Quanex Building Products CORP 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Quanex Building Products Corporation Page Reports of Independent Registered Public Accounting Firm (PCAOB ID 248 ) 31 Management's Annual Report on Internal Control over Financial Reporting 34 Consolidated Financial Statements Consolidated Balance Sheets 35 Consolidated Statements of Income 36 Consolidated Statements of Comprehensive Income 37 Consolidated Statement of Stockholders’ Equity 38 Consolidated Statements of Cash Flow 39 Notes to Consolidated Financial Statements 40 30 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Quanex Building Products Corporation Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Quanex Building Products Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of October 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of October 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated December 15, 2023 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Quantitative goodwill impairment assessment of the reporting unit included in the North American Cabinet Components operating segment As described in Note 1 to the financial statements, the Company performs its annual goodwill impairment test as of August 31. The Company performed a quantitative assessment of the reporting unit included in the North American Cabinet Components operating segment primarily due to the history of a narrow margin of fair value over carrying value in the quantitative assessments performed in prior years. We identified the estimation of the fair value of this reporting unit as a critical audit matter. The principal considerations for our determination that the estimation of the fair value of this reporting unit is a critical audit matter relates to the use of the income approach which is one method management uses to estimate the fair value of the reporting unit. Auditing the fair value of the reporting unit involved a high degree of auditor judgment, subjectivity and audit effort in evaluating management’s significant assumptions used in the income approach, including future cash flows related to the reporting unit and the weighted average cost of capital (WACC). In addition, the audit effort involved the use of valuation specialists to assist in performing these procedures and evaluating the audit evidence obtained. Our audit procedures related to the estimation of the fair value of this reporting unit included the following, among others. • We tested the effectiveness of controls over goodwill impairment including those over the determination of fair value, including controls relating to management’s development of forecasts of future revenues, earnings, cash flows and WACC. 31 Table of Contents • We evaluated management’s ability to accurately forecast revenues, earnings and cash flows by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s forecasts of revenues, earnings and cash flows by comparing the forecasts to historical revenues, earnings and cash flows, current budgets, our understanding of the current business strategy, communications to the Board of Directors, press releases and industry reports. • We utilized our valuation specialists to evaluate the reasonableness of the WACC used by management, including the testing of underlying source information and developing a range of independent estimates and comparing those to the rate selected by management. /s/ GRANT THORNTON LLP We have served as the Company's auditor since 2014. Houston, Texas December 15, 2023 32 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Quanex Building Products Corporation Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Quanex Building Products Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of October 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended October 31, 2023, and our report dated December 15, 2023 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Houston, Texas December 15, 2023 33 Table of Contents MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the Company, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system was designed to provide reasonable assurance to management and the Company’s Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may become inadequate over time because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2023 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on this assessment, management has concluded that, as of October 31, 2023, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles based on such criteria. Grant Thornton LLP , the Company’s independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. 34 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONSOLIDATED BALANCE SHEETS As of October 31, 2023 and 2022 October 31, 2023 2022 (In thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents $ 58,474 $ 55,093 Accounts receivable, net of allowance for credit losses of $ 843 and $ 289 97,311 96,018 Inventories, net 97,959 120,890 Income taxes receivable 8,298 — Prepaid and other current assets 11,558 8,664 Total current assets 273,600 280,665 Property, plant and equipment, net of accumulated depreciation of $ 368,763 and $ 348,528 250,664 180,400 Operating lease right-of-use assets 46,620 56,000 Goodwill 182,956 137,855 Intangible assets, net 74,115 65,035 Other assets 3,188 4,662 Total assets $ 831,143 $ 724,617 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 74,371 $ 77,907 Accrued liabilities 50,319 52,114 Income taxes payable 384 1,049 Current maturities of long-term debt 2,365 1,046 Current operating lease liabilities 7,224 7,727 Total current liabilities 134,663 139,843 Long-term debt 66,435 29,628 Noncurrent operating lease liabilities 40,361 49,286 Deferred pension — 3,917 Deferred income taxes 29,133 22,277 Liability for uncertain tax positions 250 1,361 Other liabilities 14,747 13,470 Total liabilities 285,589 259,782 Commitments and contingencies Stockholders’ equity: Preferred stock, no par value, shares authorized 1,000,000 issued and outstanding - none — — Comm on stock, $ 0.01 par value, shares authorized 125,000,000 issued 37,176,958 and 37,211,056 respectively; outstanding 33,011,119 and 33,129,250 , respectively 372 372 Additional paid-in-capital 251,576 251,947 Retained earnings 409,318 337,456 Accumulated other comprehensive loss ( 38,141 ) ( 49,422 ) Less: Treasury s tock at cost, 4,165,839 and 4,081,806 shares, respectively ( 77,571 ) ( 75,518 ) Total stockholders’ equity 545,554 464,835 Total liabilities and stockholders' equity $ 831,143 $ 724,617 See notes to consolidated financial statements. 35 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONSOLIDATED STATEMENTS OF INCOME For the Years Ended October 31, 2023, 2022 and 2021 Year Ended October 31, 2023 2022 2021 (In thousands, except per share amounts) Net sales $ 1,130,583 $ 1,221,502 $ 1,072,149 Cost and expenses: Cost of sales (excluding depreciation and amortization) 853,059 953,004 831,541 Selling, general and administrative 123,957 117,108 115,967 Restructuring charges — — 39 Depreciation and amortization 42,866 40,109 42,732 Operating income 110,701 111,281 81,870 Non-operating (expense) income: Interest expense ( 8,136 ) ( 2,559 ) ( 2,530 ) Other, net ( 5,519 ) 1,041 754 Income before income taxes 97,046 109,763 80,094 Income tax expense ( 14,545 ) ( 21,427 ) ( 23,114 ) Net income $ 82,501 $ 88,336 $ 56,980 Basic earnings per common share $ 2.51 $ 2.67 $ 1.72 Diluted earnings per common share $ 2.50 $ 2.66 $ 1.70 Weighted-average common shares outstanding: Basic 32,819 33,048 33,193 Diluted 33,026 33,205 33,495 Cash dividends per share $ 0.32 $ 0.32 $ 0.32 See notes to consolidated financial statements. 36 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended October 31, 2023, 2022 and 2021 Year Ended October 31, 2023 2022 2021 (In thousands) Net income $ 82,501 $ 88,336 $ 56,980 Other comprehensive income: Foreign currency translation adjustments gain (loss) 8,542 ( 28,334 ) 7,152 Change in pension from net unamortized gain (pretax) 3,558 897 5,477 Change in pension from net unamortized gain tax expense ( 819 ) ( 215 ) ( 1,375 ) Total other comprehensive income (loss), net of tax 11,281 ( 27,652 ) 11,254 Comprehensive income $ 93,782 $ 60,684 $ 68,234 See notes to consolidated financial statements. 37 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY For the Years Ended October 31, 2023, 2022 and 2021 Common Stock Accumulated Treasury Stock Total Shares Amount Additional Paid-in Capital Retained Earnings Other Comprehensive Loss Shares Amount Stockholders’ Equity (In thousands, except share amounts) Balance at October 31, 2020 37,296,166 $ 373 $ 253,458 $ 213,517 $ ( 33,024 ) ( 4,491,429 ) $ ( 78,565 ) $ 355,759 Net income — — — 56,980 — — — 56,980 Foreign currency translation adjustments — — — — 7,152 — — 7,152 Change in pension from net unamortized gain (net of tax benefit of $ 1,375 ) — — — — 4,102 — — 4,102 Common dividends ($ 0.32 per share) — — — ( 10,779 ) — — — ( 10,779 ) Treasury shares purchased, at cost — — — — — ( 478,311 ) ( 11,182 ) ( 11,182 ) Expense related to stock-based compensation — — 1,970 — — — 1,970 Stock options exercised — — 1,073 — — 865,393 15,199 16,272 Restricted stock awards granted — — ( 1,282 ) — — 73,300 1,282 — Performance restricted stock unit awards vested — — ( 565 ) — — 32,322 565 — Other ( 22,656 ) — ( 492 ) — — — — ( 492 ) Balance at October 31, 2021 37,273,510 $ 373 $ 254,162 $ 259,718 $ ( 21,770 ) ( 3,998,725 ) $ ( 72,701 ) $ 419,782 Net income — — — 88,336 — — — 88,336 Foreign currency translation adjustments — — — — ( 28,334 ) — — ( 28,334 ) Change in pension from net unamortized gain (net of tax of expense of $ 215 ) — — — — 682 — — 682 Common dividends ($ 0.32 per share) — — — ( 10,598 ) — — — ( 10,598 ) Treasury shares purchased, at cost — — — — — ( 291,000 ) ( 6,600 ) ( 6,600 ) Expense related to stock-based compensation — — 2,291 — — — 2,291 Stock options exercised — — 38 — — 35,600 651 689 Restricted stock awards granted — — ( 1,534 ) — — 84,400 1,534 — Performance restricted stock unit awards vested — — ( 1,598 ) — — 87,919 1,598 — Other ( 62,454 ) ( 1 ) ( 1,412 ) — — — — ( 1,413 ) Balance at October 31, 2022 37,211,056 $ 372 $ 251,947 $ 337,456 $ ( 49,422 ) ( 4,081,806 ) $ ( 75,518 ) $ 464,835 Net income — — — 82,501 — — — 82,501 Foreign currency translation adjustments — — — — 8,542 — — 8,542 Change in pension from net unamortized gain (net of tax expense of $ 819 ) — — — — 2,739 — — 2,739 Common dividends ($ 0.32 per share) — — — ( 10,639 ) — — — ( 10,639 ) Treasury shares purchased, at cost — — — — — ( 275,000 ) ( 5,593 ) ( 5,593 ) Expense related to stock-based compensation — — 2,521 — — — 2,521 Stock options exercised — — 32 — — 63,587 1,183 1,215 Restricted stock awards granted — — ( 1,752 ) — — 94,700 1,752 — Performance restricted stock unit awards vested — — ( 605 ) — — 32,680 605 — Other ( 34,098 ) — ( 567 ) — — — — ( 567 ) Balance at October 31, 2023 37,176,958 $ 372 $ 251,576 $ 409,318 $ ( 38,141 ) ( 4,165,839 ) $ ( 77,571 ) $ 545,554 See notes to consolidated financial statements. 38 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW For the Years Ended October 31, 2023, 2022 and 2021 Year Ended October 31, 2023 2022 2021 (In thousands) Operating activities: Net income $ 82,501 $ 88,336 $ 56,980 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 42,866 40,109 42,732 Loss on disposition of capital assets 278 109 3,039 Stock-based compensation 2,521 2,291 1,970 Deferred income tax 5,147 2,097 1,785 Other, net 1,529 1,905 2,126 Changes in assets and liabilities: Decrease (increase) in accounts receivable 6,969 6,945 ( 19,017 ) Decrease (increase) in inventory 30,024 ( 32,035 ) ( 31,382 ) Increase in other current assets ( 1,880 ) ( 970 ) ( 1,817 ) (Decrease) increase in accounts payable ( 11,611 ) ( 3,047 ) 7,097 (Decrease) increase in accrued liabilities ( 4,249 ) ( 3,159 ) 16,212 Decrease in income taxes payable ( 9,009 ) ( 5,192 ) ( 378 ) (Decrease) increase in deferred pension ( 359 ) 77 ( 708 ) Increase in other long-term liabilities 683 305 477 Other, net 1,642 194 ( 528 ) Cash provided by operating activities 147,052 97,965 78,588 Investing activities: Acquisitions, net of cash acquired ( 91,302 ) — — Capital expenditures ( 37,390 ) ( 33,121 ) ( 24,008 ) Proceeds from disposition of capital assets 253 159 5,300 Cash used for investing activities ( 128,439 ) ( 32,962 ) ( 18,708 ) Financing activities: Borrowings under credit facility 102,000 70,500 — Repayments of credit facility borrowings ( 100,000 ) ( 95,500 ) ( 65,000 ) Debt issuance costs — ( 1,210 ) — Repayments of other long-term debt ( 2,567 ) ( 1,747 ) ( 680 ) Common stock dividends paid ( 10,639 ) ( 10,598 ) ( 10,779 ) Issuance of common stock 1,215 689 16,272 Payroll tax paid to settle shares forfeited upon vesting of stock ( 567 ) ( 1,413 ) ( 492 ) Purchase of treasury stock ( 5,593 ) ( 6,600 ) ( 11,182 ) Cash used for financing activities ( 16,151 ) ( 45,879 ) ( 71,861 ) Effect of exchange rate changes on cash and cash equivalents 919 ( 4,092 ) 421 Increase (decrease) in cash and cash equivalents 3,381 15,032 ( 11,560 ) Cash and cash equivalents at beginning of period 55,093 40,061 51,621 Cash and cash equivalents at end of period $ 58,474 $ 55,093 $ 40,061 See notes to consolidated financial statements. 39 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations, Basis of Presentation and Significant Accounting Policies Nature of Operations Quanex Building Products Corporation is a component supplier to original equipment manufacturers (OEMs) in the building products industry. These components can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of fenestration components include: (1) energy-efficient flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, and (4) precision-formed metal and wood products. We also manufacture cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry. In addition, we provide certain other non-fenestration components and products, which include custom mixing, solar panel sealants, trim moldings, vinyl decking, fencing, water retention barriers, and conservatory roof components. We have organized our business into three reportable business segments: (1) North American Fenestration (NA Fenestration), (2) European Fenestration (EU Fenestration) and (3) North American Cabinet Components (NA Cabinet Components). For additional discussion of our reportable business segments, see Note 17, “Segment Information.” We use low-cost production processes and engineering expertise to provide our customers with specialized products for their specific window, door, and cabinet applications. We believe these capabilities provide us with unique competitive advantages. We serve a primary customer base in North America and the United Kingdom (U.K.), and also serve customers in international markets through our operating plants in the U.K. and Germany, as well as through sales and marketing efforts in other countries. Unless the context indicates otherwise, references to “Quanex”, the “Company”, “we”, “us” and “our” refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries. Basis of Presentation and Principles of Consolidation Our consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). We consolidate our wholly-owned subsidiaries and eliminate intercompany sales and transactions. We have no cost or equity investments in companies that are not wholly-owned. In our opinion, these audited financial statements contain all adjustments necessary to fairly present our financial position, results of operations and cash flows for the periods presented. Use of Estimates In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. We review our estimates on an ongoing basis, including those related to impairment of long lived assets and goodwill, pension and retirement liabilities, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates. A summary of our significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: Revenue from Contracts with Customers Revenue recognition We recognize revenue that reflects the consideration we expect to receive for product sales upon transfer to customers. Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we are entitled to consideration in exchange for such transfer. We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those products, and when collectability of the consideration due is probable. Performance obligations A performance obligation is a promise to provide the customer with a good or service. Our performance obligations include product sales, with each product included in a customer contract being recognized as a separate performance obligation. For contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable. 40 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to acc ount for product returns related to general returns and product nonconformance. We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Pricing and sales i ncentives Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts. Shipping and handling cost s We account for shipping and handling services as fulfillment services; accordingly, freight revenue is combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in cost of sales in the accompanying consolidated statements of income. Contract assets and liabilities Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration. Disaggregation of revenue We produce a wide variety of products that are used in the fenestration industry, including insulating glass spacer systems; extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we produce certain non-fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other products. The following table summarizes our product sales for the three years ended October 31, 2023, 2022, and 2021 into groupings by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. For further details regarding our results by segment, refer to Note 17, “Segment Information.” 41 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Year Ended October 31, 2023 2022 2021 (in thousands) NA Fenestration: United States - fenestration $ 518,396 $ 609,572 $ 507,634 International - fenestration 30,100 35,906 34,610 United States - non-fenestration 103,090 29,039 24,534 International - non-fenestration 15,896 12,941 11,554 $ 667,482 $ 687,458 $ 578,332 EU Fenestration: International - fenestration $ 191,871 $ 194,854 $ 199,511 International - non-fenestration 58,903 67,204 52,088 $ 250,774 $ 262,058 $ 251,599 NA Cabinet Components: United States - fenestration $ 16,899 $ 17,696 $ 13,326 United States - non-fenestration 195,866 254,726 230,559 International - non-fenestration 2,680 3,282 2,190 $ 215,445 $ 275,704 $ 246,075 Unallocated Corporate & Other: Eliminations $ ( 3,118 ) $ ( 3,718 ) $ ( 3,857 ) $ ( 3,118 ) $ ( 3,718 ) $ ( 3,857 ) Net sales $ 1,130,583 $ 1,221,502 $ 1,072,149 Cash and Cash Equivalents Cash equivalents include all highly liquid investments with an original maturity of three months or less. Such securities with an original maturity which exceeds three months are deemed to be short-term investments. We maintain cash and cash equivalents at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts. Concentration of Credit Risk and Allowance for Credit Losses Certain of our businesses or product lines are largely dependent on a relatively few large customers. Although we believe we have an exte nsive customer base, the loss of one of these large customers or if such customers were to incur a prolonged period of decline in business, our financial condition and results of operations could be adversely affected. For the years ended October 31, 2023 and 20 22, one c ustomer provided more than 10 % of our consolidated net sales. For the year ended October 31, 2021, no customer provided more than 10% of our consolidated net sales. We have establishe d an allowance for credit losses to estimate the risk of loss associated with our accounts receivable balances. Our policy for determining the allowance is based on factors that affect collectability, including: (a) historical trends of write-offs, recoveries and credit losses; (b) the credit quality of our customers; and (c) projected economic and market conditions. We believe our allowance is adequate to absorb any known or probable lo sses as of October 31, 2023. Different assumptions or changes in economic circumstances could result in changes to the allowance. 42 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Business Combinations We apply the acquisition method of accounting for business combinations, which requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets and liabilities acquired. We account for contingent assets and liabilities at fair value on the acquisition date, and record changes to fair value associated with these asse ts and liabilities as a period cost as incurred. We use established valuation techniques and engage reputable valuation specialists to assist us with these valuations. However, there is a risk that we may not identify all pre-acquisition contingencies or that our estimates may not reflect the actual results when realized. We use a reasonable measurement period to record any adjustment related to the opening balance sheet (generally, less than one year). After the measurement period, changes to the opening balance sheet can result in the recognition of income or expense as period costs. To the extent these items stem from contingencies that existed at the balance sheet date, but are contingent upon the realization of future events, the cost is charged to expense at the time the future event becomes known. Inventory We record inventory at the lower of cost or net realizable value. Inventories are valued using the first-in first-out (FIFO) method. Fixed costs related to excess manufacturing capacity are evaluated and expensed in the period, to ensure that inventory is properly capitalized. Inventory quantities are regularly reviewed and provisions for excess or obsolete inventory are recorded primarily based on our forecast of future demand and our estimates regarding current and future market conditions. Significant unanticipated variances to our forecasts could require a change in the provision for excess or obsolete inventory, resulting in a charge to net income during the period of the change. Long-Lived Assets Property, Plant and Equipment and Intangible Assets with Defined Lives We make judgments and estimates related to the carrying value of property, plant and equipment, intangible assets with defined lives, and long-lived assets, which include determining when to capitalize costs, the depreciation and amortization methods to use and the useful lives of these assets. We evaluate these assets for impairment when there are indicators that the carrying values of these assets might not be recoverable. Such indicators of impairment may include changes in technology, significant market fluctuations, historical losses or loss of a significant customer, or other changes in circumstance that could affect the assets’ ability to generate future cash flows. When we evaluate these assets for impairment, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset to its carrying value. If the carrying value exceeds the sum of the undiscounted cash flows, and there is no alternative use for the asset, we determine that the asset is impaired. To measure the impairment charge, we compare the carrying amount of the long-lived asset to its fair value, as determined by quoted market prices in active markets, if available, or by discounting the projected future cash flows. This calculation of fair value requires us to develop and employ long-term forecasts of future operating results related to these assets. These forecasts are based on assumptions about demand for our products and future market conditions. Future events and unanticipated changes to these assumptions could require a provision for impairment, resulting in a charge to net income during the period of the change. We monitor relevant circumstances, including industry trends, general economic conditions, and the potential impact that such circumstances might have on the valuation of our identifiable intangible assets with finite lives. Events and changes in circumstance that may cause a triggering event and necessitate such a review include, but are not limited to: a decrease in sales for certain customers, improvements or changes in technology, and/or a decision to discontinue the use of a trademark or trade name, or to allow a patent to lapse. Such events could negatively impact the fair value of our identifiable intangible assets. In such circumstances, we may evaluate the underlying assumptions and estimates made by us in order to assess the appropriate valuation of these identifiable intangible assets and compare to the carrying value of the assets. We may be required to write down these identifiable intangible assets and record a non-cash impairment charge. When we originally value our intangible assets, we use a variety of techniques to establish the carrying value of the assets, including the relief from royalty method, excess current year earnings method and income method. During the year ended October 31, 2022, our North American vinyl extrusion operations in our NA Fenestration segment experienced lower-than-expected operating results due to the continued impact of inflation and historical customer contracts which prevent us from passing on the full impact of higher costs to our customers. We determined that this condition was an indicator of a triggering event which necessitated an evaluation of certain long-term assets used in this business for potential impairment. We compared the projected undiscounted cash flows we expected to realize associated with these assets over the remaining useful lives of the primary operating assets to the net book value of the long-term assets and determined that these 43 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) assets were not impaired. Should we be unable to successfully increase prices to offset inflation, it is possible that we could incur an impairment in the future. There were no other indicators of triggering events noted for any period in the years ended October 31, 2023 and 2022. Therefore, we did not record an impairment charge related to property, plant and equipment or intangible assets with defined lives during the years ended October 31, 2023, 2022 and 2021. Software development costs, including costs incurred to purchase third-party software, are capitalized when we have determined that the technology is capable of meeting our performance requirements, and we have authorized funding for the project. We cease capitalization of software costs when the software is substantially complete and is ready for its intended use. The software is then amortized over its estimated useful life. When events or circumstances indicate the carrying value of internal use software might not be recoverable, we assess the recoverability of these assets by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated from the asset’s use, consistent with the methodology to test other property, plant and equipment for impairment. Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. We capitalize betterments which extend the useful lives or significantly improve the operational efficiency of assets. We expense repair and maintenance costs as incurred. The estimated useful lives of our primary asset categories at October 31, 2023 were as follows: Useful Life (in Years) Land improvements 7 to 25 Buildings 25 to 40 Building improvements 5 to 20 Machinery and equipment 2 to 15 Leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the lease. Goodwill We use the acquisition method to account for business combinations and, to the extent that the purchase price exceeds the fair value of the net assets acquired, we record goodwill. In accordance with U.S. GAAP, we are required to evaluate our goodwill at least annually. We perform our annual goodwill assessment as of August 31, or more frequently if indicators of impairment exist. Qualitative factors that indicate impairment could include, but are not limited to, (i) macroeconomic conditions, (ii) industry and market considerations, (iii) cost factors, (iv) overall financial performance of the reporting unit, and (v) other relevant entity-specific events. The first step in our annual goodwill assessment is to perform the optional qualitative assessment allowed by ASC Topic 350 “Intangibles - Goodwill and Other” (ASC 350). In our qualitative assessment, we evaluate relevant events or circumstances to determine whether it is more likely than not (i.e., greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, ASC 350 requires us to compare the fair value of such reporting unit to its carrying value including goodwill. To determine the fair value of our reporting units, we use multiple valuation techniques including a discounted cash flow analysis, using the applicable weighted average cost of capital, in combination with a market approach that uses market multiples and a selection of guideline public companies. This test requires us to make assumptions about the future growth of our business and the market in general, as well as other variables such as the level of investment in capital expenditure, growth in working capital requirements and the terminal or residual value of our reporting units beyond the periods of estimated annual cash flows. We use a third-party valuation firm to assist us with this analysis. If the fair value of each reporting unit exceeds its carrying value, no action is required. Otherwise, an impairment loss is recorded to the extent that the carrying amount of the reporting unit including goodwill exceeds the fair value of that reporting unit. We believe the estimates and assumptions used in our impairment assessment are reasonable based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated during current or future periods. 44 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) At our annual testing date, August 31, 2023, we had six reporting units with goodwill balances: three reporting units included in our NA Fenestration operating segment, two reporting units included in our EU Fenestration operating segment, and one reporting unit included in our NA Cabinet Components operating segmen t. We performed a qualitative assessment of three of the reporting units in the NA Fenestration segment and two of the reporting units in the EU Fenestration segment. This review included an analysis of historical goodwill test results, operating results relative to forecast, projected results over the next five years, and other measures and concluded that there were no indicators of potential impairment associated with these reporting units. Therefore, no additional testing was deemed necessary for these five reporting units. Also, at our annual testing date, we performed a quantitative assessment of the reporting unit in our NA Cabinet Components segment primarily due to the impairment of goodwill during the second and fourth quarters of 2019 and the history of a narrow margin of fair value above carrying value in quantitative assessments performed in prior years. We determined that the fair value of this reporting unit exceeded the carrying value an d concluded that no impairment was necessary. Restructuring We accrue one-time severance costs pursuant to an approved plan of restructuring at the communication date, when affected employees have been notified of the potential severance and sufficient information has been provided for the employee to calculate severance benefits, in the event the employee is involuntarily terminated. In addition, we accrue costs associated with the termination of contractual commitments including leases at the time the lease is terminated pursuant to the lease provisions or in accordance with another agreement with the landlord. Otherwise, we continue to recognize lease expense through the cease-use date. After the cease-use date, we determine if our operating lease payments are at market. We assume sublet of the facility at the market rate. To the extent our lease obligations exceed the fair value rentals, we discount to arrive at the present value and record a liability. If the facility is not sublet, we expense the amount of the assumed sublet in the current period. For other costs directly related to the restructuring effort, such as equipment moving costs, we expense in the period incurred. Insurance We manage our exposure to losses for workers’ compensation, group medical, property, casualty and other insurance claims through a combination of self-insurance retentions and insurance coverage with third-party carriers. We record undiscounted liabilities associated with our portion of these exposures, which we estimate by considering various factors such as our historical claims experience, severity factors and estimated claims incurred but not reported, for which we have developed loss development factors, which are estimates as to how claims will develop over time until closed. While we consider a number of factors in preparing the estimates, sensitive assumptions using significant judgment are made in determining the amounts that are accrued in the financial statements. Actual claims could differ significantly from these estimated liabilities, depending on future claims experience. We do not record insurance recoveries until any contingencies relating to the claim have been resolved. Retirement Plans We have historically sponsored a defined benefit pension plan. To measure our liabilities associated with these plans, we made assumptions related to future events, including expected return on plan assets, and rate of compensation increases. The discount rate reflected the rate at which benefits could be effectively settled on the measurement date. We determined our discount rate using a FTSE Above Median pension discount curve whereby target yields were developed from bonds across a range of maturity points, and a curve was fitted to those targets. Spot rates (zero coupon bond yields) were developed from the curve and used to discount benefit payments associated with each future year. During the year ended October 31, 2023, the defined benefit pension plan as terminated and the pension obligation was settled. Warranty Obligations We accrue warranty obligations when we recognize revenue for certain products. Our provision for warranty obligations is based on historical costs incurred for such obligations and is adjusted, where appropriate, based on current conditions and factors. Our ability to estimate our warranty obligations is subject to significant uncertainties, including changes in product design and our overall product sales mix. 45 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Income Taxes We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and the amounts reported in our consolidated balance sheets, as well as net operating losses and tax credit carry forwards. We evaluate the carrying value of the net deferred tax assets and determine whether we will be able to generate sufficient future taxable income to realize our deferred tax assets. We perform this review for recoverability on a jurisdictional basis, whereby we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence can be objectively verified. Cumulative losses in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. Thus, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. We believe we will fully realize our deferred tax assets, net of a recorded valuation allowance. We project future taxable income using the same forecasts used to test long-lived assets and intangibles for impairment, scheduling out the future reversal of existing taxable temporary differences and reviewing our most recent financial operations. In the event the estimates and assumptions indicate we will not generate sufficient future taxable income to realize our deferred tax assets, we record a valuation allowance against a portion of our deferred tax assets. We evaluate our ongoing tax positions to determine if it is more-likely-than-not we will be successful in defending such positions if challenged by taxing authorities. To the extent that our tax positions do not meet the more-likely-than-not criteria, we record a liability for uncertain tax positions. We have recorded a liability for uncertain tax positions which stem from certain state tax items related to the interpretation of tax laws and regulations. We continue to evaluate our positions regarding various state tax interpretations at each reporting date, until the applicable statute of limitations lapse. On August 16, 2022, the Inflation Reduction Act of 2022 was enacted into U.S. law. This Act did not have a material impact to our consolidated financial statements. Derivative Instruments We have historically used financial and commodity-based derivative contracts to manage our exposure to fluctuations in foreign currency exchange rates and aluminum prices. All derivatives are measured at fair value on a recurring basis. We have not designated the derivative instruments we use as cash flow hedges under ASC Topic 815 “Derivatives and Hedging” (ASC 815). Therefore, all gains and losses, both realized and unrealized, are recognized in the consolidated statements of income (loss) in the period of the change as the underlying assets and liabilities are marked-to-market. We do not enter into derivative instruments for speculative or trading purposes. As such, these instruments are considered economic hedges, and are reflected in the operating activities section of the consolidated statements of cash flow. Foreign Currency Translation Our consolidated financial statements are presented in our reporting currency, the United States Dollar. Our German and U.K. operations are measured using the local currency as the functional currency. The assets and liabilities of our foreign operations which are denominated in other currencies are translated to United States Dollars using the prevailing exchange rates as of the balance sheet date. Revenues and expenses are translated at the average exchange rates for the applicable period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss on the consolidated balance sheets. Occasionally, we enter into transactions that are denominated in currencies other than our functional currency. At each balance sheet date, we translate these asset or liability accounts to our functional currency and record unrealized transaction gains or losses. When these assets or liabilities settle, we record realized transaction gains or losses. These realized and unrealized gains or losses are included in the accompanying consolidated statements of income under the caption, “Other, net.” 46 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Stock–Based Compensation We have issued stock-based compensation in the form of stock options to directors, employees and officers, and non-vested restricted stock awards to certain key employees and officers. We apply the provisions of ASC Topic 718 “Compensation - Stock Compensation” (ASC 718), to determine the fair value of stock option awards on the date of grant using the Black-Scholes valuation model. We recognize the fair value as compensation expense on a straight-line basis over the requisite service period of the award based on awards ultimately expected to vest. Stock options granted to directors vest immediately while the stock options granted to our employees and officers typically vest ratably over a three-year period with service and continued employment as the vesting conditions. For new option grants to retirement-eligible employees, we recognize expense and vest immediately upon grant, consistent with the retirement vesting acceleration provisions of these grants. For employees near retirement age, we amortize such grants over the period from the grant date to the retirement-eligibility date if such period is shorter than the standard vesting schedule. For grants of non-vested restricted stock, we calculate the compensation expense at the grant date as the number of shares granted multiplied by the closing stock price of our common stock on the date of grant. This expense is recognized ratably over the vesting period. Our non-vested restricted stock grants to officers and employees cliff vest over a three-year period with service and continued employment as the only vesting criteria. Our fair value determination of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behavior over the expected term, our dividend rate, risk-free rate and expectation with regards to forfeitures. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, the valuation models may not provide an accurate measure of the fair value of our employee stock options. Accordingly, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. We have granted other awards which are linked to the performance of our common stock, but will settle in cash rather than the issuance of shares of our common stock. The value of these awards fluctuates with changes in our stock price, with the resulting gains or losses reflected in the period of the change. We have recorded current and non-current liabilities related to these awards reflected in the accompanying consolidated balance sheets at October 31, 2023 and 2022. See Note 14, “Stock-based Compensation.” In addition, we have granted performance share awards which use return on net assets as the vesting condition and the awards settle in cash. We use a Monte Carlo simulation model to value the market condition and our stock price on the date of grant to value the internal performance condition and recognize expense ratably over the vesting period of three years . We esti mate that the performance measures will be met and shares will vest at target until the year of settlement (third year of cliff vesting). As of October 31, 2023 , we have deemed 122,400 performance share awards related to the December 2020 grants as probable to vest. We have also granted performance restricted stock units which settle in shares upon vesting. These awards cliff vest upon a three-year service period with the absolute performance of our common stock as the vesting criteria. The number of performance restricted stock units earned is variable depending on the metric achieved, and the settlement method is 100% in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the shares had been outstanding throughout the performance period. To value the performance restricted stock units, we use a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Similar to performance shares, the performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares. As of October 31, 2023, we have deemed 49,228 shares related to the December 2020 grants of performance restricted stock units as probable to vest. Treasury Stock We use the cost method to record treasury stock purchases whereby the entire cost of the acquired shares of our common stock is recorded as treasury stock (at cost). When we subsequently reissue these shares, proceeds in excess of cost upon the issuance of treasury shares are credited to additional paid-in-capital, while any deficiency is charged to retained earnings. 47 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Earnings per Share Data We calculate basic earnings per share based on the weighted average number of our common shares outstanding for the applicable period. We calculate diluted earnings per share based on the weighted average number of our common shares outstanding for the period plus all potentially dilutive securities using the treasury stock method, whereby we assume that all such shares are converted into common shares at the beginning of the period, if deemed to be dilutive. If we incur a loss from continuing operations, the effects of potentially dilutive common stock equivalents (stock options and unvested restricted stock awards) are excluded from the calculation of diluted earnings per share because the effect would be anti-dilutive. Performance shares and performance restricted stock units are excluded from contingent shares for purposes of calculating diluted weighted average shares until the performance measure criteria is probable and shares are likely to be issued. Supplemental Cash Flow Information The following table summarizes our supplemental cash flow information for the years ended October 31, 2023, 2022 and 2021 (in thousands): Year Ended October 31, 2023 2022 2021 Cash paid for interest $ 5,737 $ 1,982 $ 1,993 Cash paid for income taxes 22,224 26,410 22,160 Cash received from income tax refunds 2,460 2,235 381 Noncash investing and financing activities: Increase (decrease) in capitalized expenditures in accounts payable $ 1,953 $ ( 1,692 ) $ 1,124 Related Party Transactions N et sales for the year ended October 31, 2023, 2022, and 2021 included approxim ately $ 1.2 million, $ 1.9 million and zero of transactions with a customer which is a related party with one of our non-employee directors. We performed a review of these transactions, of which no single transaction or series of related transactions exceeded $ 120,000 in amount, and determined that these transactions were enacted independently of each other in fair transactions. We are not aware of any other related party transactions with any of our current non-employee directors or officers outside of their normal business functions or expected contractual duties. Subsequent Events We have evaluated events occurring after the balance sheet date for possible disclosure as a subsequent event through the date the financial statements were is sued. 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 the Credit Facility. For the twelve months ended October 31, 2023, our consolidated operating results included net sales of $ 75.6 million and operating income of $ 8.3 million associated with LMI. In connection with the Acquisition, we amended our existing finance lease with Lauren Real Estate Hol ding 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. The purchase price has been allocated to the fair value of the assets acquired and liabilities assumed, as indicated in the table below. 48 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 twelve months ended October 31, 2022 and 2021. The following pro forma results give effect to these acquisitions, assuming the transaction occurred on November 1, 2021. For the Years Ended October 31, 2022 October 31, 2021 (In thousands, except per share amounts) (Unaudited) Net sales $ 1,291,620 $ 1,129,355 Net income $ 94,235 $ 61,621 Basic earnings per share $ 2.85 $ 1.86 Diluted earnings per share $ 2.84 $ 1.84 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. 49 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. Accounts Receivable and Allowance for Credit Losses Accounts receivable consisted of the following as of October 31, 2023 and 2022 (in thousands): October 31, 2023 2022 Trade receivables $ 97,871 $ 95,851 Other 283 456 Total 98,154 96,307 Less: Allowance for credit losses 843 289 Accounts receivable, net $ 97,311 $ 96,018 The changes in our allowance for credit losses were as follows (in thousands): Year Ended October 31, 2023 2022 2021 Beginning balance as of November 1, 2022, 2021 and 2020 $ 289 $ 340 $ 161 Current period provision for expected credit losses 711 314 267 Amounts written off ( 165 ) ( 299 ) ( 88 ) Recoveries — 10 — Foreign currency translation adjustments 8 ( 76 ) — Balance as of October 31, 2023, 2022 and 2021 $ 843 $ 289 $ 340 4. Inventories Inventories consisted of the following at October 31, 2023 and 2022 (in thousands): October 31, 2023 2022 Raw materials $ 55,500 $ 68,455 Finished goods and work in process 43,394 54,013 Supplies and other 2,179 1,551 Total 101,073 124,019 Less: Inventory reserves 3,114 3,129 Inventories, net $ 97,959 $ 120,890 The changes in our inventory reserve accounts were as follows (in thousands): Year Ended October 31, 2023 2022 2021 Beginning balance as of November 1, 2022, 2021 and 2020 $ 3,129 $ 2,936 $ 6,484 Charged to cost of sales 210 494 ( 568 ) Write-offs ( 293 ) ( 133 ) ( 3,060 ) Other 68 ( 168 ) 80 Balance as of October 31, 2023, 2022 and 2021 $ 3,114 $ 3,129 $ 2,936 50 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Property, Plant and Equipment Property, plant and equipment consisted of the following at October 31, 2023 and 2022 (in thousands): October 31, 2023 2022 Land and land improvements $ 11,268 $ 10,702 Buildings and building improvements 149,093 105,696 Machinery and equipment 429,743 384,023 Construction in progress 29,323 28,507 Property, plant and equipment, gross 619,427 528,928 Less: Accumulated depreciation 368,763 348,528 Property, plant and equipment, net $ 250,664 $ 180,400 Depreciation expense for the years ended October 31, 2023, 2022, and 2021 was $ 27.6 million , $ 26.9 million and $ 28.8 million, respectively. If there are indicators of potential impairment, we evaluate our property, plant and equipment for recoverability over the remaining useful lives of the assets. We did not incur impairment losses associated with these assets for the years ended October 31, 2023, 2022, and 2021. See further discussion at Note 1, “Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Property, Plant and Equipment and Intangible Assets with Defined Lives.” 6. Leases We recognize a right-of-use (ROU) asset and lease liability for each operating and finance lease with a contractual term greater than 12 months at the time of lease inception. We include ROU assets and lease liabilities for leases that exist within other contracts. Leases with an original term of 12 months or less are not recognized on the balance sheet, and the rent expense related to those short-term leases is recognized over the lease term. We do not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class. We lease certain manufacturing plants, warehouses, office space, vehicles and equipment under finance and operating leases. Lease commencement occurs on the date we take possession or control of the property or equipment. Original terms for our real estate-related leases are generally between five and twenty years . Original terms for equipment-related leases, primarily manufacturing equipment and vehicles, are generally between one and ten years . Some of our leases also include rental escalation clauses. Renewal options are included in the determination of lease payments when management determines the options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital. If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of our leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable, our estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on information available at lease commencement. Total lease costs recorded include fixed operating lease costs and variable lease costs. Most of our real estate leases require we pay certain expenses, such as common area maintenance costs, of which the fixed portion is included in operating lease costs. We recognize operating lease costs on a straight-line basis over the lease term. In addition to the above costs, variable lease costs are recognized when probable and are not included in determining the present value of our lease liability. The ROU asset is measured at the initial amount of the lease liability (calculated as the present value of lease payments over the term of the lease) adjusted for lease payments made at or before the lease commencement date and initial direct costs. For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each finance lease liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as long-lived assets and we determined there have been no triggering events for impairment. Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required. 51 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The table below presents the lease-related assets and liabilities recorded on the balance sheet at October 31, 2023 and 2022 (in thousands): October 31, Leases Classification 2023 2022 Assets Operating lease assets Operating lease right-of-use assets $ 46,620 $ 56,000 Finance lease assets Property, plant and equipment (less accumulated depreciation of $ 6,691 and $ 3,726 ) 58,496 22,003 Total lease assets $ 105,116 $ 78,003 Liabilities Current Operating Current operating lease liabilities $ 7,224 $ 7,727 Finance Current maturities of long-term debt 2,676 1,336 Noncurrent Operating Noncurrent operating lease liabilities 40,361 49,286 Finance Long-term debt 52,309 17,816 Total lease liabilities $ 102,570 $ 76,165 The table below presents the components of lease costs for the year ended October 31, 2023 and 2022 (in thousands): Year Ended October 31, 2023 2022 Operating lease cost $ 9,145 $ 9,934 Finance lease cost Amortization of leased assets 3,285 1,332 Interest on lease liabilities 2,425 583 Variable lease costs 1,663 977 Total lease cost $ 16,518 $ 12,826 The table below presents supplemental cash flow information related to leases for the year ended October 31, 2023 and 2022 (in thousands): Year Ended October 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Finance leases - financing cash flows $ 2,397 $ 1,162 Finance leases - operating cash flows $ 2,425 $ 583 Operating leases - operating cash flows $ 9,179 $ 9,955 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 7,509 $ 13,872 Finance leases $ 26,531 $ 6,467 52 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The table below presents the weighted average remaining lease terms and weighted average discount rates for the Company's leases as of October 31, 2023 and 2022: October 31, 2023 2022 Weighted average remaining lease term (in years) Operating leases 10.7 10.8 Financing leases 18.7 13.7 Weighted average discount rate Operating leases 4.09 % 3.84 % Financing leases 4.52 % 3.78 % The table below presents the maturity of the lease liabilities as of October 31, 2023 (in thousands): Operating Leases Finance Leases 2024 $ 8,825 $ 5,061 2025 7,597 4,979 2026 6,268 4,812 2027 5,214 4,671 2028 4,312 4,534 Thereafter 28,097 57,936 Total lease payments 60,313 81,993 Less: present value discount 12,728 27,008 Total lease liabilities $ 47,585 $ 54,985 7. Goodwill and Intangible Assets Goodwill The change in the carrying amount of goodwill for the years ended October 31, 2023 and 2022 was as follows (in thousands): Year Ended October 31, 2023 2022 Beginning balance as of November 1, 2022 and 2021 $ 137,855 $ 149,205 LMI acquisition 41,393 — Foreign currency translation adjustment 3,708 ( 11,350 ) Balance as of October 31, 2023 and 2022 $ 182,956 $ 137,855 At our annual testing date, August 31, 2023, we ha d six reporting units with goodwill balances. Three of these units were included in our NA Fenestration segment and had goodwill balances of $ 41.4 million, $ 35.9 million and $ 2.8 million, two units were included in our EU Fenestration segment with goodwill balances of $ 47.8 million and $ 15.9 million, and our NA Cabinet Components segment had one unit with a goodwill balance of $ 39.2 million. The details of the results of our goodwill assessments during the year ended October 31, 2023 are more fully described at Note 1, “Nature of Operations, Basis of Presentation and Significant Accounting Policies - Long-Lived Assets - Goodwill.” For a summary of the change in the carrying amount of goodwill by segment, see Note 17, “Segment Information.” 53 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Identifiable Intangible Assets Amortizable intangible assets consisted of the following as of October 31, 2023 and 2022 (in thousands): October 31, 2023 October 31, 2023 October 31, 2022 Remaining Weighted Average Useful Life Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Customer relationships 11 years $ 157,629 $ 99,230 $ 139,607 $ 88,646 Trademarks and trade names 6 years 55,519 42,879 54,389 40,610 Patents and other technology 13 years 25,127 22,051 22,390 22,095 Total $ 238,275 $ 164,160 $ 216,386 $ 151,351 We do not estimate a residual value associated with these intangible assets. See additional disclosure at Note 1, "Nature of Operations, Basis of Presentation and Significant Accounting Policies - Restructuring." The aggregate amortization expense associated with identifiable intangible assets for the years ended October 31, 2023, 2022, and 2021 was $ 12.1 million, $ 11.9 million and $ 12.8 million, respectively. Estimated remaining amortization expense, assuming current in tangible balances and no new acquisitions, for future fiscal years as of October 31, 2023 (in thousands): Estimated Amortization Expense 2024 $ 11,278 2025 10,051 2026 9,976 2027 9,977 2028 4,743 Thereafter 28,090 Total $ 74,115 We did no t incur impairment losses related to our identifiable intangible assets during the years ended October 31, 2023, 2022, and 2021. 8. Accrued Liabilities Accrued liabilities consisted of the following at October 31, 2023 and 2022 (in thousands): October 31, 2023 2022 Payroll, payroll taxes and employee benefits $ 18,184 $ 23,878 Accrued insurance and workers compensation 7,754 7,232 Sales allowances 5,237 7,456 Deferred compensation (current portion) 1,969 — Goods and services 4,189 — Deferred revenue 1,021 792 Warranties 15 13 Audit, legal, and other professional fees 3,572 3,136 Accrued taxes, other 1,980 2,864 Freight 1,071 666 Utilities 1,389 539 Other 3,938 5,538 Accrued liabilities $ 50,319 $ 52,114 54 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. Debt Long-term debt consisted of the following at October 31, 2023 and 2022 (in thousands): October 31, 2023 2022 Revolving Credit Facility $ 15,000 $ 13,000 Finance lease obligations and other 55,000 19,202 Unamortized deferred financing fees ( 1,200 ) ( 1,528 ) Total debt 68,800 30,674 Less: Current maturities of long-term debt 2,365 1,046 Long-term debt $ 66,435 $ 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 during the year ended October 31, 2022 . This $ 325.0 million revolving credit facility has a five -year term, maturing on July 6, 2027, and replaced our previous credit facility we entered into on October 18, 2018. Our previous credit facility is more fully described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. Interest payments for the Credit Facility are calculated, at our election and depending upon the Consolidated Net Leverage Ratio, at a Base Rate 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. As of October 31, 2023, the applicable rate was RFR + 1.25 %. The applicable margin and commitment fees are outlined in the following table: Pricing Level Consolidated 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 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 Agreement. The Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than 3.00 to 1.00, and (2) Consolidated Net Leverage Ratio requirement whereby the Consolidated Net Leverage Ratio, as defined, must be greater than 3.25 to 1.00. In addition to maintaining these financial covenants, the Credit Facility also limits our ability to enter into certain business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted payments, pay dividends (limited to $ 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 total leverage is less than or equal to 2.75 to 1.00 and available liquidity exceeds $ 25.0 million. Substantially all of our domestic assets, with the exception of real property were used as collateral for the Credit Agreement. As of October 31, 2023, we had $ 15.0 million of borrowings outstanding under the Credit Facility (reduced by unamortized debt issuance costs of $ 1.2 million), $ 5.0 million of outstanding letters of credit and $ 55.0 million outstanding 55 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) primarily under finance leases and other debt. We had $ 305.0 million available for use under the Credit Facility at October 31, 2023. The borrowings outstanding as of October 31, 2023 under the Credit Facility accrue interest at 6.67 % per annum, and our weighted average borrowing rate for borrowings outstanding during the years ended October 31, 2023 and 2022 was 6.01 % and 2.16 %, respectively. We were in compliance with our debt covenants as of October 31, 2023. We maintain certain finance lease obligations related to equipment purchases, vehicles, and warehouse space. Refer to Note 6 “Leases” for further information regarding our finance leases. The table below presents the scheduled maturity dates of our long-term debt outstanding (excluding deferred financing fees of $ 1.2 million) at October 31, 2023 (in thousands): Revolving Credit Facility Finance Leases and Other Obligations Aggregate Maturities 2024 $ — $ 5,076 $ 5,076 2025 — 4,979 4,979 2026 — 4,812 4,812 2027 15,000 4,671 19,671 2028 — 4,534 4,534 Thereafter — 57,936 57,936 Total debt payments 15,000 82,008 97,008 Less: present value discount of finance leases — ( 27,008 ) ( 27,008 ) Total $ 15,000 $ 55,000 $ 70,000 10. Retirement Plans We have a number of retirement plans covering substantially all employees. We provide both defined benefit and defined contribution plans. In general, an employee’s coverage for retirement benefits depends on the location of employment. Defined Benefit Plan Our non-contributory, single employer defined benefit pension plan covered certain of our employees in the U.S. On January 1, 2020 we enacted changes to our pension plan whereby the benefits for all participants were frozen and thereafter those participants will receive increased benefits in the Company sponsored defined benefit plan in lieu of participation in a defined benefit plan. As a result of freezing the plan on January 1, 2020, we remeasured the pension assets and obligations for the pension plan, which resulted in a decrease to our projected benefit obligation and a corresponding net actuarial gain that was recorded in accumulated other comprehensive income. During the year ended October 31. 2023, we terminated our defined contribution plan and settled the obligation during the three months ended October 31, 2023. Until such time that the termination was complete, the participants received an interest related credit on their respective balance equivalent to the prevailing 30-year Treasury rate. The majority of our pension plan participants had their benefit determined pursuant to the cash balance formula. For the remaining participants, the benefit formula was a traditional formula for retirement benefits, whereby the plan payed benefits to employees using a formula which considered years of service and pensionable compensation. 56 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Funded Status and Net periodic Benefit Cost The changes in benefit obligation and plan assets, and our funded status (reported in deferred pension and postretirement benefits on the consolidated balance sheets) were as follows (in thousands): October 31, Change in Benefit Obligation: 2023 2022 Beginning balance as of November 1, 2022 and 2021 $ 32,529 $ 42,379 Service cost 383 860 Interest cost 1,558 806 Actuarial loss (gain) 1,315 ( 6,944 ) Benefits paid ( 389 ) ( 349 ) Administrative expenses ( 356 ) ( 604 ) Settlements ( 35,040 ) ( 3,619 ) Projected benefit obligation at October 31, 2023 and 2022 $ — $ 32,529 Change in Plan Assets: Beginning balance as of November 1, 2022 and 2021 $ 28,612 $ 37,642 Actual return on plan assets 862 ( 4,458 ) Employer contributions 6,311 — Benefits paid ( 389 ) ( 349 ) Administrative expenses ( 356 ) ( 604 ) Settlements ( 35,040 ) ( 3,619 ) Fair value of plan assets at October 31, 2023 and 2022 $ — $ 28,612 Noncurrent liability - Funded Status $ — $ ( 3,917 ) As of October 31, 2023 and 2022, included in our accumulated comprehensive loss was a net actuarial loss of zero and $ 3.6 million, respectively. There were no net prior service costs or transition obligations for the years ended October 31, 2023 and 2022. As of October 31, 2023 and 2022, the accumulated benefit obligation was zero and $ 32.5 million, respectively. The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date, and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. The net periodic benefit cost for the years ended October 31, 2023, 2022 and 2021, was as follows (in thousands): Year Ended October 31, 2023 2022 2021 Service cost $ 383 $ 860 $ 850 Interest cost 1,558 806 756 Expected return on plan assets ( 1,465 ) ( 1,991 ) ( 1,960 ) Amortization of net loss 42 6 143 Settlements 5,431 396 222 Net periodic benefit cost $ 5,949 $ 77 $ 11 57 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The changes in plan assets and projected benefit obligations which were recognized in our other comprehensive loss for the years ended October 31, 2023, 2022 and 2021 were as follows (in thousands): Year Ended October 31, 2023 2022 2021 Net loss (gain) arising during the period $ 1,915 $ ( 495 ) $ ( 5,112 ) Less: Amortization of net loss 42 6 143 Less: Settlements 5,431 396 222 Total recognized in other comprehensive income $ ( 3,558 ) $ ( 897 ) $ ( 5,477 ) Measurement Date and Assumptions We generally determine our actuarial assumptions on an annual basis, with a measurement date of October 31. The following table presents our assumptions for pension benefit calculations for the years ended October 31, 2023, 2022 and 2021: For the Year Ended October 31, 2023 2022 2021 2023 2022 2021 Weighted Average Assumptions: Benefit Obligation Net Periodic Benefit Cost Discount rate — % 5.36 % 2.77 % 5.36 % 2.77 % 2.60 % Rate of compensation increase — % — % — % — % — % — % Expected return on plan assets n/a n/a n/a 5.50 % 5.50 % 6.00 % The discount rate was used to calculate the present value of the projected benefit obligation for pension benefits. The rate reflected the amount at which benefits could be effectively settled on the measurement date. We used the FTSE Above Median Model whereby target yields are developed from bonds across a range of maturity points, and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the curve and used to discount benefit payments associated with each future year. This model assumes spot rates will remain level beyond the 30-year point. We determine the present value of plan benefits by applying the discount rates to projected benefit cash flows. The expected return on plan assets was used to determine net periodic pension expense. The rate of return assumptions were based on projected long-term market returns for the various asset classes in which the plans were invested, weighted by the target asset allocations. We review the return assumption at least annually. The rate of compensation increase represents the long-term assumption for expected increases in salaries. 58 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Plan Assets The following tables provides our asset allocation by asset category and fair value measurements as of October 31, 2022. Our asset balance as of October 31, 2023 was zero as all funds were used during the settlement process. Actual Allocation October 31, 2022 Equity securities — % Fixed income 100.0 % Fair Value Measurements at October 31, 2022 (In thousands) Money market fund $ 22,508 High-quality core bond 4,980 High-quality government bond 547 High-yield bond 577 Fixed income $ 6,104 Total securities (1) $ 28,612 (1) Quoted prices in active markets for identical assets (Level 1). Benefit Payments and Funding For the fiscal years ended October 31, 2023, 2022 and 2021, we made total pension contributio ns of $ 6.3 million, zero and $ 0.5 million, respectively. As of October 31, 2023, no more contributions are expected to be made to the plan. Defined Contribution Plan We also sponsor two defined contribution plans into which we and our employees make contributions. As of January 1, 2020, we match 100 % up to the first 5 % of employee annual salary deferrals under our plan for all employees excluding NA Cabinet Components participants, who receive a 100 % match up to 4 % of employee annual salary deferrals. Between January 1, 2018 and January 1, 2020, we matched 50 % up to the first 5 % of employee salary deferrals. We do not offer our common stock as a direct investment option under these plans. For the years ended October 31, 2023, 2022 and 2021, we contributed approximately $ 6.5 million , $ 6.8 million and $ 6.3 million for these plans, respectively. Other Plans We have supplemental benefit plans covering certain executive officers and a non-qualified deferred compensation plan covering members of the Board of Directors and certain key employees. A s of October 31, 2023 and 2022, o ur liability under the supplemental benefit plan was approximately $ 2.0 million and $ 1.9 million , respectively. During the year ended October 31, 2023 , the supplemental benefit plan was terminated. Benefits associated with this plan will be distributed in June 2024 in accordance with Internal Revenue Service regulations. As of October 31, 2023 and 2022 our liability under the deferred compensation plan was approximately $ 3.9 million a nd $ 3.3 million, respectively. As of October 31, 2023 and 2022, the current portion of these liabilities was recorded under the caption “Accrued Liabilities,” and the long-term portion was included under the caption “Other Liabilities” in the accompanying balance sheets. 59 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. Income Taxes The provision or benefit for income taxes includes U.S. federal income taxes (determined on a consolidated return basis), foreign income taxes and state income taxes. We provide for income taxes on taxable income at the applicable statutory rates. The following table summarizes the components of income tax expense for the years ended October 31, 2023, 2022 and 2021 (in thousands): Year Ended October 31, 2023 2022 2021 Current Federal $ 2,631 $ 11,553 $ 10,993 State and local 1,860 740 3,447 Non-United States 4,907 7,037 6,889 Total current 9,398 19,330 21,329 Deferred Federal 4,637 2,127 ( 842 ) State and local 1,015 ( 229 ) ( 277 ) Non-United States ( 505 ) 199 2,904 Total deferred 5,147 2,097 1,785 Total income tax expense $ 14,545 $ 21,427 $ 23,114 For financial reporting purposes, income before income taxes for the years ended October 31, 2023, 2022 and 2021 includes the following components (in thousands): Year Ended October 31, 2023 2022 2021 Domestic $ 42,586 $ 64,850 $ 36,879 Foreign 54,460 44,913 43,215 Total income before income taxes $ 97,046 $ 109,763 $ 80,094 The following table reconciles our effective income tax rate to the federal statutory rate for the years ended October 31, 2023, 2022 and 2021: Year Ended October 31, 2023 2022 2021 United States tax at statutory rate 21.0 % 21.0 % 21.0 % State and local income taxes net of federal tax benefit 1.8 % 1.6 % 2.3 % Foreign tax rate differential 1.1 % 0.3 % 0.5 % U.K. patent box benefit ( 5.9 ) % ( 1.2 ) % ( 1.4 ) % U.S. income tax credits ( 4.9 ) % ( 3.2 ) % ( 4.2 ) % Foreign inclusions (including global intangible low-taxed income) 4.6 % 3.2 % 4.2 % Permanent differences 1.3 % 0.6 % 1.7 % Tax return to accrual adjustments ( 2.3 ) % ( 3.0 ) % ( 1.5 ) % Change in deferred tax rate — % — % 3.9 % Change in uncertain tax position ( 1.1 ) % — % 1.1 % Other ( 0.6 ) % 0.2 % 1.3 % Effective tax rate 15.0 % 19.5 % 28.9 % 60 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Our earnings from our foreign subsidiaries qualifies for Dividend Received Deduction and are not subject to withholding taxes upon remittances to the U.S. As a result, we do not anticipate any significant future tax impacts from any potential repatriation of previously unremitted foreign earnings. The amount of undistributed foreign earnings from international operations as of the years ended October 31, 2023 and 2022, respectively, was $ 21.3 million and $ 19.8 million. Significant components of our net deferred tax liabilities and assets were as follows (in thousands): October 31, 2023 2022 Deferred tax assets: Employee benefit obligations $ 6,148 $ 8,046 Accrued liabilities and reserves 1,130 1,430 Pension and other benefit obligations 27 1,426 Inventory 1,159 1,409 Research and development 2,075 — Loss and tax credit carry forwards 1,203 1,589 Other 98 — Total gross deferred tax assets 11,840 13,900 Less: Valuation allowance 585 534 Total deferred tax assets, net of valuation allowance 11,255 13,366 Deferred tax liabilities: Property, plant and equipment 21,480 15,467 Goodwill and intangibles 18,908 20,162 Other — 14 Total deferred tax liabilities 40,388 35,643 Net deferred tax liabilities $ 29,133 $ 22,277 As of October 31, 2023, gross state operating loss carry forwards totaled $ 24.9 million. The majority of these losses begin to expire in 2033. We evaluate tax benefits of operating losses and tax credit carry forwards on an ongoing basis, including a review of historical and projected future operating results, the eligible carry forward period and other circumstances. We have recorded a valuation allowance for certain state net operating losses as of October 31, 2023 and 2022, totaling $ 0.6 million and $ 0.5 million, respectively. During the year ended October 31, 2023, we recorded a net $0.1 million increase in our state valuation allowance. The valuation allowance can be affected in future periods by changes to tax laws, cha nges to statutory tax rates, and changes in estimates of future taxable income. To fully realize these net deferred tax assets, we will need to generate sufficient future taxable income in the jurisdictions where these tax attributes exist during the periods in which the attributes can be utilized. As of each reporting date, management considers the weight of all evidence, both positive and negative, to determine if a valuation allowance is necessary for each jurisdiction’s net deferred tax assets. We place greater weight on historical evidence over future predictions of our ability to utilize net deferred tax assets. We consider future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income in prior carryback year(s) if carryback is permitted under applicable law. 61 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table shows the change in the unrecognized income tax benefit associated with uncertain tax positions for the years ended October 31, 2023, 2022 and 2021 (in thousands): Unrecognized Income Tax Benefits Balance at October 31, 2020 $ 522 Additions for tax positions related to the prior year 953 Reassessment of position ( 87 ) Balance at October 31, 2021 $ 1,388 Reassessment of position ( 27 ) Balance at October 31, 2022 $ 1,361 Lapse of statute of limitations ( 1,111 ) Balance at October 31, 2023 $ 250 We account for uncertain tax benefits in accordance with guidance in ASC 740, which prescribes the minimum recognition threshold a tax position taken or expected to be tak en in a tax return is required to meet before being recognized in the financial statements. During the year ended October 31, 2023, we reversed $1.1 million of unrecognized tax benefits due to expiration of the statute of limitations. The remaining liability for unrecognized tax benefits of $ 0.2 million related to certain 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. We, along with our subsidiaries, file income tax returns in the U.S. and various state jurisdictions as well as in the U.K., Germany and Canada. In certain jurisdictions, the statute of limitations has not yet expired. We generally remain subject to examination of our U.S. income tax returns for 2020 and subsequent years. We generally remain subject to examination of our various state and foreign income tax returns for a period of four to five years from the date the return was filed. The state impact of a reported federal adjustment or change remains subject to examination by various states within the longer of one year or the expiration date of the otherwise applicable statute of limitations. 12. Commitments and Contingencies Purchase Obligations We are a party to non-cancelable purchase obligations primarily for door hardware, primary and secondary steel and primary and se condary aluminum used in our manufacturing processes, as well as expenditures related to capital projects in progress. We paid $ 10.1 million and $ 11.0 million pursuant to these arrangements for the years ended October 31, 2023 and 2022, respectively. These obligations total $ 7.9 million and $ 7.6 million at October 31, 2023 and 2022, respectively, and extend through fiscal 2024. Future amounts paid pursuant to th ese arrangements will depend, to some extent, on our usage. Asset Retirement Obligation We maintain an asset retirement obligation associated with a leased facility in Kent, Washington. We have estimated our future cash flows associated with this asset retirement obligation and recorded an asset and corresponding liability. We are depreciating the asset and accre ting the liability over a seven-year term, to culminate in an asset retirement obligation of $ 2.3 million as of February 2025, which is located in Other Liabilities on the Consolidated Balance Sheets. Remediation and Environmental Compliance Costs Under applicable state and federal laws, we may be responsible for, among other things, all or part of the costs required to remove or remediate wastes or hazardous substances at locations we, or our predecessors, have owned or operated. From time to time, we also have been alleged to be liable for all or part of the costs incurred to clean up third-party sites where there might have been an alleged improper disposal of hazardous substances. At present, we are not involved in any such matters. From time to time, we incur routine expenses and capital expenditures associated with compliance with existing environmental regulations, including control of air emissions and water discharges, and plant decommissioning costs. We have not incurred any material expenses or capital expenditures related to environmental matters during the past three fiscal years, 62 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) and do not expect to incur a material amount of such costs in fi scal 2024. Wh ile we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows. Litigation From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal injury, environmental matters, product performance or warranties, product liability, insurance coverage and personnel and employment disputes. We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks to the extent deemed prudent by our management and to the extent such insurance is available. However, there is no assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations. We have been and are currently party to multiple claims, some of which are in litigation, relating to alleged defects in a commercial sealant product that was manufactured and sold during the 2000’s. While we believe that our product was not defective and that we would prevail in these commercial sealant product claims if taken to trial, the timing, ultimate resolution and potential impact of these claims is not currently determinable. Nevertheless, after taking into account all currently available information, including our defenses, the advice of our counsel, and the extent and currently-expected availability of our existing insurance coverage, we believe that the eventual outcome of these commercial sealant claims will not have a material adverse effect on our overall financial condition, results of operations or cash flows, and we have not recorded any accrual with regard to these claims. 13. Fair Value Measurements of Assets and Liabilities Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to Level 1 and the lowest priority to Level 3. The three levels of the fair value hierarchy are described below: • Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. • Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs that are derived principally from or corroborated by observable market data b y correlation or other means. • Level 3 - Inputs that are both significant to the fair value measurement and unobservable. Carrying amounts reported on the balance sheets for cash, cash equivalen ts, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Our outstanding debt is variable rate debt that re-prices frequently, thereby limiting our exposure to significant changes in interest rate risk. As a result, the fair value of our debt instruments approximates carrying value at October 31, 2023 and 2022 (Level 2 measurement). Our restricted stock units and performance share awards are marked-to-market on a quarterly basis during a three-year vesting period based on market data (Level 2 measurement). For further information refer to Note 14, “Stock-Based Compensation - Performance Share Awards.” 63 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. Stock-Based Compensation We have established and maintain an Omnibus Incentive Plan (2020 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards, performance restricted stock units, and other stock-based and cash-based awards. The 2020 Plan is administered by the Compensation and Management Development Committee of the Board of Directors. The aggregate number of shares of common stock authorized for grant under the 2020 Plan is 3,139,895 as approved by the shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 2020 Plan. We grant restricted stock units to non-employee directors on the first business day of each fiscal year. As approved by the Compensation & Management Development Committee of our Board of Directors annually, we grant a mix of restricted stock awards, performance shares and/or performance restricted stock units to officers, management and key employees. We also historically granted stock options to certain officers, directors and key employees. Occasionally, we may make additional grants to key employees at other times during the year. Restricted Stock Awards Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a three-year period with service and continued employment as the only vesting criteria. The recipient of a restricted stock award is entitled to all of the rights of a shareholder, except that the awards are nontransferable during the vesting period and dividends are not paid until vesting. 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 award activity during the years ended October 31, 2023, 2022 and 2021, follows: Restricted Stock Awards Weighted Average Grant Date Fair Value per Share Non-vested at October 31, 2020 187,500 $ 16.82 Granted 73,300 20.68 Vested ( 44,400 ) 20.70 Forfeited — — Non-vested at October 31, 2021 216,400 17.28 Granted 84,400 22.54 Vested ( 88,700 ) 13.74 Forfeited — — Non-vested at October 31, 2022 212,100 20.86 Granted 94,700 23.49 Vested ( 54,400 ) 18.49 Forfeited ( 10,100 ) 22.30 Non-vested at October 31, 2023 242,300 $ 22.36 The total weighted average grant-date fair value of restricted stock awards that vested during the years ended October 31, 2023, 2022 and 2021 wa s $ 1.0 million, $ 1.2 million and $ 0.9 million, respectively. As of October 31, 2023, total unrecognized compensation cost related to unamortized restricted stock awards totaled $ 2.2 million. We expect to recognize this expense over the remaining weighted average period of 1.8 years. Stock Options Historically, stock options have been awarded to key employees, officers and non-employee directors. In December 2017, the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted stock units as further described below. As a result, stock options were not granted during the years ended October 31, 2023, 2022 and 2021 . Stock options typically vested ratably over a three-year period with service and continued employment as the 64 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of the stock options was determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital. We used the Black-Scholes pricing model to estimate the grant date fair value. The inputs to this model included expected volatility, expected term, a risk-free rate and expected dividend rate at the time of grant. For employees who were nearing retirement-eligibility, we recognized stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date. The following table summarizes our stock option activity for the years ended October 31, 2023, 2022 and 2021. Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (000s) Outstanding at October 31, 2020 1,095,329 $ 18.88 3.6 $ 561 Exercised ( 865,393 ) 18.80 Forfeited/Expired ( 11,632 ) 18.22 Outstanding at October 31, 2021 218,304 $ 19.37 3.4 $ 297 Exercised ( 35,600 ) 19.36 Forfeited/Expired ( 7,587 ) 19.04 Outstanding at October 31, 2022 175,117 $ 19.39 2.9 $ 485 Exercised ( 63,587 ) 19.12 Forfeited/Expired ( 4,000 ) 21.11 Outstanding at October 31, 2023 107,530 19.48 2.3 $ 792 Vested at October 31, 2023 107,530 $ 19.48 2.3 $ 792 Exercisable at October 31, 2023 107,530 $ 19.48 2.3 $ 792 Intrinsic value is the amount by which the market price of the common stock on the date of exercise exceeds the exercise price of the stock option. For the years ended October 31, 2023, 2022 and 2021, the total intrinsic value of our stock options that were exercised to taled $ 0.5 million, $ 0.2 million and $ 4.2 million, respectively. Restricted Stock Units Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee directors. The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date. Restricted stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued employment as the vesting conditions. Restricted stock units are not considered outstanding shares and do not have voting rights, although the holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares. Once the vesting criteria is met, each restricted stock unit is payable to the holder in cash based on the market value of one share of our common stock. Accordingly, we record a liability for the restricted stock units on our balance sheet and recognize any changes in the market value during each reporting period as compensation expense. During the years ended October 31, 2023, 2022 and 2021, 38,704 , 36,669 and 28,826 restricted stock units, respectively, were granted with corresponding weighted average grant date fair value of $ 20.67 , $ 22.52 , and $ 18.79 , respectively. During the fiscal year ended October 31, 2023, 21,774 restricted stock units, which were awarded to key employees, vested. During the years ended October 31, 2023, 2022 and 2021, we paid $ 0.4 million, $ 1.0 million and $ 0.8 million to settle restricted stock units. 65 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Performance Share Award s We have awarded annual grants of performance shares to key employees and officers. Beginning with the fiscal year ended October 31, 2019, performance share awards vest with return on net assets (RONA) as the vesting condition, pay out 100 % in cash, and are accounted for as liability. The expected cash settlement of the performance share award is recorded as a liability and is being marked to market over the three-year term of the award, and could fluctuate depending on the number of shares ultimately expected to vest. Depending on the achievement of the performance conditions, 0 % to 200 % of the awarded performance shares may ultimately vest. The following table summarizes our performance share grants and the grant date fair value for the RONA performance metric: Grant Date Shares Awarded Grant Date Fair Value Shares Forfeited December 2, 2020 65,300 $ 20.68 4,100 December 9, 2021 80,900 $ 22.54 4,600 December 7, 2022 89,300 $ 23.49 4,600 In December 2022, 101,200 shares vested pursuant to the December 2019 grant, which were settled with a cash payment of $ 2.2 million. In December 2021, 183,000 shares vested pursuant to the December 2018 grant, which were settled with a cash payment of $ 3.8 million. Performance share awards are payable in cash based upon the number of performance shares ultimately earned, and are therefore not considered outstanding shares. Performance Restricted Stock Units We awarded performance restricted stock units to key employees and officers. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of performance restricted stock units earned is variable depending on the metric achieved, and the settlement method is 100% in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the shares had been outstanding throughout the performance period. To value the performance restricted stock units, we utilized a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Depending on the achievement of the performance conditions, a minimum of 0 % and a maximum of 150 % of the awarded performance restricted stock units may vest. Specifically, the awards vest on a continuum with the following Absolute Total Shareholder Return (A-TSR) milestones: Vesting Level Vesting Criteria Percentage of Award Vested Level 1 A-TSR greater than or equal to 50% 150 % Level 2 A-TSR less than 50% and greater than or equal to 20% 100 % Level 3 A-TSR less than 20% and greater than or equal to -20% 50 % Level 4 A-TSR less than -20% — % The following table summarizes our performance restricted stock unit grants and the grant date fair value for the A-TSR performance metric: Grant Date Shares Awarded Grant Date Fair Value Shares Forfeited December 2, 2020 38,400 $ 20.68 2,900 December 9, 2021 50,900 $ 21.06 3,400 December 7, 2022 51,500 $ 23.22 3,100 66 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The performance restricted stock units are not considered outstanding shares, do not have voting rights, and are excluded from diluted weighted-average shares used to calculate earnings per share until the performance criteria is probable to result in the issuance of contingent shares. The following table summarizes amounts expensed as selling, general and administrative expense related to restricted stock awards, stock options, restricted stock units, performance share awards and performance restricted stock units for the years ended October 31, 2023, 2022 and 2021 (in thousands): Year Ended October 31, 2023 2022 2021 Restricted stock awards $ 1,712 $ 1,452 $ 1,235 Restricted stock units 1,686 1,167 1,197 Performance share awards 5,106 2,373 4,039 Performance restricted stock units 809 840 729 Total compensation expense 9,313 5,832 7,200 Income tax effect 1,396 1,138 2,078 Net compensation expense $ 7,917 $ 4,694 $ 5,122 15. Stockholders' Equity As of October 31, 2023, our authorized capital stock consists of 125,000,000 shares of common stock, at par value of $ 0.01 per s hare, and 1,000,000 shares of preferred stock, with no par value. As of October 31, 2023 and 2022, we had 37,176,958 and 37,211,056 shares of common stock issued, respectively, and 33,011,119 and 33,129,250 shares of common stock outstanding, respectively. T here were no shares of preferred stock issued or outstanding at October 31, 2023 and 2022. Stock Repurchase Program and Treasury Stock During December 2021, our Board of Directors approved a stock repurchase program that authorized the repurchase of up to $ 75.0 million worth of shares of our common stock. Repurchases under the program are made in open market transactions or privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. The program does not have an expiration date or a limit on the number of shares that may be purchas ed. During the years ended October 31, 2023 and 2022, we purchased 275,000 shares and 291,000 shares, respectively, at a cost of $ 5.6 million and $ 6.6 million respectively, under these programs. 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. For a summary of treasury stock activity for the years ended October 31, 2023, 2022 and 2021, refer to the Consolidated Statement of Stockholders' Equity located elsewhere herein. 67 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 16. Other, net Other income included under the caption “Other, net” on the accompanying consolidated statements of income (loss), consisted of the following (in thousands): Year Ended October 31, 2023 2022 2021 Foreign currency transaction (losses) gains $ ( 146 ) $ 386 $ ( 98 ) Foreign currency exchange derivative gains 1 19 — Pension service (expense) benefit ( 5,566 ) 783 839 Interest income 248 19 5 Other ( 56 ) ( 166 ) 8 Other (loss) income $ ( 5,519 ) $ 1,041 $ 754 17. Segment Information We present three reportable business segments: (1) NA Fenestration, comprising four operating segments 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 and conservatories, and the European insulating glass business manufacturing insulating glass spacers; and (3) NA Cabinet Components, comprising our cabinet door and components segment. We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance and legal costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. Other general and administrative costs associated with the corporate office are allocated to the reportable segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as those used to prepare the accompanying consolidated financial statements. Corporate general and administrative expenses allocated during the years ended October 31, 2023, 2022 and 2021 were $ 23.5 million , $ 24.5 million and $ 21.6 million, respectively. ASC Topic 280-10-50, “Segment Reporting” (ASC 280) permits aggregation of operating segments based on factors including, but not limited to: (1) similar nature of products serving the building products industry, primarily the fenestration business; (2) similar production processes, although there are some differences in the amount of automation amongst operating plants; (3) similar types or classes of customers, namely the primary OEMs; (4) similar distribution methods for product delivery, although the extent of the use of third-party distributors will vary amongst the businesses; (5) similar regulatory environment; and (6) converging long-term economic similarities. 68 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Segment information for the years ended October 31, 2023, 2022 and 2021 was as follows (in thousands): NA Fenestration EU Fenestration NA Cabinet Comp. Unallocated Corp. & Other Total Year Ended October 31, 2023 Net sales $ 667,482 $ 250,774 $ 215,445 $ ( 3,118 ) $ 1,130,583 Depreciation and amortization 20,539 9,849 12,208 270 42,866 Operating income (loss) 72,159 50,084 3,953 ( 15,495 ) 110,701 Capital expenditures 18,265 11,193 6,972 960 37,390 Total assets $ 379,286 $ 239,333 $ 158,824 $ 53,700 $ 831,143 Year Ended October 31, 2022 Net sales $ 687,458 $ 262,058 $ 275,704 $ ( 3,718 ) $ 1,221,502 Depreciation and amortization 16,253 9,674 13,830 352 40,109 Operating income (loss) 74,570 40,270 3,245 ( 6,804 ) 111,281 Capital expenditures 18,758 7,810 6,454 99 33,121 Total assets $ 279,139 $ 223,729 $ 176,154 $ 45,595 $ 724,617 Year Ended October 31, 2021 Net sales $ 578,332 $ 251,599 $ 246,075 $ ( 3,857 ) $ 1,072,149 Depreciation and amortization 18,730 10,373 13,263 366 42,732 Operating income (loss) 56,248 39,299 896 ( 14,573 ) 81,870 Capital expenditures $ 9,966 $ 8,155 $ 5,559 $ 328 $ 24,008 The following table summarizes the change in the carrying amount of goodwill by segment for the years ended October 31, 2023 and 2022 (in thousands): NA Fenestration EU Fenestration NA Cabinet Comp. Unallocated Corp. & Other Total Balance as of October 31, 2021 $ 38,712 $ 71,346 $ 39,147 $ — $ 149,205 Foreign currency translation adjustment — ( 11,350 ) — — ( 11,350 ) Balance as of October 31, 2022 $ 38,712 $ 59,996 $ 39,147 $ — $ 137,855 LMI acquisition 41,393 — — — 41,393 Foreign currency translation adjustment — 3,708 — — 3,708 Balance as of October 31, 2023 $ 80,105 $ 63,704 $ 39,147 $ — $ 182,956 For further details of Goodwill, see Note 7, “Goodwill and Intangible Assets”, located herewith. We did not allocate non-operating expense or income tax expense to the reportable segments. The following table reconciles operating income as reported above to net income for the years ended October 31, 2023, 2022 and 2021 (in thousands): Year Ended October 31, 2023 2022 2021 Operating income $ 110,701 $ 111,281 $ 81,870 Interest expense ( 8,136 ) ( 2,559 ) ( 2,530 ) Other, net ( 5,519 ) 1,041 754 Income tax expense ( 14,545 ) ( 21,427 ) ( 23,114 ) Net income $ 82,501 $ 88,336 $ 56,980 69 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Geographic Information Our manufacturing facilities and all long-lived assets are located in the U.S., U.K. and Germany. We attribute our net sales to a geographic region based on the location of the customer. The following tables provide information concerning our net sales for the years ended October 31, 2023, 2022 and 2021, and our long-lived assets as of October 31, 2023 and 2022 (in thousands): Year Ended October 31, Net sales 2023 2022 2021 United States $ 834,525 $ 911,180 $ 778,486 Europe 244,560 255,400 244,308 Canada 25,845 31,442 25,007 Asia 14,298 15,021 18,445 Other foreign countries 11,355 8,459 5,903 Total net sales $ 1,130,583 $ 1,221,502 $ 1,072,149 October 31, Long-lived assets, net 2023 2022 United States $ 384,318 $ 279,616 Germany 44,098 41,669 United Kingdom 125,939 118,005 Total long-lived assets, net $ 554,355 $ 439,290 Long-lived assets, net includes: property, plant and equipment, net; goodwill, intangible assets, net, and operating leases. 70 Table of Contents QUANEX BUILDING PRODUCTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 18. 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 and contingent shares associated with performance share awards, if dilutive. The computation of basic and diluted earnings per share for the years ended October 31, 2023, 2022 and 2021 follows (in thousands, except per share data): Year Ended October 31, 2023 Net Income Weighted Average Shares Per Share Basic earnings per common share $ 82,501 32,819 $ 2.51 Effect of dilutive securities: Stock options 33 Restricted stock awards 124 Performance restricted stock units 50 Diluted earnings per common share $ 82,501 33,026 $ 2.50 Year Ended October 31, 2022 Basic earnings per common share $ 88,336 33,048 $ 2.67 Effect of dilutive securities: Stock options 25 Restricted stock awards 100 Performance restricted stock units 32 Diluted earnings per common share $ 88,336 33,205 $ 2.66 Year Ended October 31, 2021 Basic earnings per common share $ 56,980 33,193 $ 1.72 Effect of dilutive securities: Stock options 82 Restricted stock awards 132 Performance restricted stock units 88 Diluted earnings per common share $ 56,980 33,495 $ 1.70 We do not include equity instruments in our calculation of diluted earnings per share if those instruments would be antidilutive. Such dilution is dependent on the excess of the market price of our stock over the exercise price and other components of the treasury stock method. 19. 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 twelve months ended October 31, 2023. As of October 31, 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. 71 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.