attributable to a decrease in medical expense claims and lower compensation expense including the valuations of our stock-based compensation awards during the three months ended April 30, 2023 as compared to the prior year period. Changes related to Non-Operating Items: Interest Exp ense . Interest expense increased $1.6 million for the three months ended April 30, 2023 compared to the same period in 2022 as a result of higher borrowings outstanding during the period and an increase in interest rates. Income Taxes . We recorded inco me tax expense of $5.6 million on pre-tax income of $27.1 million for the three months ended April 30, 2023, an effective rate of 20.5%, and income tax expense of $7.9 million on pre-tax income of $34.4 million for the three months ended April 30, 2022, an effective rate of 22.9%. The decrease in income tax expense year-over-year was primarily driven by the decrease in pre-tax book income during the three months ended April 30, 2023, relative to the three months ended April 30, 2022. Six Months Ended April 30, 2023 Compared to Six Months Ended April 30, 2022 Six Months Ended April 30, 2023 2022 Change $ % Variance (Dollars in thousands) Net sales $ 535,451 $ 589,933 $ (54,482) (9) % Cost of sales (excluding depreciation and amortization) 416,521 461,485 (44,964) 10 % Selling, general and administrative 64,115 58,952 5,163 (9) % Depreciation and amortization 21,076 20,820 256 (1) % Operating income 33,739 48,676 (14,937) (31) % Interest expense (4,503) (1,125) (3,378) (300) % Other, net 189 507 (318) (63) % Income tax expense (6,004) (10,297) 4,293 42 % Net income $ 23,421 $ 37,761 $ (14,340) (38) % Our period-over-period results by reportable segment follow. 30 Table of Contents Changes Related to Operating Income by Reportable Segment: NA Fenestration Six Months Ended April 30, 2023 2022 $ Change % Variance (Dollars in thousands) Net sales $ 309,955 $ 324,539 $ (14,584) (4)% Cost of sales (excluding depreciation and amortization) 247,189 253,535 (6,346) 3% Selling, general and administrative 27,453 28,455 (1,002) 4% Depreciation and amortization 10,295 8,177 2,118 (26)% Operating income $ 25,018 $ 34,372 $ (9,354) (27)% Operating income margin 8 % 11 % Net Sales. Ne t sales decreased $14.6 million, or 4%, for the six months ended April 30, 2023 compared to the same period in 2022, which was primarily driven by a $48.3 million decrease in volumes mainly due to softer market demand, a return to normal seasonality, customer destocking, and an decrease in price and raw material surcharges of $0.5 million, partially offset by a $34.2 million contribution from the addition of LMI in 2023. Cost of Sales. The cost of sales decreased $6.3 million, or 3%, for the six months ended April 30, 2023 as compared to the same period in 2022. Cost of sales, including labor, decreased primarily due to lower volumes and deflation of raw materials during the period partially offset by LMI’s cost of sales in 2023. Selling, General and Administrative. S elling, general and administrative expenses decreased $1.0 million, or 4%, for the six months ended April 30, 2023 as compared to the same period in 2022. This decrease was primarily due to a decrease in labor costs year-over-year. Depreciation and Amortization. Depreciation and amortization expense increased $2.1 million, or 26%, for the six months ended April 30, 2023 as compared to the same period in 2022, primarily due to the acquisition of LMI’s property, plant and equipment and intangible assets. EU Fenestration Six Months Ended April 30, 2023 2022 $ Change Variance % (Dollars in thousands) Net sales $ 118,715 $ 132,341 $ (13,626) (10)% Cost of sales (excluding depreciation and amortization) 78,155 90,935 (12,780) 14% Selling, general and administrative 15,957 15,904 53 —% Depreciation and amortization 4,701 5,091 (390) 8% Operating income $ 19,902 $ 20,411 $ (509) (2)% Operating income margin 17 % 15 % Net Sales . Net sales decreased $13.6 million, or 10%, comparing the six months ended April 30, 2023 to the same period in 2022, which was primarily driven by a $12.0 million decrease in volumes largely due to softer market demand, a return to normal seasonality, customer destocking, and $10.8 million of foreign currency rate change, partially offset by $9.2 million of base price increases. Cost of Sales. The cost of sales decreased $12.8 million, or 14%, for the six months ended April 30, 2023 compared to the same period in 2022. Cost of sales decreased primarily due to a decrease in volumes and foreign currency impacts partially offset by inflation of raw materials. Selling, General and Administrative. Selling, general and administrative expense increased $0.1 million, for the six months ended April 30, 2023 compared to the same period in 2022, which was essentially flat year-over-year. 31 Table of Contents NA Cabinet Components Six Months Ended April 30, 2023 2022 $ Change Variance % (Dollars in thousands) Net sales $ 108,192 $ 135,231 $ (27,039) (20)% Cost of sales (excluding depreciation and amortization) 91,787 118,248 (26,461) 22% Selling, general and administrative 10,844 10,488 356 (3)% Depreciation and amortization 5,904 7,380 (1,476) 20% Operating loss $ (343) $ (885) $ 542 61% Operating loss margin — % (1) % Net Sales . Net sales decreased $27.0 million, or 20%, for the six months ended April 30, 2023 compared to the same period in 2022, which was driven by a $29.1 million decrease in volumes due to softer market demand driven by weaker consumer confidence partially offset by a $2.1 million increase in price and raw material indexes. Cost of Sales . Cost of sales decreased $26.5 million, or 22%, for the six months ended April 30, 2023 compared with the same period in 2022, primarily as a result of lower volumes year-over-year and lumber price deflation. Selling, General and Administrative . Selling, general and administrative expense increased $0.4 million, or 3%, for the six months ended April 30, 2023 compared to the same period in 2022 primarily due to a loss on an asset caused by wind damage to a manufacturing facility and an increase in professional fees partially offset by a decrease in labor costs. Depreciation and Amortization. Depreciation and amortization expense decreased $1.5 million , or 20%, for the six months ended April 30, 2023 as compared to the same period in 2022, reflecting the run-off of depreciation expense related to existing assets. Unallocated Corporate & Other Six Months Ended April 30, 2023 2022 $ Change Variance % (Dollars in thousands) Net sales $ (1,411) $ (2,178) $ 767 35% Cost of sales (excluding depreciation and amortization) (610) (1,233) 623 (51)% Selling, general and administrative 9,861 4,105 5,756 (140)% Depreciation and amortization 176 172 4 (2)% Operating loss $ (10,838) $ (5,222) $ (5,616) (108)% Net Sales . Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the six months ended April 30, 2023 and 2022. Cost of Sales . Cost of sales for Unallocated Corporate & Other consists of the elimination of inter-segment sales, profit in inventory, and other costs. Selling, General and Administrative . Selling, general and administrative expenses increased $5.8 million, or 140%, for the six months ended April 30, 2023 compared to the same period in 2022. This increase is primarily attributable an increase in transaction fees and compensation expense including the valuations of our stock-based compensation awards, partially offset by a decrease related to medical expense claims during the six months ended April 30, 2023 as compared to the prior year period. Changes related to Non-Operating Items: Interest Exp ense . Interest expense increased $3.4 million for the six months ended April 30, 2023 compared to the same period in 2022 as a result of higher borrowings outstanding during the period and an increase in interest rates. Income Taxes . We recorded income tax expense of $6.0 million on pre-tax income of $29.4 million for the six months ended April 30, 2023, an effective rate of 20.4%, and income tax expense of $10.3 million on a pre-tax income of $48.1 million for the six months ended April 30, 2022, an effective rate of 21.4%. The decrease in income tax expense year-over-year was primarily driven by the decrease in pre-tax book income during the six months ended April 30, 2023, relative to the six months ended April 30, 2022. 32 Table of Contents Liquidity and Capital Resources Overview Historically, our principal sources of funds have been cash on hand, cash flow from operations, and borrowings under our credit facilities. We maintain a $325.0 million revolving credit facility (the Credit Facility) that matures in 2027 (5-year term) and requires interest payments calculated at a variable market rate depending upon our Consolidated Net Leverage Ratio. The applicable rate during the six months ended April 30, 2023 was RFR Rate + 1.25%. Our cost of capital could increase depending upon the Consolidated Net Leverage Ratio at the end of any given quarter. In addition to the Con solidated Net Leverage Ratio covenant, we are required to meet a Consolidated Interest Coverage Ratio covenant, and there are limitations on certain transactions including our ability to incur indebtedness, incur liens, dispose of material assets, acquire businesses, make restricted payments and pay dividends (limited to $25.0 million per year). We are amortizing deferred financing fees of $1.4 million straight-line over the remaining term of the facility. For further details of the Credit Facility, refer to Note 6, “Debt and Finance Lease Obligations” to the accompanying unaudited condensed consolidated financial statements contained elsewhere herein. As of April 30, 2023, we had $43.5 million of cash and equivalents, $80.0 million outstanding under the Credit Facility, $5.1 million of outstanding letters of credit and $55.6 million outstanding under finance leases and other debt. Of the $55.6 million outstanding under finance leases and other debt, $53.1 million relates to real estate leases. We had $239.9 million available for use under the Credit Facility at April 30, 2023. We repatriated $21.2 million and $4.1 million of f oreign cash during the six months ended April 30, 2023 and 2022, respectively. We expect to repatriate excess cash moving forward and use the funds to retire debt or meet current working capital needs. In the U.K., we insure against a portion of our credit losses. We believe our business model, our current cash reserves and our strong balance sheet leave us well-positioned to manage our business and remain in compliance with our debt covenants. Analysis of Cash Flow The following table summarizes our cash flow results for the six months ended April 30, 2023 and 2022: Six Months Ended April 30, 2023 2022 (Dollars in thousands) Cash provided by (used for) operating activities $ 38,460 $ (1,881) Cash used for investing activities $ (106,275) $ (13,749) Cash provided by financing activities $ 54,313 $ 16,502 Operating A ctivities . Cash provided by operating activities increased $40.3 million for the six months ended April 30, 2023 compared to the six months ended April 30, 2022. The increase in operating cash flows is primarily due to favorable changes to working capital partially offset by lower net income year-over-year due to a decrease in customer demand. The favorable changes in working capital were largely driven by an increase in inventory value due to raw material price inflation and a decrease in accounts receivable partially offset by a decrease in accounts payable. Investing Activities. Cash used f or investing activities increased $92.5 million for the six months ended April 30, 2023 compared to the same period in 2022, primarily as a result of the Acquisition of LMI. Financing Activities. Cash provided by financing activities was $54.3 million for the six months ended April 30, 2023, which included $65.7 million of net borrowings of long-term debt, $5.6 million related to the purchase of treasury stock $5.3 million of dividends paid to our shareholders, and $0.6 million of payroll tax paid to settle shares forfeited upon vesting of stock. Liquidity Requirements Historically, our strategy for deploying cash has been to invest in organic growth opportunities, develop our infrastructure, and ex plore strategic acquisitions. Other uses of cash include paying cash dividends to our shareholders and repurchasing our common stock. During the six months ended April 30, 2023 and 2022, we repatriated $21.2 million and $4.1 million, respectively, of foreign earnings from our foreign locations. We maintain cash balances in foreign countries which total $13.1 million as of April 30, 2023. 33 Table of Contents Critical Accounting Policies and Estimates The preparation of our financial statements in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. Estimates and assumptions about future events and their effects cannot be perceived with certainty. Estimates may change as new events occur, as more experience is acquired, as additional information becomes available and as our operating environment changes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, and that we believe provide a basis for making judgments about the carrying value of assets and liabilities that are not readily available through open market quotes. We must use our judgment with regard to uncertainties in order to make these estimates. Actual results could differ from these estimates. For a description of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. Our critical accounting policies and estimates have not changed materially during the six months ended April 30, 2023. New Accounting Pronouncements 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. 34 Table of Contents