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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-33913
________________________________________________
QUANEX BUILDING PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
________________________________________________
| | | | | | | | |
Delaware | | 26-1561397 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1800 West Loop South, Suite 1500, Houston, Texas 77027
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (713) 961-4600
________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | NX | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ (Do not check if a smaller reporting company) | | Smaller reporting company | | ☐ |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. | | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant's Common Stock as of February 28, 2022 was 33,387,400.
QUANEX BUILDING PRODUCTS CORPORATION
INDEX
| | | | | | | | |
PART I. | | |
| | |
Item 1: | Financial Statements (Unaudited) | |
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Item 2: | | |
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Item 3: | | |
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Item 4: | | |
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PART II. | | |
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Item 6: | | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | |
| January 31, 2022 | | October 31, 2021 |
| (In thousands, except share amounts) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 31,719 | | | $ | 40,061 | |
Accounts receivable, net of allowance for credit losses of $521 and $340 | 99,355 | | | 108,309 | |
Inventories, net | 117,384 | | | 92,529 | |
| | | |
Prepaid and other current assets | 11,621 | | | 8,148 | |
| | | |
Total current assets | 260,079 | | | 249,047 | |
Property, plant and equipment, net of accumulated depreciation of $340,120 and $336,493 | 175,294 | | | 178,630 | |
Operating lease right-of-use assets | 50,700 | | | 52,708 | |
Goodwill | 147,793 | | | 149,205 | |
Intangible assets, net | 78,750 | | | 82,410 | |
Other assets | 5,656 | | | 5,323 | |
| | | |
Total assets | $ | 718,272 | | | $ | 717,323 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 75,457 | | | $ | 86,765 | |
Accrued liabilities | 39,564 | | | 56,156 | |
Income taxes payable | 7,473 | | | 6,038 | |
Current maturities of long-term debt | 836 | | | 846 | |
Current operating lease liabilities | 8,298 | | | 8,196 | |
Total current liabilities | 131,628 | | | 158,001 | |
Long-term debt | 76,691 | | | 52,094 | |
Noncurrent operating lease liabilities | 43,415 | | | 45,367 | |
Deferred pension and postretirement benefits | 4,658 | | | 4,737 | |
Deferred income taxes | 22,597 | | | 21,965 | |
| | | |
Other liabilities | 14,784 | | | 15,377 | |
| | | |
Total liabilities | 293,773 | | | 297,541 | |
Commitments and contingencies | | | |
Stockholders’ equity: | | | |
Preferred stock, no par value, shares authorized 1,000,000; issued and outstanding - none | — | | | — | |
Common stock, $0.01 par value, shares authorized 125,000,000; issued 37,212,391 and 37,273,510, respectively; outstanding 33,388,735 and 33,274,785, respectively | 373 | | | 373 | |
Additional paid-in-capital | 250,204 | | | 254,162 | |
Retained earnings | 268,370 | | | 259,718 | |
Accumulated other comprehensive loss | (24,929) | | | (21,770) | |
Less: Treasury stock at cost, 3,823,656 and 3,998,725 shares, respectively | (69,519) | | | (72,701) | |
Total stockholders’ equity | 424,499 | | | 419,782 | |
Total liabilities and stockholders' equity | $ | 718,272 | | | $ | 717,323 | |
The accompanying notes are an integral part of the financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | January 31, |
| | | | | 2022 | | 2021 |
| | | | | (In thousands, except per share amounts) |
Net sales | | | | | $ | 267,040 | | | $ | 230,147 | |
Cost and expenses: | | | | | | | |
Cost of sales (excluding depreciation and amortization) | | | | | 211,834 | | | 176,397 | |
Selling, general and administrative | | | | | 30,823 | | | 30,861 | |
Restructuring charges | | | | | — | | | 39 | |
Depreciation and amortization | | | | | 10,257 | | | 11,015 | |
| | | | | | | |
Operating income | | | | | 14,126 | | | 11,835 | |
Non-operating (expense) income: | | | | | | | |
Interest expense | | | | | (523) | | | (751) | |
Other, net | | | | | 54 | | | 192 | |
Income before income taxes | | | | | 13,657 | | | 11,276 | |
Income tax expense | | | | | (2,418) | | | (3,424) | |
| | | | | | | |
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Net income | | | | | $ | 11,239 | | | $ | 7,852 | |
| | | | | | | |
Basic earnings per common share | | | | | $ | 0.34 | | | $ | 0.24 | |
| | | | | | | |
Diluted earnings per common share | | | | | $ | 0.34 | | | $ | 0.24 | |
| | | | | | | |
Weighted-average common shares outstanding: | | | | | | | |
Basic | | | | | 33,124 | | | 32,872 | |
Diluted | | | | | 33,298 | | | 33,212 | |
| | | | | | | |
Cash dividends per share | | | | | $ | 0.08 | | | $ | 0.08 | |
The accompanying notes are an integral part of the financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | January 31, |
| | | | | 2022 | | 2021 |
| | | | | (In thousands) |
Net income | | | | | $ | 11,239 | | | $ | 7,852 | |
Other comprehensive (loss)income: | | | | | | | |
Foreign currency translation (loss) gain | | | | | (3,159) | | | 8,600 | |
| | | | | | | |
| | | | | | | |
Other comprehensive (loss) income | | | | | (3,159) | | | 8,600 | |
Comprehensive income | | | | | $ | 8,080 | | | $ | 16,452 | |
The accompanying notes are an integral part of the financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended |
| January 31, |
| 2022 | | 2021 |
| (In thousands) |
Operating activities: | | | |
Net income | $ | 11,239 | | | $ | 7,852 | |
Adjustments to reconcile net income to cash used for operating activities: | | | |
Depreciation and amortization | 10,257 | | | 11,015 | |
Stock-based compensation | 552 | | | 523 | |
Deferred income tax | 854 | | | 1,925 | |
| | | |
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Other, net | 1,218 | | | 3,189 | |
Changes in assets and liabilities: | | | |
Decrease in accounts receivable | 8,340 | | | 7,103 | |
Increase in inventory | (25,318) | | | (14,061) | |
Increase in other current assets | (3,534) | | | (873) | |
Decrease in accounts payable | (8,391) | | | (14,577) | |
Decrease in accrued liabilities | (18,248) | | | (2,692) | |
Increase (decrease) in income taxes payable | 1,391 | | | (2,790) | |
Decrease in deferred pension and postretirement benefits | (80) | | | (52) | |
Increase (decrease) in other long-term liabilities | 404 | | | (399) | |
Other, net | (335) | | | 442 | |
Cash used for operating activities | (21,651) | | | (3,395) | |
Investing activities: | | | |
| | | |
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Capital expenditures | (7,370) | | | (5,246) | |
| | | |
Proceeds from disposition of capital assets | 10 | | | 64 | |
Cash used for investing activities | (7,360) | | | (5,182) | |
Financing activities: | | | |
Borrowings under credit facilities | 28,000 | | | — | |
Repayments of credit facility borrowings | (3,000) | | | (5,000) | |
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Repayments of other long-term debt | (228) | | | (541) | |
Common stock dividends paid | (2,587) | | | (2,637) | |
Issuance of common stock | 55 | | | 10,030 | |
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Payroll tax paid to settle shares forfeited upon vesting of stock | (1,383) | | | (492) | |
Purchase of treasury stock | — | | | (1,927) | |
Cash provided by (used for) financing activities | 20,857 | | | (567) | |
Effect of exchange rate changes on cash and cash equivalents | (188) | | | 949 | |
Decrease in cash and cash equivalents | (8,342) | | | (8,195) | |
Cash and cash equivalents at beginning of period | 40,061 | | | 51,621 | |
Cash and cash equivalents at end of period | $ | 31,719 | | | $ | 43,426 | |
The accompanying notes are an integral part of the financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
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Three Months Ended January 31, 2022 | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Stockholders’ Equity |
| (In thousands, no per share amounts shown except in verbiage) |
Balance at October 31, 2021 | $ | 373 | | | $ | 254,162 | | | $ | 259,718 | | | $ | (21,770) | | | $ | (72,701) | | | $ | 419,782 | |
Net income | — | | | — | | | 11,239 | | | — | | | — | | | 11,239 | |
Foreign currency translation adjustment | — | | | — | | | — | | | (3,159) | | | — | | | (3,159) | |
Common dividends ($0.08 per share) | — | | | — | | | (2,587) | | | — | | | — | | | (2,587) | |
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Stock-based compensation activity: | | | | | | | | | | | |
Expense related to stock-based compensation | — | | | 552 | | | — | | | — | | | — | | | 552 | |
Stock options exercised | — | | | 5 | | | — | | | — | | | 50 | | | 55 | |
Restricted stock awards granted | — | | | (1,534) | | | — | | | — | | | 1,534 | | | — | |
Performance restricted stock units vested | — | | | (1,598) | | | — | | | — | | | 1,598 | | | — | |
Other | — | | | (1,383) | | | — | | | — | | | — | | | (1,383) | |
Balance at January 31, 2022 | $ | 373 | | | $ | 250,204 | | | $ | 268,370 | | | $ | (24,929) | | | $ | (69,519) | | | $ | 424,499 | |
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Three Months Ended January 31, 2021 | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Stockholders’ Equity |
| (In thousands, no per share amounts shown except in verbiage) |
Balance at October 31, 2020 | $ | 373 | | | $ | 253,458 | | | $ | 213,517 | | | $ | (33,024) | | | $ | (78,565) | | | $ | 355,759 | |
Net income | — | | | — | | | 7,852 | | | — | | | — | | | 7,852 | |
Foreign currency translation adjustment | — | | | — | | | — | | | 8,600 | | | — | | | 8,600 | |
Common dividends ($0.08 per share) | — | | | — | | | (2,637) | | | — | | | — | | | (2,637) | |
Treasury shares purchased, at cost | — | | | — | | | — | | | — | | | (1,927) | | | (1,927) | |
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Stock-based compensation activity: | | | | | | | | | | | |
Expense related to stock-based compensation | — | | | 523 | | | — | | | — | | | — | | | 523 | |
Stock options exercised | — | | | 635 | | | — | | | — | | | 9,395 | | | 10,030 | |
Restricted stock awards granted | — | | | (1,282) | | | — | | | — | | | 1,282 | | | — | |
Performance restricted stock units vested | — | | | (565) | | | — | | | — | | | 565 | | | — | |
Other | — | | | (492) | | | — | | | — | | | — | | | (492) | |
Balance at January 31, 2021 | $ | 373 | | | $ | 252,277 | | | $ | 218,732 | | | $ | (24,424) | | | $ | (69,250) | | | $ | 377,708 | |
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The accompanying notes are an integral part of the financial statements.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Basis of Presentation
Quanex Building Products Corporation is a component supplier to original equipment manufacturers (OEMs) in the building products industry. These components can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of fenestration components include: (1) energy-efficient flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, and (4) precision-formed metal and wood products. We also manufacture cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, vinyl fencing, water retention barriers, and conservatory roof components. We have organized our business into three reportable business segments. For additional discussion of our reportable business segments, see Note 11, “Segment Information.” We use low-cost, short lead-time production processes and engineering expertise to provide our customers with specialized products for their specific window, door, and cabinet applications. We believe these capabilities provide us with unique competitive advantages. We serve a primary customer base in North America and the United Kingdom (U.K.), and also serve customers in international markets through our operating plants in the U.K. and Germany, as well as through sales and marketing efforts in other countries.
Unless the context indicates otherwise, references to “Quanex”, the “Company”, “we”, “us” and “our” refer to the consolidated business operations of Quanex Building Products Corporation and its subsidiaries.
The accompanying interim unaudited condensed consolidated financial statements include the accounts of Quanex Building Products Corporation. All intercompany accounts and transactions have been eliminated in consolidation. These financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of October 31, 2021 was derived from audited financial information but does not include all disclosures required by U.S. GAAP. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. In our opinion, the accompanying financial statements contain all adjustments (which consist of normal recurring adjustments, except as disclosed herein) necessary to fairly present our financial position, results of operations and cash flows for the interim periods. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year or for any future periods.
In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. We review our estimates on an on-going basis, including those related to impairment of long-lived assets and goodwill, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.
Revenue from Contracts with Customers
Revenue recognition
We recognize revenue that reflects the consideration we expect to receive for product sales upon transfer to customers. Revenue for product sales is recognized when control of the promised products is transferred to our customers, and we are entitled to consideration in exchange for such transfer. We account for a contract when a customer provides us with a firm purchase order that identifies the products to be provided, the payment terms for those products, and when collectability of the consideration due is probable.
Performance obligations
A performance obligation is a promise to provide the customer with a good or service. Our performance obligations include product sales, with each product included in a customer contract being recognized as a separate performance obligation. For contracts with multiple performance obligations, the standalone selling price of each product is generally readily observable.
Revenue from product sales is recognized at a point in time when the product is transferred to the customer, in accordance with the shipping terms, which is generally upon shipment. We estimate a provision for sales returns and warranty allowances to account for product returns related to general returns and product nonconformance.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. Additionally, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Pricing and sales incentives
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price, reflective of current and prospective discounts.
Shipping and handling costs
We account for shipping and handling services as fulfillment services; accordingly, freight revenue is combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement. Shipping and handling costs incurred by us for the delivery of goods to customers are considered a cost to fulfill the contract and are included in cost of sales in the accompanying condensed consolidated statements of income.
Contract assets and liabilities
Deferred revenue, which is not significant, is recorded when we have remaining unsatisfied performance obligations for which we have received consideration.
Disaggregation of revenue
We produce a wide variety of products that are used in the fenestration industry, including window spacer systems; extruded vinyl products; metal fabricated products; and astragals, thresholds and screens. In addition, we produce certain non-fenestration products, including kitchen and bath cabinet doors and components, flooring and trim moldings, solar edge tape, plastic decking, fencing, water retention barriers, conservatory roof components, and other products.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our product sales for the three months ended January 31, 2022 and 2021 into groupings by segment which we believe depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. For further details regarding our results by segment, refer to Note 11, “Segment Information”.
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| | | Three Months Ended |
| | | January 31, |
| | | | | 2022 | | 2021 |
| | | | | (In thousands) |
North American Fenestration: | | | | | | | |
United States - fenestration | | | | | $ | 128,367 | | | $ | 112,300 | |
International - fenestration | | | | | 9,136 | | | 7,778 | |
United States - non-fenestration | | | | | 6,716 | | | 5,398 | |
International - non-fenestration | | | | | 2,412 | | | 2,640 | |
| | | | | $ | 146,631 | | | $ | 128,116 | |
European Fenestration: | | | | | | | |
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International - fenestration | | | | | $ | 44,621 | | | 41,354 | |
International - non-fenestration | | | | | 14,293 | | | 7,737 | |
| | | | | $ | 58,914 | | | $ | 49,091 | |
North American Cabinet Components: | | | | | | | |
United States - fenestration | | | | | $ | 3,765 | | | $ | 2,974 | |
United States - non-fenestration | | | | | 57,767 | | | 50,502 | |
International - non-fenestration | | | | | 821 | | | 518 | |
| | | | | $ | 62,353 | | | $ | 53,994 | |
Unallocated Corporate & Other | | | | | | | |
Eliminations | | | | | $ | (858) | | | $ | (1,054) | |
| | | | | $ | (858) | | | $ | (1,054) | |
Net sales | | | | | $ | 267,040 | | | $ | 230,147 | |
Allowance for Credit Losses
We have established an allowance for credit losses to estimate the risk of losses, which represents an estimate of expected losses over the remaining contractual life of our receivables. The allowance is determined using two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, a specific reserve is established for individual accounts where information indicates the customers may have an inability to meet financial obligations. Second, a reserve is determined for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection rates, write-off experience, and forecasts of future economic conditions. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful.
Related Parties
Net sales for the three months ended January 31, 2022 included approximately $0.4 million of transactions with a customer which is a related party with one of our non-employee directors. We performed a review of these transactions, of which no single transaction or series of related transactions exceeded $120,000 in amount, and determined that these transactions were enacted independently of each other in fair transactions. We are not aware of any other related party transactions with any of our current non-employee directors or officers outside of their normal business functions or expected contractual duties.
COVID-19 Impact
On March 11, 2020, the World Health Organization (WHO) declared the outbreak of COVID-19 as a global pandemic and advised aggressive containment action. The COVID-19 pandemic and its impacts are continuing to have an adverse effect on many sectors of the economy, including negative impacts to the global supply chain and increased inflation. Measures providing for business shutdowns generally exclude certain essential services commonly including critical infrastructure such as
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
construction and the businesses that support that critical infrastructure. To date, we have not experienced significant challenges or expenses implementing crisis management plans intended for containment and prevention.
The health and safety of our employees are high priority. In response to the COVID-19 pandemic, we have taken additional measures to limit possible infections at the workplace by implementing social distancing, sanitizing the workspace, and requiring employees to report any COVID-19 symptoms to ensure safety as infection surges dictate. We continue to assess and refine these measures on an ongoing basis as public health guidance and applicable laws and regulations continue to evolve.
As a result of the economic and business impact of COVID-19, we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of goodwill, intangibles, right-of-use assets, long-lived assets, accounts receivable (including allowances for credit losses), and inventory, which could have a material adverse effect on our financial position and results of operations.
2. Inventories
Inventories consisted of the following at January 31, 2022 and October 31, 2021 (in thousands):
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| January 31, 2022 | | October 31, 2021 |
Raw materials | $ | 65,492 | | | $ | 49,867 | |
Finished goods and work in process | 51,932 | | | 43,499 | |
Supplies and other | 2,486 | | | 2,099 | |
Total | 119,910 | | | 95,465 | |
Less: Inventory reserves | 2,526 | | | 2,936 | |
Inventories, net | $ | 117,384 | | | $ | 92,529 | |
Fixed costs related to excess manufacturing capacity, if any, have been expensed in the period they were incurred and, therefore, are not capitalized into inventory.
3. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the three months ended January 31, 2022 was as follows (in thousands):
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| Three Months Ended |
| January 31, 2022 |
Beginning balance as of November 1, 2021 | $ | 149,205 | |
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Foreign currency translation adjustment | (1,412) | |
Balance as of the end of the period | $ | 147,793 | |
At our last annual test date, August 31, 2021, we evaluated the recoverability of goodwill at each of our five reporting units with goodwill balances and determined that our goodwill was not impaired. We evaluated for indicators of impairment during the three months ended January 31, 2022 and determined that there were no triggering events. For a summary of the change in the carrying amount of goodwill by segment, see Note 11, “Segment Information.”
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Identifiable Intangible Assets
Amortizable intangible assets consisted of the following as of January 31, 2022 and October 31, 2021 (in thousands):
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| January 31, 2022 | | October 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Customer relationships | $ | 145,485 | | | $ | 83,345 | | | $ | 146,207 | | | $ | 81,086 | |
Trademarks and trade names | 56,213 | | | 39,998 | | | 56,437 | | | 39,589 | |
Patents and other technology | 22,504 | | | 22,109 | | | 22,525 | | | 22,084 | |
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Total | $ | 224,202 | | | $ | 145,452 | | | $ | 225,169 | | | $ | 142,759 | |
We had aggregate amortization expense related to intangible assets for the three months ended January 31, 2022 of $3.0 million and $3.4 million for the comparable prior year period.
Estimated remaining amortization expense, based on current intangible balances, for each of the fiscal years ending October 31, is as follows (in thousands):
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| Estimated Amortization Expense |
2022 (remaining nine months) | $ | 9,049 | |
2023 | 11,324 | |
2024 | 10,573 | |
2025 | 9,347 | |
2026 | 9,277 | |
Thereafter | 29,180 | |
Total | $ | 78,750 | |
4. Debt and Finance Lease Obligations
Long-term debt consisted of the following at January 31, 2022 and October 31, 2021 (in thousands):
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| January 31, 2022 | | October 31, 2021 |
Revolving Credit Facility | $ | 63,000 | | | $ | 38,000 | |
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Finance lease obligations and other | 15,048 | | | 15,537 | |
Unamortized deferred financing fees | (521) | | | (597) | |
Total debt | $ | 77,527 | | | $ | 52,940 | |
Less: Current maturities of long-term debt | 836 | | | 846 | |
Long-term debt | $ | 76,691 | | | $ | 52,094 | |
Revolving Credit Facility
As more fully described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021, on October 18, 2018, we amended and extended our prior credit facility by entering into a $325.0 million revolving credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as Agent, Swingline Lender and Issuing Lender, and Bank of America, N.A. serving as Syndication Agent. The Credit Facility has a five-year term, maturing on October 18, 2023.
On December 28, 2021, we entered into a second amendment (the “Amendment”) of the Credit Facility. Pursuant to the Amendment, (a) the definition of “Capital Lease” was modified and clarified to provide an exclusion of certain agreed leases of the Company and its subsidiaries from the Credit Facility’s financial covenants and other provisions and (b) secured overnight financing rate, interest rate mechanics and interest rate reference benchmark replacement provisions were implemented to effectuate the transition from LIBOR as a reference interest rate. We will, however, continue to use the One Month LIBOR Rate plus applicable margin for the Credit Facility until June of 2023 when One Month LIBOR will no longer be available.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Following the Amendment, interest payments are calculated, at our election and depending upon the Consolidated Leverage Ratio, at a Base Rate plus an applicable margin or at the same rate as One Month LIBOR for domestic borrowings, Eurocurrency Rate Loan, Transitioned RFR Loan or RFR Loan plus an applicable margin. In addition, we are subject to commitment fees for the unused portion of the Credit Facility.
The applicable margin and commitment fees are outlined in the following table:
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Pricing Level | | Consolidated Leverage Ratio | | Commitment Fee | | LIBOR, Eurocurrency Rate Loans and Transitioned RFR Loans | | Initial RFR Loans | | Base Rate Loans |
I | | Less than or equal to 1.50 to 1.00 | | 0.200% | | 1.25% | | 1.2826% | | 0.25% |
II | | Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00 | | 0.225% | | 1.50% | | 1.5326% | | 0.50% |
III | | Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00 | | 0.250% | | 1.75% | | 1.7826% | | 0.75% |
IV | | Greater than 3.00 to 1.00 | | 0.300% | | 2.00% | | 2.0326% | | 1.00% |
In the event of default, outstanding borrowings would accrue interest at the Default Rate, as defined, whereby the obligations will bear interest at a per annum rate equal to 2% above the total per annum rate otherwise applicable.
The Credit Facility provides for incremental revolving credit commitments for a minimum principal amount of $10.0 million, up to an aggregate amount of $150.0 million, subject to the lender's discretion to elect or decline the incremental increase. We can also borrow up to the lesser of $15.0 million or the revolving credit commitment, as defined, under a Swingline feature of the Credit Facility.
The Credit Facility contains a: (1) Consolidated Interest Coverage Ratio requirement whereby we must not permit the Consolidated Interest Coverage Ratio, as defined, to be less than 2.25 to 1.00, and (2) Consolidated Leverage Ratio requirement, whereby we must not permit the Consolidated Leverage Ratio, as defined, to be greater than 3.25 to 1.00.
In addition to maintaining these financial covenants, the Credit Facility also limits our ability to enter into certain business transactions, such as to incur indebtedness or liens, to acquire businesses or dispose of material assets, make restricted payments, pay dividends (limited to $20.0 million per year) and other transactions as further defined in the Credit Facility. Some of these limitations, however, do not take effect so long as total leverage is less than or equal to 2.75 to 1.00 and available liquidity exceeds $25.0 million. Substantially all of our domestic assets, with the exception of real property, are used as collateral for the Credit Agreement.
As of January 31, 2022, we had $63.0 million of borrowings outstanding under the Credit Facility (reduced by unamortized debt issuance costs of $0.5 million), $4.5 million of outstanding letters of credit and $15.0 million outstanding primarily under finance leases and other debt. We had $257.5 million available for use under the 2018 Credit Facility at January 31, 2022. Outstanding borrowings under the 2018 Credit Facility accrue interest at 1.36% per annum. Our weighted average borrowing rate for borrowings outstanding during the three months ended January 31, 2022 and 2021 was 1.35% and 1.56%, respectively. We were in compliance with our debt covenants as of January 31, 2022.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Retirement Plans
Pension Plan
Our non-contributory, single employer defined benefit pension plan covers certain of our employees in the U.S. The net periodic pension cost for this plan for the three months ended January 31, 2022 and 2021 was as follows (in thousands):
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| | | Three Months Ended |
| | | January 31, |
| | | | | 2022 | | 2021 |
Service cost | | | | | $ | 216 | | | $ | 212 | |
Interest cost | | | | | 202 | | | 189 | |
Expected return on plan assets | | | | | (498) | | | (490) | |
Amortization of net loss | | | | | 1 | | | 36 | |
Net periodic pension benefit | | | | | $ | (79) | | | $ | (53) | |
During September 2021, we contributed $0.5 million to fund our plan. During fiscal 2022, we do not expect to need to make a contribution to the pension plan to maintain targeted funding levels and meet minimum contribution requirements.
Other Plans
We also have a supplemental benefit plan covering certain executive officers and key employees and a non-qualified deferred compensation plan covering members of the Board of Directors and certain key employees. As of January 31, 2022 and October 31, 2021, our liability under the supplemental benefit plan was approximately $2.9 million. As of January 31, 2022 and October 31, 2021, the liability associated with the deferred compensation plan was approximately $3.4 million. We record the current portion of liabilities associated with these plans under the caption “Accrued Liabilities,” and the long-term portion under the caption “Other Liabilities” in the accompanying condensed consolidated balance sheets.
6. Income Taxes
To determine our income tax expense or benefit for interim periods, consistent with accounting standards, we apply the estimated annual effective income tax rate to year-to-date results, adjusted for any applicable discrete items. Our estimated annual effective tax rates from continuing operations for the three months ended January 31, 2022 and 2021 were 25.3% and 26.0%, respectively. The difference between our effective income tax rate and the U.S. federal statutory rate of 21% principally results from discrete tax items, U.S. state tax, non-U.S. tax rate differential and other permanent differences. The primary discrete items affecting the 2022 effective rate were a charge of $0.5 million related to the vesting or exercise of equity-based compensation awards and a benefit of $0.3 million for the true-up of our accruals and related deferred taxes from prior year. The 2021 effective tax rate was primarily impacted by a discrete benefit of $0.5 million related to the vesting or exercise of equity-based compensation awards and a charge of $0.8 million for the true-up of our deferred taxes from prior year filings.
As of January 31, 2022, our liability for uncertain tax positions (UTP) of $1.4 million relates to certain U.S. federal and state tax items regarding the interpretation of tax laws and regulations, including a minimal amount of interest and penalties. We include all interest and penalties related to uncertain tax benefits within our income tax provision account. To the extent interest and penalties are not assessed with respect to uncertain tax positions or the uncertainty of deductions in the future, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. Our total unrecognized tax benefits, if recognized, would not materially affect our effective tax rate. We do not believe that the recorded amount of unrecognized tax benefits will decrease significantly within the next twelve months.
We evaluate the likelihood of realization of our deferred tax assets by considering both positive and negative evidence. We maintain a valuation allowance for certain state net operating losses which totaled $1.3 million as of January 31, 2022 and October 31, 2021.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Contingencies
Remediation and Environmental Compliance Costs
Under applicable state and federal laws, we may be responsible for, among other things, all or part of the costs required to remove or remediate wastes or hazardous substances at locations we, or our predecessors, have owned or operated. From time to time, we also have been alleged to be liable for all or part of the costs incurred to clean up third-party sites where there might have been an alleged improper disposal of hazardous substances. At present, we are not involved in any such matters.
From time to time, we incur routine expenses and capital expenditures associated with compliance with existing environmental regulations, including control of air emissions and water discharges, and plant decommissioning costs. We have not incurred any material expenses or capital expenditures related to environmental matters during the past three fiscal years, and do not expect to incur a material amount of such costs in fiscal 2022. While we will continue to have future expenditures related to environmental matters, any such amounts are impossible to reasonably estimate at this time. Based upon our experience to date, we do not believe that our compliance with environmental requirements will have a material adverse effect on our operations, financial condition or cash flows.
Litigation
From time to time, we, along with our subsidiaries, are involved in various litigation matters arising in the ordinary course of our business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal injury, environmental matters, product performance or warranties, product liability, insurance coverage and personnel and employment disputes. We regularly review with legal counsel the status of all ongoing proceedings, and we maintain insurance against these risks to the extent deemed prudent by our management and to the extent such insurance is available. However, there is no assurance that we will prevail in these matters or that our insurers will accept full coverage of these matters, and we could, in the future, incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome or insurability of matters we face, which could materially impact our results of operations.
We have been and are currently party to multiple claims, some of which are in litigation, relating to alleged defects in a commercial sealant product that was manufactured and sold during the 2000’s. While we believe that our product was not defective and that we would prevail in these commercial sealant product claims if taken to trial, the timing, ultimate resolution and potential impact of these claims is not currently determinable. Nevertheless, after taking into account all currently available information, including our defenses, the advice of our counsel, and the extent and currently-expected availability of our existing insurance coverage, we believe that the eventual outcome of these commercial sealant claims will not have a material adverse effect on our overall financial condition, results of operations or cash flows, and we have not recorded any accrual with regard to these claims.
8. Fair Value Measurement of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market data developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to Level 1 and the lowest priority to Level 3. The three levels of the fair value hierarchy are described below:
•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
•Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
Carrying amounts reported on the balance sheet for cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Our outstanding debt is variable rate debt that re-
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
prices frequently, thereby limiting our exposure to significant change in interest rate risk. As a result, the fair value of our debt instrument approximates carrying value at January 31, 2022, and October 31, 2021 (Level 2 measurement).
Our performance share awards are marked-to-market on a quarterly basis during a three-year vesting period based on market data (Level 2 measurement). For further information, refer to Note 9, “Stock-Based Compensation - Performance Share Awards.”
9. Stock-Based Compensation
We have established and maintain an Omnibus Incentive Plan (2020 Plan) that provides for the granting of restricted stock awards, stock options, restricted stock units, performance share awards, performance restricted stock units, and other stock-based and cash-based awards. The 2020 Plan is administered by the Compensation and Management Development Committee of the Board of Directors.
The aggregate number of shares of common stock authorized for grant under the 2020 Plan is 3,139,895 as approved by shareholders. Any officer, key employee and/or non-employee director is eligible for awards under the 2020 Plan. We grant restricted stock units to non-employee directors on the first business day of each fiscal year. As approved by the Compensation & Management Development Committee of our Board of Directors annually, we grant a mix of restricted stock awards, restricted stock units, performance shares and/or performance restricted stock units to officers, management and key employees. We also historically granted stock options to certain officers, directors and key employees. Occasionally, we may make additional grants to key employees at other times during the year.
Restricted Stock Awards
Restricted stock awards are granted to key employees and officers annually, and typically cliff vest over a three-year period with service and continued employment as the only vesting criteria. The recipient of the restricted stock award is entitled to all of the rights of a shareholder, except that the award is nontransferable during the vesting period. The fair value of the restricted stock award is established on the grant date and then expensed over the vesting period resulting in an increase in additional paid-in-capital. Shares are generally issued from treasury stock at the time of grant.
A summary of non-vested restricted stock awards activity during the three months ended January 31, 2022 is presented below:
| | | | | | | | | | | |
| Restricted Stock Awards | | Weighted Average Grant Date Fair Value per Share |
Non-vested at October 31, 2021 | 216,400 | | | $ | 17.28 | |
Granted | 84,400 | | | 22.54 | |
Forfeited | — | | | — | |
Vested | (84,200) | | | 13.63 | |
Non-vested at January 31, 2022 | 216,600 | | | $ | 20.75 | |
The total weighted average grant-date fair value of restricted stock awards that vested during each of the three months ended January 31, 2022 and 2021 was $1.1 million and $0.9 million, respectively. As of January 31, 2022, total unrecognized compensation cost related to unamortized restricted stock awards was $3.0 million. We expect to recognize this expense over the remaining weighted average vesting period of 2.4 years.
Stock Options
Historically, stock options have been awarded to key employees, officers and non-employee directors. In December 2017, the Compensation & Management Development Committee of the Board of Directors approved a change to the long-term incentive award program eliminating the grant of stock options and replacing this award with a grant of performance restricted stock units and performance shares as further described below. As a result, the final stock options were granted during the fiscal year ended October 31, 2017. Stock options typically vested ratably over a three-year period with service and continued employment as the vesting conditions. Our stock options may be exercised up to a maximum of ten years from the date of grant. The fair value of the stock options was determined on the grant date and expensed over the vesting period resulting in an increase in additional paid-in-capital. For employees who were nearing retirement-eligibility, we recognized stock option expense ratably over the shorter of the vesting period or the period from the grant-date to the retirement-eligibility date.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
We use a Black-Scholes pricing model to estimate the fair value of stock options. A description of the methodology for the valuation assumptions was disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
The following table summarizes our stock option activity for the three months ended January 31, 2022:
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| Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (000s) |
Outstanding at October 31, 2021 | 218,304 | | | $ | 19.37 | | | | | |
Granted | — | | | $ | — | | | | | |
Exercised | (2,750) | | | 20.01 | | | | | |
Forfeited/Expired | (500) | | | 18.22 | | | | | |
Outstanding at January 31, 2022 | 215,054 | | | $ | 19.37 | | | 3.2 | | $ | 520 | |
Vested at January 31, 2022 | 215,054 | | | $ | 19.37 | | | 3.2 | | $ | 520 | |
Exercisable at January 31, 2022 | 215,054 | | | $ | 19.37 | | | 3.2 | | $ | 520 | |
Intrinsic value is the amount by which the market price of the common stock on the date of exercise exceeds the exercise price of the stock option. The total intrinsic value of stock options exercised during the three months ended January 31, 2022 and 2021 was less than $0.1 million and $2.3 million, respectively.
Restricted Stock Units
Restricted stock units may be awarded to key employees and officers from time to time, and annually to non-employee directors. The non-employee director restricted stock units vest immediately but are payable only upon the director's cessation of service unless an election is made by the non-employee director to settle and pay the award on an earlier specified date. Restricted stock units awarded to employees and officers typically cliff vest after a three-year period with service and continued employment as the vesting conditions. Restricted stock units are not considered outstanding shares and do not have voting rights, although the holder does receive a cash payment equivalent to the dividend paid, on a one-for-one basis, on our outstanding common shares. Once the criteria is met, each restricted stock unit is payable to the holder in cash based on the market value of one share of our common stock. Accordingly, we record a liability for the restricted stock units on our balance sheet and recognize any changes in the market value during each reporting period as compensation expense.
During the three months ended January 31, 2022 and 2021, non-employee directors received 33,579 and 28,826 restricted stock units, respectively, at a grant date fair value of $22.54 per share and $18.79 per share, respectively, which vested immediately. As of January 31, 2022, there were 21,774 non-vested restricted stock units, which were awarded in January 2020 to key employees at a weighted average grant date fair value of $17.08. During the three months ended January 31, 2022 and January 31, 2021, we paid $0.1 million to settle vested restricted stock units.
Performance Share Awards
We have awarded annual grants of performance shares to key employees and officers. Performance share awards vest with return on net assets (RONA) as the vesting condition and pay out 100% in cash, and are accounted for as liability.
The expected cash settlement of the performance share award is recorded as a liability and is being marked to market over the three-year term of the award and can fluctuate depending on the number of shares ultimately expected to vest. Depending on the achievement of the performance conditions, 0% to 200% of the awarded performance shares may ultimately vest.
The following table summarizes our performance share grants and the grant date fair value for the RONA performance metrics:
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Grant Date | Shares Awarded | | Grant Date Fair Value | | Shares Forfeited |
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| | | | | |
December 5, 2019 | 55,900 | | | $ | 19.40 | | | 5,300 | |
December 2, 2020 | 65,300 | | | $ | 20.68 | | | — | |
December 9, 2021 | 80,900 | | | $ | 22.54 | | | — | |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
In December 2021, 183,000 shares vested pursuant to the December 2018 grant, which were settled with a cash payment of $3.8 million.
Performance share awards are payable in cash based upon the number of performance shares ultimately earned, and are therefore not considered outstanding shares.
Performance Restricted Stock Units
We award performance restricted stock units to key employees and officers. These awards cliff vest upon a three-year service period with the absolute total shareholder return of our common stock over this three-year term as the vesting criteria. The number of shares earned is variable depending on the metric achieved, and the settlement method is 100% in our common stock, with accrued dividends paid in cash at the time of vesting, assuming the shares had been outstanding throughout the performance period.
To value the performance restricted stock units, we used a Monte Carlo simulation model to arrive at a grant-date fair value. This amount will be adjusted for forfeitures and expensed over the three-year term of the award with a credit to additional paid-in-capital. Depending on the achievement of the performance conditions, a minimum of 0% and a maximum of 150% of the awarded performance restricted stock units may vest. Specifically, the awards vest on a continuum with the following Absolute Total Shareholder Return (A-TSR) milestones:
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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:
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Grant Date | | Shares Awarded | | Grant Date Fair Value | | Shares Forfeited |
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| | | | | | |
December 5, 2019 | | 35,000 | | | $ | 19.40 | | | — | |
December 2, 2020 | | 38,400 | | | $ | 20.68 | | | — | |
December 9, 2021 | | 50,900 | | | $ | 21.06 | | | — | |
During the three months ended January 31, 2022, 87,919 performance restricted stock units vested.
The performance restricted stock units are not considered outstanding shares, do not have voting rights, and are 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 January 31, 2022, we have deemed 33,093 shares related to the December 2019 grant of performance restricted stock units as probable to vest.
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes amounts expensed as selling, general and administrative expense related to restricted stock awards, stock options, restricted stock units, performance share awards and performance restricted stock units for the three months ended January 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Three Months Ended |
| January 31, |
| 2021 | | 2020 |
Restricted stock awards | $ | 348 | | | $ | 302 | |
Stock options | — | | | — | |
Restricted stock units | 994 | | | 1,284 | |
Performance share awards | 1,340 | | | 2,685 | |
Performance restricted stock units | 204 | | | 171 | |
Total compensation expense | $ | 2,886 | | | $ | 4,442 | |
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Treasury Shares
We record treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Shares are generally issued from treasury stock at the time of grant of restricted stock awards, upon the exercise of stock options, and upon the vesting of performance shares and performance restricted stock units. On the subsequent issuance of treasury shares, we record proceeds in excess of cost as an increase in additional paid in capital. A deficiency of such proceeds relative to costs would be applied to reduce paid-in-capital associated with prior issuances to the extent available, with the remainder recorded as a charge to retained earnings. There were no charges to retained earnings during the three months ended January 31, 2022.
The following table summarizes the treasury stock activity during the three months ended January 31, 2022:
| | | | | |
| Three Months Ended |
| January 31, 2022 |
Beginning Balance as of November 1, 2021 | 3,998,725 | |
Restricted stock awards granted | (84,400) | |
Performance restricted stock units vested | (87,919) | |
Stock options exercised | (2,750) | |
| |
Balance at January 31, 2022 | 3,823,656 | |
10. Other, net
Other, net on the condensed consolidated statements of income consisted of the following for the three months ended January 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | January 31, |
| | | | | 2022 | | 2021 |
Foreign currency transaction losses | | | | | $ | (41) | | | $ | (78) | |
| | | | | | | |
Pension service benefit | | | | | 295 | | | 265 | |
Interest income | | | | | 15 | | | 3 | |
Other | | | | | (215) | | | 2 | |
Other, net | | | | | $ | 54 | | | $ | 192 | |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Segment Information
We present three reportable business segments (1) NA Fenestration, comprising three operating segments primarily focused on the fenestration market in North America including vinyl profiles, insulating glass spacers, screens & other fenestration components; (2) EU Fenestration, comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles & conservatories, and the European insulating glass business manufacturing insulating glass spacers; and (3) NA Cabinet Components, comprising our cabinet door and components operations. We maintain an Unallocated Corporate & Other which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance, legal, and other costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. Other general and administrative costs associated with the corporate office are allocated to the reportable segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. We allocate corporate expenses to businesses acquired mid-year from the date of acquisition. The accounting policies of our operating segments are the same as those used to prepare the accompanying condensed consolidated financial statements. Corporate general and administrative expense allocated during the three month period ended January 31, 2022 was $5.8 million, and $5.2 million for the comparable prior year period.
ASC Topic 280-10-50, “Segment Reporting” (ASC 280) permits aggregation of operating segments based on factors including, but not limited to: (1) similar nature of products serving the building products industry, primarily the fenestration business; (2) similar production processes, although there are some differences in the amount of automation amongst operating plants; (3) similar types or classes of customers, namely the primary OEMs; (4) similar distribution methods for product delivery, although the extent of the use of third-party distributors will vary amongst the businesses; (5) similar regulatory environment; and (6) converging long-term economic similarities.
Segment information for the three months ended January 31, 2022 and 2021, and total assets as of January 31, 2022 and October 31, 2021 are summarized in the following table (in thousands):
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| NA Fenestration | | EU Fenestration | | NA Cabinet Comp. | | Unallocated Corp. & Other | | Total |
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Three Months Ended January 31, 2022 | | | | | | | | | |
Net sales | $ | 146,631 | | | $ | 58,914 | | | $ | 62,353 | | | $ | (858) | | | $ | 267,040 | |
Depreciation and amortization | 4,139 | | | 2,569 | | | 3,463 | | | 86 | | | 10,257 | |
Operating income (loss) | 12,151 | | | 7,815 | | | (1,453) | | | (4,387) | | | 14,126 | |
Capital expenditures | 5,305 | | | 954 | | | 1,073 | | | 38 | | | 7,370 | |
Three Months Ended January 31, 2021 | | | | | | | | | |
Net sales | $ | 128,116 | | | $ | 49,091 | | | $ | 53,994 | | | $ | (1,054) | | | $ | 230,147 | |
Depreciation and amortization | 5,111 | | | 2,518 | | | 3,270 | | | 116 | | | 11,015 | |
Operating income (loss) | 11,203 | | | 8,187 | | | (13) | | | (7,542) | | | 11,835 | |
Capital expenditures | 2,820 | | | 472 | | | 1,953 | | | 1 | | | 5,246 | |
As of January 31, 2022 | | | | | | | | | |
Total assets | $ | 282,033 | | | $ | 229,515 | | | $ | 179,410 | | | $ | 27,314 | | | $ | 718,272 | |
As of October 31, 2021 | | | | | | | | | |
Total assets | $ | 268,773 | | | $ | 236,755 | | | $ | 178,671 | | | $ | 33,124 | | | $ | 717,323 | |
QUANEX BUILDING PRODUCTS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the change in the carrying amount of goodwill by reportable business segment for the three months ended January 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NA Fenestration | | EU Fenestration | | NA Cabinet Comp. | | Unallocated Corp. & Other | | Total |
Balance as of October 31, 2021 | $ | 38,712 | | | $ | 71,346 | | | $ | 39,147 | | | $ | — | | | $ | 149,205 | |
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Foreign currency translation adjustment | — | | | (1,412) | | | — | | | — | | | (1,412) | |
Balance as of January 31, 2022 | $ | 38,712 | | | $ | 69,934 | | | $ | 39,147 | | | $ | — | | | $ | 147,793 | |
For further details of Goodwill, see Note 3, “Goodwill & Intangible Assets”, located herewith.
We did not allocate non-operating loss or income tax benefit to the reportable segments. The following table reconciles operating income as reported above to net income for the three months ended January 31, 2022 and 2021 (in thousands):
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| | | Three Months Ended |
| | | January 31, |
| | | | | 2022 | | 2021 |
Operating income | | | | | $ | 14,126 | | | $ | 11,835 | |
Interest expense | | | | | (523) | | | (751) | |
Other, net | | | | | 54 | | | 192 | |
Income tax expense | | | | | (2,418) | | | (3,424) | |
Net income | | | | | $ | 11,239 | | | $ | 7,852 | |
12. Earnings Per Share
We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common shares include the weighted average of additional shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock as determined using the treasury stock method prescribed by U.S. GAAP and contingent shares associated with performance share awards, if dilutive.
Basic and diluted earnings per share for the three months ended January 31, 2022 and 2021 were calculated as follows (in thousands, except per share data):
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| Net Income | | Weighted Average Shares | | Per Share |
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Three Months Ended January 31, 2022 | | | | | |
Basic earnings per common share | $ | |