QUANEX BUILDING PRODUCTS CORPORATION 
The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as ofJuly 31, 2020 , and for the three and nine months endedJuly 31, 2020 and 2019, included elsewhere herein. For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 . Our Business We manufacture components for original equipment manufacturers (OEMs) in the building products industry. These components can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of fenestration components include (1) energy-efficient flexible insulating glass spacers, (2) extruded vinyl profiles, (3) window and door screens, and (4) precision-formed metal and wood products. We also manufacture cabinet doors and other components for OEMs in the kitchen and bathroom cabinet industry. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, fencing, water retention barriers, and conservatory roof components. We use low-cost, short lead-time production processes and engineering expertise to provide our customers with specialized products for their specific window, door, and cabinet applications. We believe these capabilities provide us with unique competitive advantages. We serve a primary customer base inNorth America and theU.K. , and also serve customers in international markets through our operating plants in theU.K. andGermany , as well as through sales and marketing efforts in other countries. We currently have three reportable business segments: (1) North American Fenestration segment (NA Fenestration), comprising three operating segments primarily focused on the fenestration market inNorth America manufacturing vinyl profiles, insulating glass spacers, screens & other fenestration components; (2) European Fenestration segment (EU Fenestration), comprising ourU.K. -based vinyl extrusion business, manufacturing vinyl profiles and conservatories, and the European insulating glass business manufacturing insulating glass spacers; and (3) North American Cabinet Components segment (NA Cabinet Components), comprising our cabinet door and components operations. We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on performance of our common stock and other factors, certain severance and legal costs not allocable to our operating segments, depreciation of corporate assets, interest expense, other, net, income taxes, 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. The accounting policies of our operating segments are the same as those used to prepare our accompanying condensed consolidated financial statements. We continue to invest in organic growth initiatives, enhance our product offerings, provide new complementary technology, enhance our leadership position within the markets we serve, expand into new markets or service lines, and explore strategic acquisitions. 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. Recent Transactions and Events OnMarch 11, 2020 , the WHO declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures. Our first priority with regard to the COVID-19 pandemic is to do everything we can to ensure the safety, health and welfare of our employees, customers, suppliers and other partners. With the implementation of health and safety practices at our facilities, we are continuing to supply the industry during this uncertain time, recognizing the important role the construction industry plays in providing housing and necessary infrastructure. As federal, state and local governments react to the public health crisis, significant uncertainties have been created in the economy. The COVID-19 pandemic and actions taken in response thereto are continuing to have a significant adverse effect on many sectors of the economy, including new home building and remodeling activity and we may be further impacted by our role in that supply chain. As part of our response to the COVID-19 pandemic, we have taken the following measures: •We are continuing to provide our products to support critical infrastructure needs while following national, state, and local guidelines required to continue operations during the existence of the pandemic and related local declarations of emergency. All manufacturing facilities inthe United States andGermany remained operational for the duration of the pandemic and bothU.K. plants became operational again duringMay 2020 . However, local or regional hotspots of the 28 -------------------------------------------------------------------------------- Table of Contents pandemic could result in other locations being temporarily idled due to the need to deep clean areas where an employee who has tested positive for COVID-19 worked. •While we currently expect any negative impact on sales to be temporary, the duration of the COVID-19 pandemic, the actions to contain the pandemic and treat its impacts, and the effects on our operations are highly uncertain and cannot be predicted at this time. •We are taking precautionary measures and adjusting our operational needs, including a reduction of our 2020 capital expenditure plans by approximately 25% to 30%. We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. During the year endedOctober 31, 2019 , our North American Cabinet Components segment experienced declines in current and forecasted demand as a result of an industry-wide shift from semi-custom cabinets to stock cabinets, and received notice about a change in strategy at one of our large customers that may result in lower sales volumes in the future. As a result, during the first quarter of fiscal 2020, we began to restructure our operations within that segment by announcing the closure of one of our plants. We incurred expenses for severance, equipment moves, and other exit activities of$0.3 million related to this plant closure during the nine months endedJuly 31, 2020 and we may incur costs related to additional restructuring activities in future periods. Market Overview and Outlook We believe the primary drivers of our operating results continue to be North American new home construction and residential remodeling and replacement (R&R) activity. We believe that housing starts and window shipments are indicators of activity levels in the homebuilding and window industries, and we use this data, as published by or derived from third-party sources, to evaluate the market. We have evaluated the market using data from theNational Association of Homebuilders (NAHB) with regard to housing starts, and published reports byDucker Worldwide, LLC (Ducker), a consulting and research firm, with regard to window shipments in theU.S. We obtain market data fromCatalina Research , a consulting and research firm, for insight into theU.S. residential wood cabinet demand. InJuly 2020 , theNAHB forecasted calendar-year housing starts (excluding manufactured units) to be 1.1 million in 2020, 1.2 million in 2021, and 1.4 million in 2022. TheAugust 2020 , Ducker forecast indicated that window shipments in the R&R market are expected to decrease approximately 5% during the calendar year ended 2020 and increase 2% and 4% in 2021 and 2022, respectively. Derived from reports published by Ducker, the overall decrease in window shipments for the trailing twelve months endedJune 30, 2020 was 9.2%. During this period, new construction and R&R activities decreased 11.2% and 7.8%, respectively. InAugust 2020 ,Catalina Research estimated that residential semi-custom cabinet demand in theU.S. will decline approximately 10% in 2020 and rebound approximately 2% in 2021. In line with market forecasts, we expect that some sales originally planned for the year endedOctober 31, 2020 may be realized during the years endedOctober 31, 2021 and 2022. We utilize several commodities in our business for which pricing can fluctuate, 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. Our long-term exposure to these price fluctuations is somewhat mitigated due to the contractual component of the adjuster program. However, these adjusters are not in place with all customers and for all commodities, and there is a level of exposure to such volatility due to the lag associated with the timing of price updates in accordance with our customer agreements, particularly with regard to hardwoods. In addition, some of these commodities, such as silicone, are in high demand, particularly inEurope , which can affect the cost of the raw materials, a portion of which we may not be able to fully recover. Thus far we have not experienced any supply or logistics disruptions as lower demand has not required us to source the same level of supply. OnJune 23, 2016 , voters in theU.K. voted for theU.K. to exit theEuropean Union (E.U.) (referred to as Brexit). InOctober 2019 , theU.K. and E.U. ratified a withdrawal agreement, and subsequently theU.K. left the E.U. onJanuary 31, 2020 . A transition period is in place untilDecember 31, 2020 while theU.K. and E.U. negotiate additional arrangements. The current rules for trade, travel, and business for theU.K. and E.U. will continue to apply during the transition period and any new rules will take effectJanuary 1, 2021 . Since the 2016 vote, the primary impact on Quanex's financial performance has been related to foreign currency fluctuations of the British Pound Sterling. This fluctuation has driven foreign currency translation impacts, as well as raw material cost increases from upstream suppliers located outside of theU.K. 29 -------------------------------------------------------------------------------- Table of Contents Given the lack of comparable precedent, it is difficult for us to predict the future impacts on ourU.K. based operations, which accounted for approximately 15% of our total sales for the year endedOctober 31, 2019 . Due to the fact that we manufacture and sell a majority of ourU.K. products within theU.K. , there is minimal risk to our ability to physically deliver goods and complete sales. As such, we believe we are well positioned within theU.K. to respond to potential changes to underlying demand as a result of the final Brexit outcome. The primary focus for ourU.K. operations centers on the availability and pricing of raw materials. While we source the majority of our raw materials from within theU.K. , many of the primary upstream raw materials our vendors utilize are being sourced from outside of theU.K. , which could expose us to cross-border issues and raw material price impacts due to foreign currency volatility. InFebruary 2020 , theU.K. announced its intention to introduce border controls and ourU.K. businesses have positioned themselves well to cope with additional demands that this will bring in order to comply and facilitate the flow of goods in and out of theU.K. 30 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months EndedJuly 31, 2020 Compared to Three Months EndedJuly 31, 2019 Three Months Ended July 31, 2020 2019 Change $ % Variance (Dollars in millions) Net sales$ 212.1 $ 238.5 $ (26.4) (11) %
Cost of sales (excluding depreciation and amortization) 162.4
181.4 (19.0) 10 %
Selling, general and administrative 22.0 25.7 (3.7) 14 %
Restructuring charges 0.1 0.1 - - %
Depreciation and amortization 11.0 12.2 (1.2) 10 %
Operating income $ 16.6 $ 19.1 $ (2.5) (13) %
Interest expense (1.2) (2.6) 1.4 54 %
Other, net (0.2) 0.3 (0.5) (167) %
Income tax expense (4.4) (5.0) 0.6 12 %
Net income $ 10.8 $ 11.8 $ (1.0) (8) %
Our period-over-period results by reportable segment follow.
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Table of Contents Changes Related to Operating Income by Reportable Segment: NA Fenestration
Three Months Ended July 31,
2020 2019 $ Change % Variance
(Dollars in millions)
Net sales $ 122.4 $ 136.3 $ (13.9) (10)%
Cost of sales (excluding depreciation and amortization) 92.6
101.7 (9.1) 9%
Selling, general and administrative 11.9 11.9 - -%
Restructuring charges 0.1 0.1 - -%
Depreciation and amortization 5.4 6.6 (1.2) 18%
Operating income $ 12.4 $ 16.0 $ (3.6) (23)%
Operating income margin 10 % 12 %
Net Sales . Net sales decreased $13.9 million , or 10%, for the three months ended
July 31, 2020 compared to the same period in 2019, which was driven by a
decrease in volumes including the impacts of COVID-19.
Cost of Sales. The cost of sales decreased $9.1 million when comparing the three
months ended July 31, 2020 to the same period in 2019. Cost of sales decreased
due to lower volumes during the period, including a corresponding decrease in
selling expenses as a result of the impacts of COVID-19 as mentioned above.
Selling, General and Administrative. Selling, general and administrative
expenses remained flat when comparing the three months ended July 31, 2020 to
the same period in 2019.
Restructuring Charges. Restructuring charges for each of the three month periods
ended July 31, 2020 and 2019 of $0.1 million relate to facility lease expense
for a vinyl extrusion plant which was closed in January 2017 in the U.S. that
has not been sublet or otherwise exited as of July 31, 2020 .
EU Fenestration
Three Months Ended July 31,
2020 2019 $ Change % Variance
(Dollars in millions)
Net sales $ 38.2 $ 44.3 $ (6.1) (14)%Cost of sales (excluding depreciation and amortization) 25.8
30.7 (4.9) 16%
Selling, general and administrative 4.8 6.0 (1.2) 20%
Depreciation and amortization 2.3 2.2 0.1 (5)%
Operating income $ 5.3 $ 5.4 $ (0.1) (2)%
Operating income margin 14 % 12 %
Net Sales . Net sales decreased$6.1 million , or 14%, when comparing the three months endedJuly 31, 2020 to the same period in 2019. Net sales decreased$5.8 million year-over-year as a result of lower volumes, including the impacts of COVID-19, and$0.4 million due to unfavorable foreign currency rate changes. These decreases were slightly offset by$0.1 million of base price increases. Cost of Sales. The cost of sales decreased$4.9 million for the three months endedJuly 31, 2020 compared to the same period in 2019. Cost of sales decreased due to lower volumes during the period, primarily resulting from the impacts of COVID-19 as mentioned above. Selling, General and Administrative. Selling, general and administrative expense decreased$1.2 million , or 20%, for the three months endedJuly 31, 2020 compared to the same period in 2019. The decrease is due to savings incurred from reduced marketing and other general expenses as a result of COVID-19 restrictions, reimbursements for labor costs in theUK from government aid for COVID-19 furloughs, and lower incentive compensation. 32 -------------------------------------------------------------------------------- Table of Contents NA Cabinet Components Three Months Ended July 31, 2020 2019 $ Change Variance % (Dollars in millions) Net sales$ 51.9 $ 58.7 $ (6.8) (12)%
Cost of sales (excluding depreciation and amortization) 44.2
49.4 (5.2) 11%
Selling, general and administrative 4.6 4.5 0.1 (2)%
Depreciation and amortization 3.2 3.3 (0.1) 3%
Operating income $ (0.1) $ 1.5 $ (1.6) (107)%
Operating income margin - % 3 %
Net Sales . Net sales decreased$6.8 million for the three months endedJuly 31, 2020 compared to the same period in 2019. Approximately$5.0 million of the decrease in sales was due to lower volume related to customer strategic shifts and the impacts of COVID-19. Raw materials surcharges and price declines reduced sales by an additional$1.8 million . Cost of Sales. Cost of sales decreased$5.2 million , or 11%, for the three months endedJuly 31, 2020 compared with the same period in 2019 primarily as a result of lower volume, including a corresponding decrease in selling expenses as a result of the impacts of COVID-19 as mentioned above. Selling, General and Administrative. Selling, general and administrative expense remained relatively flat for the three months endedJuly 31, 2020 compared to the same period in 2019. Restructuring Charges. Restructuring charges incurred during the three months endedJuly 31, 2020 related to severance, equipment moving and other charges incurred for a plant closure as further described in Note 1, "Nature of Operations and Basis of Presentation - Restructuring" to the accompanying unaudited condensed consolidated financial statements contained elsewhere herein. Unallocated Corporate & Other Three Months Ended July 31, 2020 2019 $ Change Variance % (Dollars in millions) Net sales$ (0.4) $ (0.8) $ 0.4 50%
Cost of sales (excluding depreciation and amortization) (0.2)
(0.4) 0.2 (50)%
Selling, general and administrative 0.7 3.3 (2.6) 79%
Depreciation and amortization 0.1 0.1 - -%
Operating loss $ (1.0) $ (3.8) $ 2.8 (74)%
Net Sales . Net sales for Unallocated Corporate & Other represents the
elimination of inter-segment sales for the three months ended July 31, 2020 and
2019.
Cost of Sales. Cost of sales for Unallocated Corporate & Other consists of the
elimination of inter-segment sales, profit in inventory, and other costs.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $2.6 million for the three months ended July 31, 2020
compared to the same period in 2019. This decrease is attributable to $2.5
million of lower medical expenses due to a lower claims experience during the
three months ended July 31, 2020 as compared to the prior year period and $1.2
million of lower executive severance expense year-over-year. The overall
decrease was partially offset by $1.0 million of higher incentive accruals.
Changes related to Non-Operating Items:
Interest Expense. Interest expense decreased $1.4 million for the three months
ended July 31, 2020 compared to the same period in 2019 as a result of lower
interest rates during the period.
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Other, net. The decrease in other, net of $0.5 million for the three months
ended July 31, 2020 compared to the same period in 2019 relates to foreign
currency translation losses, which were partially offset by an increase in the
pension service benefit.
Income Taxes. We recorded income tax expense of $4.4 million on pre-tax income
of $15.1 million for the three months ended July 31, 2020 , an effective rate of
28.6% and income tax expense of $5.0 million on a pre-tax income of $16.8
million for the three months ended July 31, 2019 , an effective rate of 29.5%.
The $0.6 million decrease in income tax expense year-over-year corresponds with
the decline in pre-tax income.
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Nine Months Ended July 31, 2020 Compared to Nine Months Ended July 31, 2019
Nine Months Ended July 31,
2020 2019 Change $ % Variance
(Dollars in millions)
Net sales $ 596.1 $ 653.4 $ (57.3) (9) %
Cost of sales (excluding depreciation and amortization) 469.6
511.3 (41.7) 8 %
Selling, general and administrative 62.8 77.4 (14.6) 19 %
Restructuring charges 0.5 0.3 0.2 (67) %
Depreciation and amortization 35.8 37.1 (1.3) 4 %
Asset impairment charges - 30.0 (30.0) 100 %
Operating income (loss) $ 27.4 $ (2.7) $ 30.1 1,115 %
Interest expense (4.3) (7.6) 3.3 43 %
Other, net 0.1 0.4 (0.3) (75) %
Income tax expense (6.9) (5.9) (1.0) (17) %
Net income (loss) $ 16.3 $ (15.8) $ 32.1 203 %
Our period-over-period results by reportable segment follow.
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Table of Contents Changes Related to Operating Income by Reportable Segment: NA Fenestration
Nine Months Ended July 31,
2020 2019 $ Change % Variance
(Dollars in millions)
Net sales $ 341.4 $ 360.6 $ (19.2) (5)%Cost of sales (excluding depreciation and amortization) 266.5
278.9 (12.4) 4%
Selling, general and administrative 35.0 37.2 (2.2) 6%
Restructuring charges 0.2 0.3 (0.1) 33%
Depreciation and amortization 18.3 20.2 (1.9) 9%
Operating income $ 21.4 $ 24.0 $ (2.6) (11)%
Operating income margin 6 % 7 %
Net Sales . Net sales decreased$19.2 million , or 5%, for the nine months endedJuly 31, 2020 compared to the same period in 2019, which was primarily driven by a decrease in volumes of$20.6 million , which includes the impacts of COVID-19. The decrease in volume was partially offset by increases in prices and surcharges of$1.4 million . Cost of Sales. The cost of sales decreased$12.4 million , or 4%, when comparing the nine months endedJuly 31, 2020 to the same period in 2019. Cost of sales decreased due to lower volumes during the period, including a corresponding decrease in selling expenses as a result of the impacts of COVID-19 as mentioned above. Selling, General and Administrative. Selling, general and administrative expenses decreased$2.2 million , or 6%, when comparing the nine months endedJuly 31, 2020 to the same period in 2019. This decrease was due primarily to lower general expenses due to COVID-19 restrictions and lower compensation and benefits year-over-year. Restructuring Charges. Restructuring charges for each of the nine month periods endedJuly 31, 2020 and 2019 relate to facility lease expense for a vinyl extrusion plant which was closed inJanuary 2017 in theU.S. that has not been sublet or otherwise exited as ofJuly 31, 2020 . Depreciation and Amortization. Depreciation and amortization expense decreased$1.9 million when comparing the nine months endedJuly 31, 2020 and 2019, reflecting the run-off of depreciation expense related to existing assets and disposals during the period. EU Fenestration Nine Months Ended July 31, 2020 2019 $ Change Variance % (Dollars in millions) Net sales$ 104.2 $ 121.2 $ (17.0) (14)%
Cost of sales (excluding depreciation and amortization) 72.1
84.1 (12.0) 14%
Selling, general and administrative 16.0 17.4 (1.4) 8%
Depreciation and amortization 7.0 6.7 0.3 (4)%
Operating income $ 9.1 $ 13.0 $ (3.9) (30)%
Operating income margin 9 % 11 %
Net Sales . Net sales decreased$17.0 million , or 14%, when comparing the nine months endedJuly 31, 2020 to the same period in 2019. Net sales volumes decreased$16.4 million year-over-year, which includes of the impacts of COVID-19, and$1.6 million due to unfavorable foreign currency rate changes. These decreases were slightly offset by$1.0 million of base price increases. Cost of Sales. The cost of sales increased$12.0 million , or 14%, for the nine months endedJuly 31, 2020 compared to the same period in 2019. Cost of sales decreased due to lower volumes during the period, including a corresponding decrease in selling expenses as a result of the impacts of COVID-19 as mentioned above. Selling, General and Administrative. Selling, general and administrative expense remained flat for the nine months endedJuly 31, 2020 compared to the same period in 2019. The decrease is due to savings incurred from reduced marketing and other 36 -------------------------------------------------------------------------------- Table of Contents general expenses as a result of COVID-19 restrictions, reimbursements for labor costs in theUK from government aid for COVID-19 furloughs, and lower incentive compensation. NA Cabinet Components Nine Months Ended July 31, 2020 2019 $ Change Variance % (Dollars in millions) Net sales$ 152.6 $ 175.4 $ (22.8) (13)%
Cost of sales (excluding depreciation and amortization) 132.2
150.9 (18.7) 12%
Selling, general and administrative 13.4 13.9 (0.5) 4%
Restructuring charges 0.3 - 0.3 (100)%
Depreciation and amortization 10.1 9.9 0.2 (2)%
Asset impairment charges - 30.0 (30.0) 100%
Operating loss $ (3.4) $ (29.3) $ 25.9 88%
Operating loss margin (2) % (17) %
Net Sales . Net sales decreased $22.8 million , or 13%, for the nine months ended
July 31, 2020 compared to the same period in 2019. Approximately $18.4 million
of the decrease in sales was due to lower volume related to customer strategic
shifts and the impacts of COVID-19. Raw materials surcharges and price declines
reduced sales by an additional $4.3 million .
Cost of Sales. Cost of sales decreased $18.7 million , or 12%, for the nine
months ended July 31, 2020 compared with the same period in 2019 as a result of
lower volume, including a corresponding decrease in selling expenses as a result
of the impacts of COVID-19 as mentioned above.
Selling, General and Administrative. Selling, general and administrative expense
decreased $0.5 million , or 4%, for the nine months ended July 31, 2020 compared
to the same period in 2019, largely driven by lower compensation.
Restructuring Charges. Restructuring charges of $0.3 million in the nine months
ended July 31, 2020 related to severance, equipment moving and other charges
incurred for a plant closure as further described in Note 1, "Nature of
Operations and Basis of Presentation - Restructuring" to the accompanying
unaudited condensed consolidated financial statements contained elsewhere
herein.
Asset impairment charges. Asset impairment charges of $30.0 million for the nine
months ended July 31, 2019 represent a goodwill impairment which was recorded as
a result of an industry-wide shift from custom cabinets to stock cabinets.
Unallocated Corporate & Other
Nine Months Ended July 31,
2020 2019 $ Change Variance %
(Dollars in millions)
Net sales $ (2.1) $ (3.8) $ 1.7 45%Cost of sales (excluding depreciation and amortization) (1.2)
(2.6) 1.4 (54)%
Selling, general and administrative (1.6) 8.9 (10.5) 118%
Depreciation and amortization 0.4 0.3 0.1 (33)%
Operating income (loss) $ 0.3 $ (10.4) $ 10.7 103%
Net Sales . Net sales for Unallocated Corporate & Other represents the
elimination of inter-segment sales for the nine months ended July 31, 2020 and
2019.
Cost of Sales. Cost of sales for Unallocated Corporate & Other consists of the
elimination of inter-segment sales, profit in inventory, and other costs.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $10.5 million for the nine months ended July 31, 2020
compared to the same period in 2019. This decrease is attributable to (i) $6.5
million of lower medical expenses due to a lower claims experience during the
nine months ended July 31, 2020 as compared to the prior year period, (ii) $1.9
million of lower compensation expense related to the valuations of our stock
based compensation awards and
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reductions in incentive accruals, (iii) lower transaction costs of $1.2 million ,
and (iv) lower executive severance expense of $1.0 million .
Changes related to Non-Operating Items:
Interest Expense. Interest expense decreased $3.3 million for the nine months
ended July 31, 2020 compared to the same period in 2019 as a result of lower
interest rates.
Other, net. The decrease in other, net of $0.3 million at July 31, 2020 compared
to the same period in 2019 relates primarily to foreign currency translation
losses.
Income Taxes. We recorded income tax expense of $6.9 million on pre-tax income
of $23.2 million for the nine months ended July 31, 2020 , an effective rate of
29.7% and income tax expense of $5.9 million on a pre-tax loss of $9.9 million
for the nine months ended July 31, 2019 , an effective rate of 60.1%. The
difference in the effective rates between these periods is primarily due to the
fact that a majority of the asset impairment charge in the North American
Cabinet Components segment recorded during the nine months ended July 31, 2019
did not generate a tax benefit.
Liquidity and Capital Resources
Overview
Historically, our principal sources of funds have been cash on hand, cash flow
from operations, and borrowings under our credit facilities.
We maintain a $325.0 million revolving credit facility (the Credit Facility)
that matures in 2023 (5-year term) and requires interest payments calculated at
a variable market rate depending upon our Consolidated Leverage Ratio. The
applicable rate during the nine months ended July 31, 2020 ranged from LIBOR +
1.50% to LIBOR + 1.75%. Our cost of capital could increase depending upon the
Consolidated Leverage Ratio at the end of any given quarter. In addition to the
Consolidated Leverage Ratio covenant, we are required to meet a Consolidated
Interest Coverage Ratio covenant, and there are limitations on certain
transactions including our ability to incur indebtedness, incur liens, dispose
of material assets, acquire businesses, make restricted payments and pay
dividends (limited to $20.0 million per year). We are amortizing deferred
financing fees of $1.0 million straight-line over the remaining term of the
facility. For further details of the Credit Facility, refer to Note 5, "Debt and
Finance Lease Obligations" to the accompanying unaudited condensed consolidated
financial statements contained elsewhere herein.
As of July 31, 2020 , we had $41.1 million of cash and equivalents, $138.0
million outstanding under the Credit Facility, $4.8 million of outstanding
letters of credit and $15.7 million outstanding under finance leases and other
debt. We had $182.2 million available for use under the Credit Facility at
July 31, 2020 .
We repatriated $12.6 million and $13.9 million of foreign cash during the nine
months ended July 31, 2020 and 2019, respectively. We expect to repatriate
excess cash moving forward and utilize the funds to retire debt or meet current
working capital needs. Funds from operations may be impacted by softer demand
and liquidity concerns of our customers as a result of COVID-19. In the U.K. , we
insure against a portion of our credit losses. In light of the COVID-19
pandemic, the Company has implemented a range of actions aimed at reducing costs
and preserving liquidity. We believe our business model, our current cash
reserves and the recent steps we have taken to strengthen our balance sheet
leave us well-positioned to manage our business as a going concern and remain in
compliance with our debt covenants through the COVID-19 crisis as it continues
to unfold.
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Analysis of Cash Flow
The following table summarizes our cash flow results for the nine months ended
July 31, 2020 and 2019:
Nine Months Ended
July 31,
2020 2019
(In millions)
Cash provided by operating activities $ 47.6 $ 30.0
Cash used for investing activities $ (20.5) $ (16.7)
Cash used for financing activities $ (17.4) $ (30.5)
Operating Activities. Cash provided by operating activities for the nine months
ended July 31, 2020 increased approximately $17.6 million compared to the nine
months ended July 31, 2019 . Cash receipts were favorably impacted by improved
working capital, particularly related to inventory. Our ability to continue
operations and deliver orders as an essential service provider mitigated some of
the effects of COVID-19. Our efforts to maintain operating levels in accordance
with demand allowed us to remain efficient with our working capital and utilize
inventory effectively. To date, slower paying customers as a result of COVID-19
have not significantly impacted our liquidity, but this could become a concern
in the future.
Investing Activities. Cash used for investing activities increased $3.8 million
when comparing the nine months ended July 31, 2020 to the same period in 2019 as
a result of higher capital expenditures.
As a result of the outbreak of the COVID-19 pandemic, we reduced capital
expenditure plans by approximately 25% to 30% for the year ended October 31,
2020 . We expect to fund our capital expenditures through cash on hand, cash
generated from operations, and cash borrowed under our Credit Facility, as
necessary.
Financing Activities. Cash used for financing activities was $17.4 million for
the nine months ended July 31, 2020 , which included $7.9 million of dividends
paid to our shareholders, $6.7 million of treasury stock repurchases, and $5.3
million of net debt repayments. Our use of cash was partially offset by $3.0
million of proceeds from stock option exercises.
Our net debt repayments of $5.3 million include the borrowing and subsequent
repayment of $50.0 million of funds under our credit facility as a precautionary
measure to ensure funds were available to meet our obligations during the
COVID-19 pandemic. In the future, we may be required to borrow additional funds
in order to be prepared for any unforeseen impacts of the COVID-19 pandemic.
For the nine months ended July 31, 2019 , cash used for financing activities was
$30.5 million , primarily attributable to $18.6 million of net repayments of
debt, $8.0 million of dividends paid to our shareholders, and $6.3 million
related to the purchase of treasury stock, partially offset by $2.7 million of
proceeds received from stock option exercises.
Liquidity Requirements
Historically, our strategy for deploying cash has been to invest in organic
growth opportunities, develop our infrastructure, and explore strategic
acquisitions. Other uses of cash include paying cash dividends to our
shareholders and repurchasing our common stock. During the nine months ended
July 31, 2020 and 2019, we repatriated $12.6 million and $13.9 million ,
respectively, of foreign earnings from our foreign locations. We maintain cash
balances in foreign countries which total $13.4 million as of July 31, 2020 .
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with accounting
principles generally accepted in the U.S. (U.S. GAAP) requires us to make
estimates and assumptions that affect the reported amount of assets,
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. Estimates and assumptions about future events and their effects
cannot be perceived with certainty. Estimates may change as new events occur, as
more experience is acquired, as additional information becomes available and as
our operating environment changes. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable under
the circumstances, and that we believe provide a basis for making judgments
about the carrying value of assets and liabilities that are not readily
available through open market quotes. We must use our judgment with regard to
uncertainties in order to make these estimates. Actual results could differ from
these estimates.
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For a description of our critical accounting policies and estimates, see our
Annual Report on Form 10-K for the fiscal year ended October 31, 2019 . During
the nine months ended July 31, 2020 , we adopted new lease accounting guidance.
For further details of this change, refer to "Part I, Financial Information" of
this Quarterly Report on Form 10-Q.
While there have been no changes in the application of principles, methods, and
assumptions used to determine our significant estimates, we may be required to
revise certain accounting estimates and judgments related to the economic and
business impact of the COVID-19 pandemic, such as, but not limited to, those
related to the valuation of goodwill, intangibles, long-lived assets, accounts
receivable, and inventory, which could have a material adverse effect on our
financial position and results of operations.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial
Accounting Standards Board (FASB) or other standards setting bodies that we
adopt as of the specified effective date. Unless otherwise discussed, 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 consolidated financial statements upon adoption.
In June 2016 , the FASB issued Accounting Standards Update No. 2016-13, Financial
Instruments - Credit Losses (Topic 326). This amendment replaces the incurred
loss impairment methodology in current U.S. GAAP and requires that financial
assets be measured on an amortized cost basis and presented at the net amount
expected to be collected. This new methodology reflects expected credit losses
(rather than probable credit losses) and requires consideration of a broader
range of supportable information when determining these estimated credit losses,
including relevant experience, current conditions and supportable forecasts to
determine collectability. In addition, the amendment provides guidance with
regard to the use of an allowance for credit losses for purchased financial
assets and available-for-sale debt securities. This amendment becomes effective
for fiscal years beginning after December 15, 2019 , including interim periods
within that fiscal year. We expect to adopt this amendment during fiscal 2021,
with no material impact on our consolidated financial statements.
Refer to our Annual Report on Form 10-K for the year ended October 31, 2019 for
additional standards we are currently evaluating.
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