What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-12-16 compared with 2023-12-15 · 132 added, 94 removed, 243 unchanged (48% of the section changed)

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The majority of 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.

In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, vinyl fencing, water retention barriers, custom compound mixing, and conservatory roof components.

Examples of fenestration components include energy-efficient flexible insulating glass spacers, extruded vinyl profiles, window and door screens, precision-formed metal and wood products, window and door seals, and window and door hardware.

In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, water retention barriers, conservatory roof components, and commercial access solutions.

We use low-cost production processes and engineering expertise to provide our customers with specialized products for their specific applications.

We believe these capabilities provide us with unique competitive advantages.

We serve a primary customer base in North America and the U.K., and also serve customers in international markets through our operating plants in the U.K.

and Germany, as well as through sales and marketing efforts in other countries.

We serve a primary customer base in North America and the U.K., and also serve customers in international markets through our operating locations in the U.K., Germany, Mexico, Canada, and Italy, as well as through sales and marketing efforts in other countries.

We continue to invest in organic growth initiatives and we intend to continue evaluating business acquisitions that allow us to expand our existing fenestration and cabinet component footprint, enhance our product offerings, provide new complementary technology, enhance our leadership position within the markets we serve, and expand into new markets or service lines.

We have disposed of non-core businesses in the past, and continue to evaluate our business portfolio to ensure that we are investing in markets where we believe there is potential future growth.

We currently have three reportable business segments:

(1) North American Fenestration segment (“NA Fenestration”), comprising three operating segments, consisting of manufacturing vinyl profiles, IG spacers, screens, custom compound mixing and other fenestration components;

We currently have four reportable business segments:

(1) North American Fenestration segment (“NA Fenestration”), comprising three operating segments, consisting of vinyl profiles, IG spacers, screens, custom compound mixing and other fenestration components;

(2) European Fenestration segment (“EU Fenestration”), comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles and conservatories, and the European insulating glass business manufacturing IG spacers;

and (3) North American Cabinet Components segment (“NA Cabinet Components”), comprising our North American cabinet door and components business and two wood-manufacturing plants.

(3) North American Cabinet Components segment (“NA Cabinet Components”), comprising our North American cabinet door and components business and two wood-manufacturing plants, and (4) Tyman, which was acquired on August 1, 2024, comprising a leading international supplier of engineered fenestration components and access solutions to the construction industry.

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 corporate general and administrative costs have been allocated to the reportable business segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs.

We allocate corporate expenses to businesses acquired mid-year from the date of acquisition.

The accounting policies of our operating segments are the same as those used to prepare our accompanying consolidated financial statements.

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Recent Transactions and Events

On August 1, 2024, we completed the acquisition of Tyman plc (the “Tyman Acquisition”), a company incorporated in England and Wales (“Tyman”).

The aggregate consideration due pursuant to the Tyman Acquisition at closing comprised of 14,139,477 newly issued Quanex common shares (“New Quanex Shares”) and cash consideration of approximately $504.1 million (being the Pound Sterling amount of cash consideration of £392.2 million in respect of all of the Tyman Shares converted to U.S.

Dollars at an exchange rate of 1.2855).

New Quanex Shares issued in connection with the Tyman Acquisition on the New York Stock Exchange took effect on August 2, 2024 and Tyman’s shares on the London Stock Exchange were canceled.

On November 1, 2022, we entered into an Asset Purchase Agreement with LMI and the equity owners of LMI, Lauren International, Ltd.

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Under the Purchase Agreement, we acquired substantially all of the operating assets comprising LMI’s polymer mixing and rubber compound production business and also agreed to assume certain liabilities relating to the Acquisition.

LMI is allocated entirely to our North American Fenestration reportable operating segment.

L MI is allocated entirely to our North American Fenestration reportable operating segment.

As consideration for the Purchased Assets, we paid $91.3 million in cash utilizing funds borrowed under our Credit Facility.

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We believe that housing starts and window shipments are indicators of activity levels in the homebuilding and window industries, and we use this data, as published by or derived from third-party sources, to evaluate the market.

We have historically evaluated the market using data from the National Association of Homebuilders (NAHB) with regard to housing starts, and published reports by Ducker Worldwide, LLC (Ducker), a consulting and research firm, with regard to window shipments in the U.S.

In November 2023, the NAHB forecasted calendar-year housing starts (excluding manufactured units) to be 1.4 million in the 2023, 2024 and 2025 calendar-years.

The November 2022 Ducker forecast indicated that window shipments in the R&R market are expected to decrease approximately 6% and increase 1% in the calendar-years ended 2023 and 2024, respectively, and window shipments in the new construction market are expected to decrease 10% and increase 5% in the calendar-years ended 2023 and 2024, respectively, resulting in overall window shipment decline of 8% in 2023 and increase 3% in 2024.

We have historically evaluated the market using data from the National Association of Homebuilders (NAHB) with regard to housing starts and R&R activity, and published reports by Ducker Worldwide, LLC (Duc ker), a consulting and research firm, with regard to window shipments in the U.S.

In November 2024, the NAHB forecasted calendar-year housing starts (excluding manufactured units) to be 1.4 million in the 2024, 1.5 million in 2025, and 1.6 million in 2026 calendar-years.

The November 2022 Ducker forecast indicated that window shipments in the R&R market are expected to decrease approximately 5.9% and increase 4.0% in the calendar-years ended 2024 and 2025, respectively, and window shipments in the new construction market are expected to increase 0.9% and 1.6% in the calendar-years ended 2024 and 2025, respectively, resulting in overall window shipment decline of 2.7% in 2024 and increase 2.8% in 2025.

Derived from reports published by Ducker, the overall decrease in window shipments for the trailing twelve months ended September 30, 2024 was 0.7%.

During this period, new construction activities decreased 13% and R&R decreased 3%.

During this period, new construction activities decreased 2.5% and R&R increased 1.1%.

vinyl business (commonly referred to as “Liniar”) is largely focused on the sale of vinyl house systems under the trade name “Liniar” to smaller window manufacturers in the U.K.

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These manufacturers seek the quality and technology of the specific products identified by the Liniar trade name.

In addition, Liniar services non-fenestration markets including the manufacture of roofing for conservatories, vinyl decking and vinyl water retention barriers used for landscaping.

In addition, Liniar services non-fenestration markets including the manufacture of roofing for conservatories, vinyl decking and vinyl water retention barriers

used for landscaping.

We believe there are growth opportunities within these markets in the U.K.

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NA Cabinet Component's primary market is semi-custom.

The Tyman business manufactures and distributes engineered door and window components and access solutions to the construction industry.

Approximately 60% of revenue is earned in the U.S., so domestic housing starts and R&R activity also constitute the primary drivers of this business, as well as commercial building starts being the main driver of the access solutions business.

Sales in the U.S.

are predominantly to large OEMs as well as through distributors.

Approximately 15% of Tyman’s revenue is earned in the U.K., with the majority being derived from R&R activity.

We have historically evaluated the U.K.

market using data from the Construction Products Association (CPA).

customers are smaller window and door manufacturers and distributors.

The remainder of revenue is earned in Canada, Italy and Continental Europe, with sales and marketing efforts in other countries internationally.

The drivers of these businesses are largely housing starts and R&R activity in these countries.

Our business is seasonal, particularly our fenestration business, as inclement weather during the winter months tends to slow down construction, particularly as related to “outside of the house” construction.

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Although the U.S.

government has been less aggressively pursuing higher energy efficiency standards in recent years, other countries have implemented higher energy efficiency standards which should bode well for our fenestration-related business in these markets, particularly our warm-edge spacer products.

Several commodities in our business are subject to pricing fluctuations, including polyvinyl resin (PVC), titanium dioxide (TiO2), petroleum products, aluminum and wood.

For the majority of our customers and critical suppliers, we have price

adjusters in place which effectively share the base pass-through price changes for our primary commodities with our customers commensurate with the market at large.

Several commodities in our business are subject to pricing fluctuations, including polyvinyl resin (PVC), titanium dioxide (TiO2), petroleum products, stainless steel, zinc, aluminum and wood.

For the majority of our customers and critical suppliers, we have price adjusters in place which effectively share the base pass-through price changes for our primary commodities with our customers commensurate with the market at large.

Our long-term exposure to these price fluctuations is somewhat mitigated due to the contractual component of the adjuster program.

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In addition, some of these commodities are in high demand, particularly in Europe, which can affect the cost of the raw materials, a portion of which we may not be able to fully recover.

The global economy remains uncertain due to currency devaluations, political unrest, terror threats, global pandemics such as COVID-19, and even the political landscape in the U.S.

The global economy remains uncertain due to currency devaluations, political unrest, terror threats, global pandemics such as COVID-19, and the political landscape in the U.S.

These and other macro-economic factors have impacted the global financial markets, which may have contributed to significant changes in foreign currencies.

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Operating income margin 11 % 11 %

Net sales decreased $20.0 million, or 3%, for the twelve months ended October 31, 2023 compared to the same period in 2022, which was primarily driven by an $86.9 million decrease in volumes mainly due to softer market demand, a return to normal seasonality, customer destocking, and a decrease in price and raw material surcharges of $8.7 million, partially offset by a $75.6 million contribution from the addition of LMI in 2023.

Net sales decreased $17.4 million, or 3%, for the twelve months ended October 31, 2024 compared to the same period in 2023 , which was primarily driven by a $20.9 million decrease in volumes mainly due to softer market demand driven by lower consumer confidence, as well as the strategic sale of a plant in October 2024, partially offset by favorable price and surcharge impacts of $3.5 million.

Cost of Sales.

Cost of sales decreased $19.4 million, or 4%, for the twelve months ended October 31, 2024 compared to the same period in 2023.

Cost of sales, including labor, decreased primarily due to lower volumes and deflation of raw materials during the period partially offset by the addition of LMI’s cost of sales in 2023.

Cost of sales, including labor, decreased primarily due to lower volumes and deflation in the price of raw materials during the period.

Selling, General and Administrati ve.

Our selling, general and administrative expenses decreased by $0.3 million, or 1%, for the twelve months ended October 31, 2024 compared to the same period in 2023.

This decrease was due primarily to decreases in labor costs year-over-year.

Depreciation and Amortization.

Depreciation and amortization expense increased $4.3 million, or 26%, f or the twelve months ended October 31, 2023 compared to the same period in 2022, primarily due to the acquisition of LMI’s property, plant and equipment and intangible assets.

This decrease was due primarily to the gain on disposition of capital assets during the twelve months ended October 31, 2024 partially offset by an increases in labor costs year-over-year.

EU Fenestration

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Operating income margin 19 % 20 %

Net sales decreased $11.3 million, or 4%, when comparing the twelve months ended October 31, 2023 compared to the same period in 2022, which was primarily driven by a $19.2 million decrease in volumes largely due to softer market demand, a return to normal seasonality, and customer destocking, and $4.1 million of foreign currency rate change, partially offset by $12.0 million of base price increases.

Net sales decreased $20.1 million, or 8%, when comparing the twelve months ended October 31, 2024 compared to the same period in 2023, which was primarily driven by an $18.4 million decrease in volumes largely due to softer market demand driven by weaker consumer confidence and base price decreases of $4.2 million, partially offset by favorable foreign currency rate change of $2.5 million.

Cost of Sales .

The cost of sales decreased $21.8 million, or 12%, for the twelve months ended October 31, 2023 compared to the same period in 2022.

The cost of sales decreased $13.9 million, or 9%, for the twe lve months ended October 31, 2024 compared to the same period in 2023.

Cost of sales decreased primarily due to a decrease in volumes, deflation in the price of raw materials and foreign currency impacts.

Selling, General and Administrative .

Our selling, general and admi nistrative exp ense increased $0.5 million, or 2%, for the twelve months ended October 31, 2023 compared to the same period in 2022.

The increase is primarily due to an increase in labor costs partially offset by a decrease in professional fees and foreign currency impacts year-over-year.

Our selling, general and admi n istrative expense decreased $1.0 million, or 3%, for the twelve months ended October 31, 2024 compared to the same period in 2023.

The decrease is primarily due to a decrease in professional fees, labor costs partially offset by a decrease in professional fees and foreign currency impacts year-over-year.

NA Cabinet Components

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Depreciation and amortization 12,244 12,208 36 —%

Operating income $ 3,953 $ 3,245 $ 708 22%

Operating income margin 2 % 1 %

Net sales decreased $60.3 million, or 22%, for the twelve months ended October 31, 2023 compared to the same period in 2022, which was primarily driven by a $49.5 million decrease in volumes due to softer market demand driven by weaker consumer confidence and a $10.8 million decrease in raw material indexes.

Operating (loss) income $ (2,961) $ 3,953 $ (6,914) (175)%

Operating (loss) income margin (1) % 2 %

Net sales decreased $17.0 million, or 8%, for the twelve months ended October 31, 2024 compared to the same period in 2023, which was primarily driven by a $13.5 million decrease in volumes due to softer market demand driven by weaker consumer confidence and a $3.5 million decrease in price from lower raw material index impacts.

Cost of Sales .

The cost of sales decreased $58.5 million, or 25%, for the twelve months ended October 31, 2023 compared to the same period in 2022, primarily as a result of lower volumes year-over-year and lumber price deflation.

The cost of sales decreased $9.8 million, or 5%, for the twelve months ended October 31, 2024 compared to the same period in 2023, primaril y as a result of lower volumes year-over-year.

Selling, General and Administrative .

Our selling, general and administrative expense decreased $0.3 million, or 2%, for the twelve months ended October 31, 2024 compared to the same period in 2023.

The decrease is primarily due to lower labor costs partially offset by an increase in professional fees and the loss on an asset caused by wind damage to a manufacturing facility.

The decrease is primarily due to lower labor costs and professional fees year-over-year.

The Tyman reportable segment is comprised solely of the business acquired on August 1, 2024.

The results for the period ended August 1, 2024 through October 31, 2024 are summarized in the following table (including the effect of the amortization of the step-up of inventory of approximately $28.5 million and accounts receivable of approximately $0.6 million, and $10.4 million of transaction fees incurred to support the acquisition during the twelve months ended October 31, 2024):

Ended October 31, 2024

(Dollars in thousands)

Net sales $ 203,435

Cost of sales (excluding depreciation and amortization) 163,946

Selling, general and administrative 44,453

Depreciation and amortization 16,438

Depreciation and amortization expense decreased $1.6 million, or 12%, for the twelve

months ended October 31, 2023 as compared to the same period in 2022, reflecting the run-off of depreciation expense related to existing assets.

Operating loss $ (21,402)

Operating loss margin (11) %

Unallocated Corporate & Other

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Our selling, general and administrative expenses increased $23.8 million, or 176%, for the twelve months ended October 31, 2024 compared to the same period in 2023.

This increase is primarily attributable to an increase in transaction fees and compensation expense including the valuations of our stock-based compensation awards during the twelve months ended October 31, 2023 compared to the same period in 2022.

This increase is primarily attributable to an increase in transaction fees year-over-year.

Changes Related to Non-Operating Items:

Interest Expense .

Interest expense increased $5.6 million, or 218%, for the twelve months ended October 31, 2023 compared to the same period in 2022 as a result of higher borrowings outstanding during the period and an increase in interest rates.

The weighted average interest rate for borrowings outstanding for the twelve months ended October 31, 2023 was 6.01% compared with 2.16% for the twelve months ended October 31, 2022.

Other loss increased $6.6 million for the twelve months ended October 31, 2023 compared to the same period in 2022.

The increase is primarily due to pension settlement exp ense.

Interest expense increased $12.5 million, or 153%, for the twelve months ended October 31, 2024 compared to the same period in 2023 as primarily as result of higher borrowings outstanding during the period.

Borrowings under credit facilities increased to $716.3 million as of October 31, 2024 compared with $15.0 million as of October 31, 2023.

Other income increased $13.4 million for the twelve months ended October 31, 2024 compared to other loss in the same period in 2023.

The increase is primarily due to an increase in foreign currency derivative gains and a decrease in expenses incurred for pension termination in the prior year.

Income Taxes .

We recorded income tax expense of $9.0 million on pre-tax income of $42.1 million for the twelve months ended October 31, 2024, an effective rate of 21.4%, and income tax expense of $14.5 million on pre-tax income of $97.0 million for the twelve months ended October 31, 2023, an effective rate of 15.0%.

The October 31, 2023 effective rate is lower than the U.S.

federal statutory rate of 21% primarily due to the U.K.

The October 31, 2024 effective rate is higher than the U.S.

federal statutory rate of 21% primarily due to state and local income tax, non U.S.

income inclusion, and nondeductible expenses, offset by the U.K.

patent box benefit, foreign tax credit, and change in the valuation allowance.

The effective rate for the twelve months ended October 31, 2023 was impacted due to the U.K.

patent box benefit, tax return to accrual adjustments, and changes in uncertain tax positions, offset by state and local income tax, non U.S.

income tax and nondeductible expenses.

The effective rate for the twelve months ended October 31, 2022 was impacted by U.S.

patent box benefit, state and local income taxes, non U.S.

income tax and nondeductible expenses.

Liquidity and Capital Resources

Historically, our principal sources of funds have been cash on hand, cash flow from operations, and borrowings under our credit facilities.

As of October 31, 2023, we had $58.5 million of cash and cash equiv alents, $15.0 million outstanding under our credit facilities, $5.0 million of outstanding letters of credit and $55.0 million outstanding leases under finance leases and other debt.

A s of October 31, 2024, we had $97.7 million of cash and cash equivalents, $716.3 million outstanding under our credit facilities, $7.0 million of outstanding letters of credit and $60.7 million outstanding leases under finance leases and other debt.

Of the $60.7 million outstanding under finance leases and other debt, $50.3 million relates to real estate leases.

We had $245.5 million available for use under a revolving credit facility at October 31, 2024.

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 replaces our previous credit facility we entered into on October 18, 2018.

Interest payments for the Credit Facility are calculated, at our election and depending upon the Consolidated Net Leverage Ratio, at a Base Rate (0.25% to 1.00%) plus an applicable margin or at the same rate as Risk-Free Rate (“RFR”) Loans for

domestic borrowings or Eurocurrency Rate Loans (1.25% to 2.00%) plus an applicable margin.

In addition, we are subject to commitment fees (0.150% to 0.250%) for the unused portion of the Credit Facility.

As of October 31, 2023, the applicable rate was RFR + 1.25%.

On June 12, 2024, in connection with the Tyman Acquisition, the Company, Wells Fargo Bank, National Association (“Wells Fargo Bank”, acting as agent, swingline lender and issuing lender, the “Agent”), the other entities therein specified in the capacities therein specified, and the lenders parties thereto, entered into an amendment to the Second Amended and Restated Credit Agreement, dated as of July 6, 2022 (the “Existing Credit Agreement”, and the Existing Credit Agreement as so amended, the “Amended Credit Agreement”).

The Amended Credit Agreement did not become effective until August 1, 2024 upon the completion of the Tyman Acquisition.

The Amended Credit Agreement (i) increased the senior secured revolving credit facility to an aggregate principal amount of $475 million (the “Revolving Credit Facility”) and (ii) provides for a senior secured term loan A facility in an aggregate principal amount of $500 million (the “Term A Facility” and together with the Revolving Credit Facility, the “Facilities”).

The Revolving Credit Facility included alternative currency, letter of credit, and swing-line sub-facilities of $100 million, $30 million, and $15 million, respectively.

We capitalized $13.8 million of deferred financing fees related to the Amended Credit Agreement.

The maturity date of the Facilities will be five years after the acquisition effective date, maturing on August 1, 2029.

The Term A Facility amortizes on a quarterly basis at 5% per annum of the original principal amount of the Term A Facility, with the remainder due at maturity.

The Term A Facility must be prepaid with 100% of the net cash proceeds of the issuance or incurrence of debt and 100% of the net cash proceeds of all asset sales, insurance and condemnation recoveries, and other asset dispositions.

Borrowings under the Facilities bear interest, at our option, at (1) the Base Rate plus an applicable margin or (2) Adjusted Term SOFR plus an applicable margin.

The applicable margin will range from 1.0% to 1.75% for Base Rate loans and 2.0 to 2.75% for Adjusted Term SOFR loans.

In addition, we are subject to commitment fees for the unused portion of the Revolving Credit Facility.

The weighted average interest rate of borrowings outstanding for the twelve-month periods ended October 31, 2024 and 2023 was 7.20% and 6.01%, respectively.

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Cash flows used for investing activities $ (420,594) $ (128,439) $ (32,962)

Cash flows used for financing activities $ (16,151) $ (45,879) $ (71,861)

Our year-over-year cash flow analysis follows.

Cash flows provided by (used for) financing activities $ 385,156 $ (16,151) $ (45,879)

Our cash flow analysis for the fiscal years ended October 31, 2023 and 2022 for the prior year comparative periods can be found in the annual report on Form 10-K for the year ended October 31, 2023.

Operating Activities

Cash provided by operating activities increased $49.1 million for the year ended October 31, 2023 compared to the year ended October 31, 2022.

The increase in operating cash flows is primarily due to favorable changes to working capital partially offset by lower net income year-over-year due to a decrease in customer demand.

The favorable changes in working capital were largely driven by a decrease in inventory value due to raw material price deflation partially offset by a decrease in accounts payable.

Cash provided by operating activities decreased $58.2 million for the year ended October 31, 2024 compared to the year ended October 31, 2023.

A portion of this decrease is attributable to the activities of Tyman, which was acquired on August 1, 2024.

Excluding this acquisition, improvements in working capital partially offset lower sales due to a reduction in demand.

Investing Activities

Cash used for investing activities for the year ended October 31, 2023 increased $95.5 million compared to the year ended October 31, 2022, primarily as a result of the acquisition of the LMI Custom Mixing assets.

Cash used for investing activities for the year ended October 31, 2024 increased $292.2 million compared to the year ended October 31, 2023, primarily as a result of the acquisition of Tyman.

At October 31, 2024, we had firm purchase commitments of approximately $2.5 million for the purchase or construction of capital assets.

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Financing Activities

Cash used for financing activities was $16.2 million for the year ended October 31, 2023 compared to the year ended October 31, 2022, which included $10.6 million of dividends paid to our shareholders, and $5.6 million related to the purchase of treasury stock.

Cash provided by financing activities was $385.2 million for the year ended October 31, 2024 compared to cash used for financing opportunities during the year ended October 31, 2023.

During the years ended October 31, 2024 and 2023, we acquired Tyman and LMI, respectively.

Liquidity Requirements

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Other uses of cash include paying cash dividends to our shareholders and repurchasing our own stock.

We maintain cash balances in foreign countries which tot aled $17.8 million and $13.6 million as of October 31, 2023 and 2022.

During the years ended October 31, 2023 and 2022, we repatr iated $47.1 million and $28.9 million, respectively, of foreign earnings from our international divisions.

We maintain cash balances in foreign countries which totaled $44.0 million and $17.8 million as of October 31, 2024 and 2023.

During the years ended October 31, 2024 and 2023, we repatriated $49.2 million and $47.1 million, respectively, of foreign earnings from our international divisions.

We believe that we have sufficient funds and adequate financial resources available to meet our anticipated liquidity needs.

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We believe these funds should be adequate to provide for our working capital requirements, capital expenditures, and dividends, while continuing to meet our debt service requirements.

Revolving Credit Facility

We maintain our $325.0 million Credit Facility, which contains a revolving credit facility, with Wells Fargo Securities, LLC, as Agent, Swingline Lender and Issuing Lender, and BofA Securities, Inc.

serving as Syndication Agent.

The Credit Facility has a five-year term, maturing on July 6, 2027, and requires interest payments calculated, at our election and depending upon our 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.

At the time of the initial borrowing, the applicable rate was RFR + 1.25%.

In addition, we are subject to commitment fees for the unused portion of the Credit Facility.

The applicable margin and commitment fees range from 0.15% to 0.25%, depending upon the type of loan and Consolidated Net Leverage Ratio.

Revolving Credit Facility and Term Loan Facility

We maintain our $475 million Revolving Credit Facility and $500 million Term A Facility with Wells Fargo Bank acting as agent, swingline lender and issuing lender.

The Revolving Credit Facility includes alternative currency, letter of credit, and swing-line sub-facilities of $100 million, $30 million, and $15 million, respectively.

The maturity date of the Facilities will be five years after the acquisition effective date, maturing on August 1, 2029.

The Term A Facility amortizes on a quarterly basis at 5% per annum of the original principal amount of the Term A Facility, with the remainder due at maturity.

Borrowings under the Facilities bear interest, at our option, at (1) the Base Rate plus an applicable margin or (2) Adjusted Term SOFR plus an applicable margin.

The applicable margin will range from 1.0% to 1.75% for Base Rate loans and 2.0 to 2.75% for Adjusted Term SOFR loans.

In addition, we are subject to commitment fees for the unused portion of the Revolving Credit Facility

The Credit Facility provides for revolving credit commitments for a minimum principal amount of $10.0 million, up to an aggregate amount of $310.0 million or 100% of Consolidated EBITDA, subject to the lender's discretion to elect or decline the incremental increase.

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During December 2021, our Board of Directors approved a new stock repurchase program that authorized the repurchase of up to $75.0 million worth of shares of our common stock.

During the years ended October 31, 2023, 2022 and 2021, we purchased 275,000, 291,000 and 478,311 shares, respectively, at a cost of $5.6 million, $6.6 million and $11.2 million, respectively, under these programs.

During the years ended October 31, 2024 , 2023 and 2022, we purchased zero, 275,000 and 291,000 shares, respectively, at a cost of zero, $5.6 million and $6.6 million, respectively, under this program.

Critical Accounting Policies and Estimates

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We consider an estimate to be critical if it is subjective and if changes in the estimate using different assumptions would result in a material impact to our financial position or results of operations.

Business Combinations - Contingencies

We apply the acquisition method of accounting for business combinations in accordance with U.S.

GAAP, which requires us to make use of estimates and judgements to allocate the purchase price paid for acquisitions to the fair value of the net assets and liabilities acquired.

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 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.

If our purchase accounting estimates are not correct, or if we do not recognize contingent liabilities within the measurement period, we may incur losses.

Impairment or Disposal of Long-Lived Assets

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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.

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 segment.

We performed a qualitative assessment for the three of the reporting units in the NA Fenestration segment and the two reporting units in the EU Fenestration segment.

At our annual testing date, August 31, 2024, we had seven 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, one reporting unit included in our NA Cabinet Components operating segment, and one reporting unit included in our Tyman operating segment, which was acquired on August 1, 2024.

We performed a qualitative assessment for the reporting units in the NA Fenestration, EU Fenestration, and Tyman operating segments.

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 the reporting units in the NA Fenestration segment and the EU Fenestration segment that were assessed qualitatively.

We also updated the quantitative assessments for the reportable unit in th e NA Cabinet Components segment.

We determined the fair value of these reportable units exceeded the carrying value by 12.9% an d concluded that no impairment was necessary.

We operate in various jurisdictions and therefore our income tax expense relates to income taxes in the U.S., U.K., Canada, and Germany, as well as local and state income taxes.

Therefore, no additional testing was deemed necessary for the reporting units in the NA Fenestration, EU Fenestration, and Tyman operating segments that were assessed qualitatively.

We also updated the quantitative assessment for the reportable unit in the NA Cabinet Components segment.

We determined the fair value of this reportable unit exceeded the carrying value by 20.5% and concluded that no impairment was necessary.

We operate in various jurisdictions and therefore our income tax expense relates primarily to income taxes in the U.S.

and the U.K., as well as local, state and foreign income taxes.

We recognize the effect of a change in tax rates in the period of the change.

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The weight given to the positive and negative evidence is commensurate with the extent to which the evidence can be objectively verified.

We evaluate recoverability based on an estimate of future taxable income using the long-term forecasts we use to evaluate long-lived assets, goodwill and intangible assets for impairment, taking into consideration the future reversal of existing taxable temporary differences and reviewing our current financial operations.

In the event that our estimates and assumptions indicate we will not generate sufficient future taxable income to realize our deferred tax assets, we will record a valuation allowance, to the extent indicated, to reduce our deferred tax assets to their realizable value.

We evaluate recoverability based on an estimate of future taxable income using the long-term forecasts we use to evaluate long-lived assets, goodwill and intangible assets for impairment, taki ng into consideration the future reversal of existing taxable temporary differences and reviewing our current financial operations.

The company classifies interest on income tax as income tax expense and classifies penalties on income tax as other expenses.

In the event that our estimates and assumptions indicate we will not generate sufficient future taxable income to realize our deferred t ax assets, we will record a valuation allowance, to the extent indicated, to reduce our deferred tax assets to their realizable value.

Annually, we evaluate our tax positions to determine if there have been any changes in uncertain tax positions or if there has been a lapse in the statute of limitations with regard to such positions.

As of October 31, 2023 and 2022 our liability for uncertain tax positions was $0.3 million and $1.4 million, respectively.

These tax positions related to certain federal and state tax items regarding the interpretation of tax laws and regulations.

As of October 31, 2024 and 2023 our liability for uncertain tax positions was zero and $0.3 million, respectively.

The tax positions related to certain state tax items regarding the interpretation of tax laws and regulations.

We believe we will have sufficient taxable income in the future to fully utilize our deferred tax assets recorded as of October 31, 2024, net of our valuation allowance.

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Our total gross deferred tax assets as of October 31, 2024 and 2023 were $60.3 million and $18.1 million, respectively, for which we reserved a valuation allowance of $4.4 million and $0.6 million for the corresponding periods.

The deferred tax assets, net of valuation allowance, offset the deferred liability within a jurisdiction.

We record inventory at the lower of cost or net realizable value.

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Significant unanticipated changes to our forecasts or changes in the net realizable value of our inventory would require a change in the pr ovision for excess or obsolete inventory.

For the years ended October 31, 2023, 2022 and 2021, our inventory reserves are approximately 3% of gross inventory.

For the years ended October 31, 2024 and 2023, our inventory reserves are approximately 1% and 3% of gross inventory, respectively.

Retirement Plans

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During the three months ended October 31, 2023, we contributed $6.3 million to the pension plan and settled the pension benefit obligation and the defined benefit pension plan as terminated.

As a result, our accumulated benefit obligation was zero as of October 31, 2023.

GAAP, we are not required to immediately recognize the effects of a deviation between actual and assumed experience under our pension plan, or to revise our estimate as a result.

This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted and disclosed as an unrecognized gain or loss.

As of October 31, 2023

and 2022, a net actuarial loss of zero an d $3.6 million, respectively, was included in our accumulated other comprehensive income.

There were no net prior service costs or transition obligations for the years ended October 31, 2023 and 2022.

During the year ended October 31, 2024, we received a $0.9 million settlement reimbursement related to the 2023 contribution.

Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments include unconditional purchase obligations which consist of commitments to buy miscellaneous parts, inventory, and expenditures related to capital projects in progress.

Our supplemental benefit plan and deferred compensation plans were terminated in June 2023.

As a result, our liabilities for these plans will be distributed in June 2024 in accordance with IRS requirements.

As of October 31, 2023, our liability under the supplemental benefit plan and the deferred compensation plan was approximat ely $2.0 million and $3.9 million, re spectively.

Our supplemental benefit plan was terminated in June 2023.

As a result, our liability for this plan was distributed in June 2024 in a ccordance with IRS requirements.

As of October 31, 2024, our liability under the deferred compensation plan was approximately $4.7 million.

Off-Balance Sheet Arrangements

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Effects of Inflation

We have experienced the impact of inflation on our cost of raw materials, labor, freight and overhead, particularly during the year ended October 31, 2023.

We have experienced the impact of inflation on our cost of raw materials, labor, freight and overhead, particularly during the years ended October 31, 2024 and 2023.

Although we use contractual price indexing along with periodic base price increases to minimize the effect of inflation on our results, we have not been able to fully recover all of the inflationary cost increases.

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We did not adopt any new accounting pronouncements during the twelve months ended October 31, 2024.

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.

Accounting Standards Not Yet Adopted

In November 2023, the FASB issued “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures,” which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 with early adoption is permitted.

The guidance is to be applied retrospectively to all prior periods presented in the financial statements.

We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.

In December 2023, the FASB issued “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures,” which includes updates to the income tax disclosures related to the rate reconciliation and disaggregation of income taxes paid by jurisdiction.

The amendments are effective for fiscal years beginning after December 15, 2024 with early adoption permitted.

The amendments should be applied prospectively, however retrospective application is permitted.

We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis