Quanex Building Products CORP (NX) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements based on our current assumptions, expectations, estimates and projections about our business and the homebuilding industry, and therefore, it should be read in conjunction with our consolidated financial statements and related notes thereto, as well as our “Cautionary Note Regarding Forward-Looking Statements” discussed elsewhere within this Annual Report on Form 10-K. For a listing of potential risks and uncertainties which impact our business and industry, see “Item 1A. Risk Factors.” Actual results could differ from our expectations due to several factors which include, but are not limited to: the impact of market price and demand for our products, economic and competitive conditions, capital expenditures, new technology, regulatory changes and other uncertainties. Unless otherwise required by law, we undertake no obligation to publicly update any forward-looking statements, even if new information becomes available or other events occur in the future.
Our Business
We currently manufacture components for original equipment manufacturers in the building products industry. The majority of these components can be categorized as window and door (fenestration) components and kitchen and bath cabinet components. Examples of fenestration components include energy-efficient flexible insulating glass spacers, extruded vinyl profiles, window and door screens, precision-formed metal and wood products, window and door seals, and window and door hardware. In addition, we provide certain other non-fenestration components and products, which include solar panel sealants, trim moldings, vinyl decking, water retention barriers, conservatory roof components, and commercial access solutions. We use low-cost production processes and engineering expertise to provide our customers with specialized products for their specific applications. We believe these capabilities provide us with unique competitive advantages. We serve a primary customer base in North America and the U.K., and also serve customers in international markets through our operating locations in the U.K., Germany, Mexico, Canada, and Italy, as well as through sales and marketing efforts in other countries.
We continue to invest in organic growth initiatives and we intend to continue evaluating business acquisitions that allow us to expand our existing fenestration and cabinet component footprint, enhance our product offerings, provide new complementary technology, enhance our leadership position within the markets we serve, and expand into new markets or service lines. We have disposed of non-core businesses in the past, and continue to evaluate our business portfolio to ensure that we are investing in markets where we believe there is potential future growth.
We currently have four reportable business segments: (1) North American Fenestration segment (“NA Fenestration”), comprising three operating segments, consisting of vinyl profiles, IG spacers, screens, custom compound mixing and other fenestration components; (2) European Fenestration segment (“EU Fenestration”), comprising our U.K.-based vinyl extrusion business, manufacturing vinyl profiles and conservatories, and the European insulating glass business manufacturing IG spacers; (3) North American Cabinet Components segment (“NA Cabinet Components”), comprising our North American cabinet door and components business and two wood-manufacturing plants, and (4) Tyman, which was acquired on August 1, 2024, comprising a leading international supplier of engineered fenestration components and access solutions to the construction industry. We maintain a grouping called Unallocated Corporate & Other, which includes transaction expenses, stock-based compensation, long-term incentive awards based on the performance of our common stock and other factors, certain severance and legal costs not deemed to be allocable to all segments, depreciation of corporate assets, interest expense, other, net, income taxes and inter-segment eliminations, and executive incentive compensation and medical expense fluctuations relative to planned costs as determined during the annual planning process. Other corporate general and administrative costs have been allocated to the reportable business segments, based upon a relative measure of profitability in order to more accurately reflect each reportable business segment's administrative costs. The accounting policies of our operating segments are the same as those used to prepare our accompanying consolidated financial statements. Corporate general and administrative expenses allocated during the years ended October 31, 2024, 2023 and 2022 were $27.3 million, $23.5 million, and $24.5 million, respectively.
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Recent Transactions and Events
On August 1, 2024, we completed the acquisition of Tyman plc (the “Tyman Acquisition”), a company incorporated in England and Wales (“Tyman”). The aggregate consideration due pursuant to the Tyman Acquisition at closing comprised of 14,139,477 newly issued Quanex common shares (“New Quanex Shares”) and cash consideration of approximately $504.1 million (being the Pound Sterling amount of cash consideration of £392.2 million in respect of all of the Tyman Shares converted to U.S. Dollars at an exchange rate of 1.2855). New Quanex Shares issued in connection with the Tyman Acquisition on the New York Stock Exchange took effect on August 2, 2024 and Tyman’s shares on the London Stock Exchange were canceled.
On November 1, 2022, we entered into an Asset Purchase Agreement with LMI and the equity owners of LMI, Lauren International, Ltd. and Meteor-US-Beteiligungs GMBH. Under the Purchase Agreement, we acquired substantially all of the operating assets comprising LMI’s polymer mixing and rubber compound production business and also agreed to assume certain liabilities relating to the Acquisition. LMI is allocated entirely to our North American Fenestration reportable operating segment. As consideration for the Purchased Assets, we paid $91.3 million in cash utilizing funds borrowed under our Credit Facility. In connection with the Acquisition, we amended our existing finance lease with Lauren Real Estate Holding LLC for the purpose of adding an additional lease renewal option and increasing rental space by approximately 60,000 square feet of rental space which was added to the 313,595 square feet of rentable area located in Cambridge, Ohio.
U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the military conflicts currently ongoing in Ukraine and Gaza. Although the length and impact of these ongoing military conflicts are highly unpredictable, the conflicts could lead to market or operational disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. Russia, Europe’s largest provider of natural gas, has significantly reduced the export of natural gas compared to the beginning of the conflict resulting in the increase in natural gas prices and the potential for natural gas shortages. In addition, one of the suppliers of a vapor barrier used in the production of our insulating glass spacers is located in Israel and may experience a disruption as a result of the ongoing conflict in Gaza. If these trends continues, this would not only negatively impact our European manufacturing facilities, this may also impact our customers and their demand for our products. We continue to monitor these situations and their impact on our business.
The conflicts in Ukraine and Gaza and their impacts on the global economy, including inflation and the price of raw materials, supply chain disruptions, and the volatility in interest rates including home mortgage rates, are unpredictable and there may be developments outside our control requiring us to adjust our operating plan.
Market Overview and Outlook
We believe the primary drivers of our operating results continue to be North American residential remodeling and replacement (R&R) and new home construction 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 historically evaluated the market using data from the National Association of Homebuilders (NAHB) with regard to housing starts and R&R activity, and published reports by Ducker Worldwide, LLC (Ducker), a consulting and research firm, with regard to window shipments in the U.S.
In November 2024, the NAHB forecasted calendar-year housing starts (excluding manufactured units) to be 1.4 million in the 2024, 1.5 million in 2025, and 1.6 million in 2026 calendar-years. The November 2022 Ducker forecast indicated that window shipments in the R&R market are expected to decrease approximately 5.9% and increase 4.0% in the calendar-years ended 2024 and 2025, respectively, and window shipments in the new construction market are expected to increase 0.9% and 1.6% in the calendar-years ended 2024 and 2025, respectively, resulting in overall window shipment decline of 2.7% in 2024 and increase 2.8% in 2025. Derived from reports published by Ducker, the overall decrease in window shipments for the trailing twelve months ended September 30, 2024 was 0.7%. During this period, new construction activities decreased 2.5% and R&R increased 1.1%.
Our U.K. vinyl business (commonly referred to as “Liniar”) is largely focused on the sale of vinyl house systems under the trade name “Liniar” to smaller window manufacturers in the U.K. Liniar is one of the larger providers of vinyl extruded products in the U.K. in terms of volume shipped. Currently, the U.K. is experiencing a shortage in affordable housing, with rising demand due in part to a growing immigrant population. Liniar’s current primary customers are smaller window fabricators, as opposed to the larger OEMs that comprise a large portion of the North American market. These manufacturers seek the quality and technology of the specific products identified by the Liniar trade name. In addition, Liniar services non-fenestration markets including the manufacture of roofing for conservatories, vinyl decking and vinyl water retention barriers
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used for landscaping. We believe there are growth opportunities within these markets in the U.K. and potential synergies which may enable us to sell complementary products.
NA Cabinet Components manufactures kitchen and bathroom cabinet doors and components, amongst other products, using a variety of woods from traditional hardwoods to engineered wood products. Currently, most of the revenue in the NA Cabinet Components segment is earned in the U.S., so domestic housing starts and R&R activity constitute the primary drivers of this business as well. The cabinet door market is stratified as follows: stock (low-cost, low-variations), semi-custom (more customized, just-in-time manufacturing, higher price point) and custom (precise customer specifications, just-in-time manufacturing, high-end price point). NA Cabinet Component's primary market is semi-custom.
The Tyman business manufactures and distributes engineered door and window components and access solutions to the construction industry. Approximately 60% of revenue is earned in the U.S., so domestic housing starts and R&R activity also constitute the primary drivers of this business, as well as commercial building starts being the main driver of the access solutions business. Sales in the U.S. are predominantly to large OEMs as well as through distributors. Approximately 15% of Tyman’s revenue is earned in the U.K., with the majority being derived from R&R activity. We have historically evaluated the U.K. market using data from the Construction Products Association (CPA). U.K. customers are smaller window and door manufacturers and distributors. The remainder of revenue is earned in Canada, Italy and Continental Europe, with sales and marketing efforts in other countries internationally. The drivers of these businesses are largely housing starts and R&R activity in these countries.
Our business is seasonal, particularly our fenestration business, as inclement weather during the winter months tends to slow down construction, particularly as related to “outside of the house” construction. To some extent, we believe our kitchen and bathroom cabinet door business lessens the impact of seasonality on our operating results, as the cabinet business is “inside of the house” and less susceptible to weather.
We are impacted by regulation of energy standards. Although the U.S. government has been less aggressively pursuing higher energy efficiency standards in recent years, other countries have implemented higher energy efficiency standards which should bode well for our fenestration-related business in these markets, particularly our warm-edge spacer products, window and door seals and tilt ‘n’ turn micro-ventilation products.
Several commodities in our business are subject to pricing fluctuations, including polyvinyl resin (PVC), titanium dioxide (TiO2), petroleum products, stainless steel, zinc, aluminum and wood. For the majority of our customers and critical suppliers, we have price adjusters in place which effectively share the base pass-through price changes for our primary commodities with our customers commensurate with the market at large. Our long-term exposure to these price fluctuations is somewhat mitigated due to the contractual component of the adjuster program. However, these adjusters are not in place with all customers and for all commodities, and there is a level of exposure to such volatility due to the lag associated with the timing of price updates in accordance with our customer agreements, particularly with regard to hardwoods. In addition, some of these commodities are in high demand, particularly in Europe, which can affect the cost of the raw materials, a portion of which we may not be able to fully recover.
The global economy remains uncertain due to currency devaluations, political unrest, terror threats, global pandemics such as COVID-19, and the political landscape in the U.S. These and other macro-economic factors have impacted the global financial markets, which may have contributed to significant changes in foreign currencies. We continue to monitor our exposure to changes in exchange rates.
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Comparison of the fiscal years ended October 31, 2024 and 2023
This table sets forth our consolidated results of operations for the twelve-month periods ended October 31, 2024 and 2023.
| For the Years Ended October 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | ||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Net sales | $ | 1,277,862 | $ | 1,130,583 | $ | 147,279 | 13% | ||||||||||
| Cost of sales (excluding depreciation and amortization) | 972,238 | 853,059 | 119,179 | 14% | |||||||||||||
| Selling, general and administrative | 190,470 | 123,957 | 66,513 | 54% | |||||||||||||
| Depreciation and amortization | 60,328 | 42,866 | 17,462 | 41% | |||||||||||||
| Operating income | 54,826 | 110,701 | (55,875) | (50)% | |||||||||||||
| Interest expense | (20,593) | (8,136) | (12,457) | (153)% | |||||||||||||
| Other, net | 7,849 | (5,519) | 13,368 | (242)% | |||||||||||||
| Income tax expense | (9,023) | (14,545) | 5,522 | 38% | |||||||||||||
| Net income | $ | 33,059 | $ | 82,501 | $ | (49,442) | (60)% |
Our year-over-year results by reportable segment follow. Our comparison of the results for the fiscal years ended October 31, 2023 and 2022 by reportable segment for the prior year comparative periods can be found in the annual report on Form 10-K for the year ended October 31, 2023.
Changes Related to Operating Income by Reportable Segment:
NA Fenestration
| For the Years Ended October 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | ||||||||||
| (Dollars in thousands) | |||||||||||||
| Net sales | $ | 650,058 | $ | 667,482 | $ | (17,424) | (3)% | ||||||
| Cost of sales (excluding depreciation and amortization) | 498,378 | 517,805 | (19,427) | (4)% | |||||||||
| Selling, general and administrative | 56,630 | 56,979 | (349) | (1)% | |||||||||
| Depreciation and amortization | 20,994 | 20,539 | 455 | 2% | |||||||||
| Operating income | $ | 74,056 | $ | 72,159 | $ | 1,897 | 3% | ||||||
| Operating income margin | 11 | % | 11 | % |
Net Sales. Net sales decreased $17.4 million, or 3%, for the twelve months ended October 31, 2024 compared to the same period in 2023, which was primarily driven by a $20.9 million decrease in volumes mainly due to softer market demand driven by lower consumer confidence, as well as the strategic sale of a plant in October 2024, partially offset by favorable price and surcharge impacts of $3.5 million.
Cost of Sales. Cost of sales decreased $19.4 million, or 4%, for the twelve months ended October 31, 2024 compared to the same period in 2023. Cost of sales, including labor, decreased primarily due to lower volumes and deflation in the price of raw materials during the period.
Selling, General and Administrative. Our selling, general and administrative expenses decreased by $0.3 million, or 1%, for the twelve months ended October 31, 2024 compared to the same period in 2023. This decrease was due primarily to the gain on disposition of capital assets during the twelve months ended October 31, 2024 partially offset by an increases in labor costs year-over-year.
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EU Fenestration
| For the Years Ended October 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | ||||||||||
| (Dollars in thousands) | |||||||||||||
| Net sales | $ | 230,712 | $ | 250,774 | $ | (20,062) | (8)% | ||||||
| Cost of sales (excluding depreciation and amortization) | 144,585 | 158,491 | (13,906) | (9)% | |||||||||
| Selling, general and administrative | 31,318 | 32,350 | (1,032) | (3)% | |||||||||
| Depreciation and amortization | 10,420 | 9,849 | 571 | 6% | |||||||||
| Operating income | $ | 44,389 | $ | 50,084 | $ | (5,695) | (11)% | ||||||
| Operating income margin | 19 | % | 20 | % |
Net Sales. Net sales decreased $20.1 million, or 8%, when comparing the twelve months ended October 31, 2024 compared to the same period in 2023, which was primarily driven by an $18.4 million decrease in volumes largely due to softer market demand driven by weaker consumer confidence and base price decreases of $4.2 million, partially offset by favorable foreign currency rate change of $2.5 million.
Cost of Sales. The cost of sales decreased $13.9 million, or 9%, for the twelve months ended October 31, 2024 compared to the same period in 2023. Cost of sales decreased primarily due to a decrease in volumes, deflation in the price of raw materials and foreign currency impacts.
Selling, General and Administrative. Our selling, general and administrative expense decreased $1.0 million, or 3%, for the twelve months ended October 31, 2024 compared to the same period in 2023. The decrease is primarily due to a decrease in professional fees, labor costs partially offset by a decrease in professional fees and foreign currency impacts year-over-year.
NA Cabinet Components
| For the Years Ended October 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | ||||||||||
| (Dollars in thousands) | |||||||||||||
| Net sales | $ | 198,424 | $ | 215,445 | $ | (17,021) | (8)% | ||||||
| Cost of sales (excluding depreciation and amortization) | 168,414 | 178,210 | (9,796) | (5)% | |||||||||
| Selling, general and administrative | 20,727 | 21,074 | (347) | (2)% | |||||||||
| Depreciation and amortization | 12,244 | 12,208 | 36 | —% | |||||||||
| Operating (loss) income | $ | (2,961) | $ | 3,953 | $ | (6,914) | (175)% | ||||||
| Operating (loss) income margin | (1) | % | 2 | % |
Net Sales. Net sales decreased $17.0 million, or 8%, for the twelve months ended October 31, 2024 compared to the same period in 2023, which was primarily driven by a $13.5 million decrease in volumes due to softer market demand driven by weaker consumer confidence and a $3.5 million decrease in price from lower raw material index impacts.
Cost of Sales. The cost of sales decreased $9.8 million, or 5%, for the twelve months ended October 31, 2024 compared to the same period in 2023, primarily as a result of lower volumes year-over-year.
Selling, General and Administrative. Our selling, general and administrative expense decreased $0.3 million, or 2%, for the twelve months ended October 31, 2024 compared to the same period in 2023. The decrease is primarily due to lower labor costs and professional fees year-over-year.
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Tyman
The Tyman reportable segment is comprised solely of the business acquired on August 1, 2024. The results for the period ended August 1, 2024 through October 31, 2024 are summarized in the following table (including the effect of the amortization of the step-up of inventory of approximately $28.5 million and accounts receivable of approximately $0.6 million, and $10.4 million of transaction fees incurred to support the acquisition during the twelve months ended October 31, 2024):
| For the Year Ended October 31, 2024 | ||
|---|---|---|
| (Dollars in thousands) | ||
| Net sales | $ | 203,435 |
| Cost of sales (excluding depreciation and amortization) | 163,946 | |
| Selling, general and administrative | 44,453 | |
| Depreciation and amortization | 16,438 | |
| Operating loss | $ | (21,402) |
| Operating loss margin | (11) | % |
Unallocated Corporate & Other
| For the Years Ended October 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | ||||||||||
| (Dollars in thousands) | |||||||||||||
| Net sales | $ | (4,767) | $ | (3,118) | $ | (1,649) | 53% | ||||||
| Cost of sales (excluding depreciation and amortization) | (3,085) | (1,447) | (1,638) | 113% | |||||||||
| Selling, general and administrative | 37,342 | 13,554 | 23,788 | 176% | |||||||||
| Depreciation and amortization | 232 | 270 | (38) | (14)% | |||||||||
| Operating loss | $ | (39,256) | $ | (15,495) | $ | (23,761) | 153% |
Net Sales. Net sales for Unallocated Corporate & Other represents the elimination of inter-segment sales for the twelve months ended October 31, 2024 and 2023.
Cost of Sales. Cost of sales for Corporate & Other consists of the elimination of inter-segment sales, profit in inventory, and other costs.
Selling, General and Administrative. Our selling, general and administrative expenses increased $23.8 million, or 176%, for the twelve months ended October 31, 2024 compared to the same period in 2023. This increase is primarily attributable to an increase in transaction fees year-over-year.
Changes Related to Non-Operating Items:
Interest Expense. Interest expense increased $12.5 million, or 153%, for the twelve months ended October 31, 2024 compared to the same period in 2023 as primarily as result of higher borrowings outstanding during the period. Borrowings under credit facilities increased to $716.3 million as of October 31, 2024 compared with $15.0 million as of October 31, 2023.
Other, net. Other income increased $13.4 million for the twelve months ended October 31, 2024 compared to other loss in the same period in 2023. The increase is primarily due to an increase in foreign currency derivative gains and a decrease in expenses incurred for pension termination in the prior year.
Income Taxes. We recorded income tax expense of $9.0 million on pre-tax income of $42.1 million for the twelve months ended October 31, 2024, an effective rate of 21.4%, and income tax expense of $14.5 million on pre-tax income of $97.0 million for the twelve months ended October 31, 2023, an effective rate of 15.0%. The October 31, 2024 effective rate is higher than the U.S. federal statutory rate of 21% primarily due to state and local income tax, non U.S. income inclusion, and nondeductible expenses, offset by the U.K. patent box benefit, foreign tax credit, and change in the valuation allowance. The effective rate for the twelve months ended October 31, 2023 was impacted due to the U.K. patent box benefit, tax return to accrual adjustments, and changes in uncertain tax positions, offset by state and local income tax, non U.S. income tax and nondeductible expenses.
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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. As of October 31, 2024, we had $97.7 million of cash and cash equivalents, $716.3 million outstanding under our credit facilities, $7.0 million of outstanding letters of credit and $60.7 million outstanding leases under finance leases and other debt. Of the $60.7 million outstanding under finance leases and other debt, $50.3 million relates to real estate leases. We had $245.5 million available for use under a revolving credit facility at October 31, 2024.
On June 12, 2024, in connection with the Tyman Acquisition, the Company, Wells Fargo Bank, National Association (“Wells Fargo Bank”, acting as agent, swingline lender and issuing lender, the “Agent”), the other entities therein specified in the capacities therein specified, and the lenders parties thereto, entered into an amendment to the Second Amended and Restated Credit Agreement, dated as of July 6, 2022 (the “Existing Credit Agreement”, and the Existing Credit Agreement as so amended, the “Amended Credit Agreement”). The Amended Credit Agreement did not become effective until August 1, 2024 upon the completion of the Tyman Acquisition.
The Amended Credit Agreement (i) increased the senior secured revolving credit facility to an aggregate principal amount of $475 million (the “Revolving Credit Facility”) and (ii) provides for a senior secured term loan A facility in an aggregate principal amount of $500 million (the “Term A Facility” and together with the Revolving Credit Facility, the “Facilities”). The Revolving Credit Facility included alternative currency, letter of credit, and swing-line sub-facilities of $100 million, $30 million, and $15 million, respectively. We capitalized $13.8 million of deferred financing fees related to the Amended Credit Agreement. The maturity date of the Facilities will be five years after the acquisition effective date, maturing on August 1, 2029.
The Term A Facility amortizes on a quarterly basis at 5% per annum of the original principal amount of the Term A Facility, with the remainder due at maturity. The Term A Facility must be prepaid with 100% of the net cash proceeds of the issuance or incurrence of debt and 100% of the net cash proceeds of all asset sales, insurance and condemnation recoveries, and other asset dispositions.
Borrowings under the Facilities bear interest, at our option, at (1) the Base Rate plus an applicable margin or (2) Adjusted Term SOFR plus an applicable margin. The applicable margin will range from 1.0% to 1.75% for Base Rate loans and 2.0 to 2.75% for Adjusted Term SOFR loans. In addition, we are subject to commitment fees for the unused portion of the Revolving Credit Facility.
The weighted average interest rate of borrowings outstanding for the twelve-month periods ended October 31, 2024 and 2023 was 7.20% and 6.01%, respectively. We were in compliance with our debt covenants as of October 31, 2024. For additional details of the Revolving Credit Facility, see Note 9, “Debt,” included elsewhere within this Annual Report on Form 10-K.
We expect to repatriate excess cash moving forward and use the funds to retire debt or meet current working capital needs. 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 and remain in compliance with our debt covenants.
Analysis of Cash Flow
The following table summarizes our cash flow results for the years ended October 31, 2024, 2023, and 2022:
| Year Ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| (In thousands) | ||||||||||
| Cash flows provided by operating activities | $ | 88,812 | $ | 147,052 | $ | 97,965 | ||||
| Cash flows used for investing activities | $ | (420,594) | $ | (128,439) | $ | (32,962) | ||||
| Cash flows provided by (used for) financing activities | $ | 385,156 | $ | (16,151) | $ | (45,879) |
Our cash flow analysis for the fiscal years ended October 31, 2023 and 2022 for the prior year comparative periods can be found in the annual report on Form 10-K for the year ended October 31, 2023.
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Operating Activities
Cash provided by operating activities decreased $58.2 million for the year ended October 31, 2024 compared to the year ended October 31, 2023. A portion of this decrease is attributable to the activities of Tyman, which was acquired on August 1, 2024. Excluding this acquisition, improvements in working capital partially offset lower sales due to a reduction in demand.
Investing Activities
Cash used for investing activities for the year ended October 31, 2024 increased $292.2 million compared to the year ended October 31, 2023, primarily as a result of the acquisition of Tyman.
At October 31, 2024, we had firm purchase commitments of approximately $2.5 million for the purchase or construction of capital assets. We plan to fund these capital expenditures through cash from operations or borrowings under our revolving credit facility.
Financing Activities
Cash provided by financing activities was $385.2 million for the year ended October 31, 2024 compared to cash used for financing opportunities during the year ended October 31, 2023. During the years ended October 31, 2024 and 2023, we acquired Tyman and LMI, respectively.
Liquidity Requirements
Our strategy for deploying cash is 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 own stock. We maintain cash balances in foreign countries which totaled $44.0 million and $17.8 million as of October 31, 2024 and 2023. During the years ended October 31, 2024 and 2023, we repatriated $49.2 million and $47.1 million, respectively, of foreign earnings from our international divisions.
We believe that we have sufficient funds and adequate financial resources available to meet our anticipated liquidity needs. We expect to use our cash flow from operations to fund operations for the next twelve months and the foreseeable future. We believe these funds should be adequate to provide for our working capital requirements, capital expenditures, and dividends, while continuing to meet our debt service requirements.
Revolving Credit Facility and Term Loan Facility
We maintain our $475 million Revolving Credit Facility and $500 million Term A Facility with Wells Fargo Bank acting as agent, swingline lender and issuing lender. The Revolving Credit Facility includes alternative currency, letter of credit, and swing-line sub-facilities of $100 million, $30 million, and $15 million, respectively. The maturity date of the Facilities will be five years after the acquisition effective date, maturing on August 1, 2029.
The Term A Facility amortizes on a quarterly basis at 5% per annum of the original principal amount of the Term A Facility, with the remainder due at maturity. The Term A Facility must be prepaid with 100% of the net cash proceeds of the issuance or incurrence of debt and 100% of the net cash proceeds of all asset sales, insurance and condemnation recoveries, and other asset dispositions.
Borrowings under the Facilities bear interest, at our option, at (1) the Base Rate plus an applicable margin or (2) Adjusted Term SOFR plus an applicable margin. The applicable margin will range from 1.0% to 1.75% for Base Rate loans and 2.0 to 2.75% for Adjusted Term SOFR loans. In addition, we are subject to commitment fees for the unused portion of the Revolving Credit Facility
The Credit Facility provides for revolving credit commitments for a minimum principal amount of $10.0 million, up to an aggregate amount of $310.0 million or 100% of Consolidated EBITDA, subject to the lender's discretion to elect or decline the incremental increase. 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 3.00 to 1.00, and (2) Consolidated Net Leverage Ratio requirement, whereby we must not permit the Consolidated Net Leverage Ratio, as defined, to be greater than 3.25 to 1.00.
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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 $35.0 million per year) and to conduct other transactions as further defined in the Credit Facility. Some of these limitations, however, do not take effect so long as Consolidated Net Leverage Ratio 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 pledged as collateral for the Credit Facility.
Issuer Purchases of Equity Securities
During December 2021, our Board of Directors approved a new stock repurchase program that authorized the repurchase of up to $75.0 million worth of shares of our common stock. During the years ended October 31, 2024, 2023 and 2022, we purchased zero, 275,000 and 291,000 shares, respectively, at a cost of zero, $5.6 million and $6.6 million, respectively, under this program.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America (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.
We believe the following are the most critical accounting policies used in the preparation of our consolidated financial statements as well as the significant judgments and uncertainties affecting the application of these policies. We consider an estimate to be critical if it is subjective and if changes in the estimate using different assumptions would result in a material impact to our financial position or results of operations.
Business Combinations - Contingencies
We apply the acquisition method of accounting for business combinations in accordance with U.S. GAAP, which requires us to make use of estimates and judgements to allocate the purchase price paid for acquisitions to the fair value of the net assets and liabilities acquired. We use established valuation techniques and engage reputable valuation specialists to assist us with these valuations. However, there is a risk that we may not identify all pre-acquisition contingencies or that our estimates may not reflect the actual results when realized. We use a a reasonable measurement period to record any adjustment related to the opening balance sheet (generally, less than one year). After the measurement period, changes to the opening balance sheet can result in the recognition of income or expense as period costs. If our purchase accounting estimates are not correct, or if we do not recognize contingent liabilities within the measurement period, we may incur losses.
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Impairment or Disposal of Long-Lived Assets
Property, Plant and Equipment and Intangible Assets with Defined Lives
We make judgments and estimates in conjunction with the carrying value of our long-term assets, including property, plant and equipment, and identifiable intangibles. These judgments may include the basis for capitalization, depreciation and amortization methods and the useful lives of the underlying assets. In accordance with U.S. GAAP, we review the carrying values of these assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine that the carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value exceeds the sum of the undiscounted cash flows and after considering alternate uses for the asset, an impairment charge would be recorded in the period in which such review is performed. We measure the impairment loss as the amount by which the carrying amount of the long-lived asset exceeds its fair value. Fair value is determined by reference to quoted market prices in active markets, if available, or by calculating the discounted cash flows associated with the use and eventual disposition of the asset. Therefore, if there are indicators of impairment, we are required to make long-term forecasts of our future revenues and costs related to the assets subject to review. Forecasts require assumptions about demand for our products and future market conditions. Although there may be no indicators of impairment in the current period, unanticipated changes to assumptions or circumstances in future periods could result in an impairment charge in the period of the change. No impairment charges were incurred with regard to our property, plant and equipment for the years ended October 31, 2024, 2023 and 2022.
We monitor relevant circumstances, including industry trends, general economic conditions, and the potential impact that such circumstances might have on the valuation of our identifiable intangibles. Events and changes in circumstances that may cause a triggering event and necessitate such a review include, but are not limited to: a decrease in sales for certain customers, improvements or changes in technology, and/or a decision to phase-out a trademark or trade name. Such events could negatively impact the carrying value of our identifiable intangibles. It is possible that changes in such circumstances or in the numerous variables associated with the judgments, assumptions, and estimates made by us in assessing the appropriate valuation of our identifiable intangibles could require us to further write down a portion of our identifiable intangibles and record related non-cash impairment charges in the future. We apply a variety of techniques to establish the carrying value of our intangible assets, including the relief from royalty and excess current year earnings methods.
Goodwill
We use the acquisition method to account for business combinations and, to the extent that the purchase price exceeds the fair value of the net assets acquired, we record goodwill. In accordance with U.S. GAAP, we are required to evaluate our goodwill at least annually. We perform our annual goodwill assessment as of August 31, or more frequently if indicators of impairment exist. Qualitative factors that indicate impairment could include, but are not limited to, (i) macroeconomic conditions, (ii) industry and market considerations, (iii) cost factors, (iv) overall financial performance of the reporting unit, and (v) other relevant entity-specific events. The first step in our annual goodwill assessment is to perform the optional qualitative assessment allowed by ASC Topic 350 “Intangibles - Goodwill and Other” (ASC 350). In our qualitative assessment, we evaluate relevant events or circumstances to determine whether it is more likely than not (i.e., greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, ASC 350 requires us to compare the fair value of such reporting unit to its carrying value including goodwill. To determine the fair value of our reporting units, we use multiple valuation techniques including a discounted cash flow analysis, using the applicable weighted average cost of capital, in combination with a market approach that uses market multiples and a selection of guideline public companies. This test requires us to make assumptions about the future growth of our business and the market in general, as well as other variables such as the level of investment in capital expenditure, growth in working capital requirements and the terminal or residual value of our reporting units beyond the periods of estimated annual cash flows. We use a third-party valuation firm to assist us with this analysis. If the fair value of each reporting unit exceeds its carrying value, no action is required. Otherwise, an impairment loss is recorded to the extent that the carrying amount of the reporting unit including goodwill exceeds the fair value of that reporting unit. We believe the estimates and assumptions used in our impairment assessment are reasonable based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated during current or future periods.
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At our annual testing date, August 31, 2024, we had seven reporting units with goodwill balances: three reporting units included in our NA Fenestration operating segment, two reporting units included in our EU Fenestration operating segment, one reporting unit included in our NA Cabinet Components operating segment, and one reporting unit included in our Tyman operating segment, which was acquired on August 1, 2024. We performed a qualitative assessment for the reporting units in the NA Fenestration, EU Fenestration, and Tyman operating segments. This review included an analysis of historical goodwill test results, operating results relative to forecast, projected results over the next five years, and other measures and concluded that there were no indicators of potential impairment associated with these reporting units. Therefore, no additional testing was deemed necessary for the reporting units in the NA Fenestration, EU Fenestration, and Tyman operating segments that were assessed qualitatively. We also updated the quantitative assessment for the reportable unit in the NA Cabinet Components segment. We determined the fair value of this reportable unit exceeded the carrying value by 20.5% and concluded that no impairment was necessary.
Income Taxes
We operate in various jurisdictions and therefore our income tax expense relates primarily to income taxes in the U.S. and the U.K., as well as local, state and foreign income taxes. We recognize the effect of a change in tax rates in the period of the change. We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and the amounts reported in our consolidated balance sheets, as well as net operating losses and tax credit carry forward. We evaluate the carrying value of our net deferred tax assets and determine if our business will generate sufficient future taxable income to realize the net deferred tax assets. We perform this review for recoverability on a jurisdictional basis, whereby we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence can be objectively verified. We evaluate recoverability based on an estimate of future taxable income using the long-term forecasts we use to evaluate long-lived assets, goodwill and intangible assets for impairment, taking into consideration the future reversal of existing taxable temporary differences and reviewing our current financial operations. The company classifies interest on income tax as income tax expense and classifies penalties on income tax as other expenses. In the event that our estimates and assumptions indicate we will not generate sufficient future taxable income to realize our deferred tax assets, we will record a valuation allowance, to the extent indicated, to reduce our deferred tax assets to their realizable value.
Annually, we evaluate our tax positions to determine if there have been any changes in uncertain tax positions or if there has been a lapse in the statute of limitations with regard to such positions. As of October 31, 2024 and 2023 our liability for uncertain tax positions was zero and $0.3 million, respectively. The tax positions related to certain state tax items regarding the interpretation of tax laws and regulations.
We believe we will have sufficient taxable income in the future to fully utilize our deferred tax assets recorded as of October 31, 2024, net of our valuation allowance. There is a risk that our estimates related to the future use of loss carry forwards and our ability to realize our deferred tax assets may not come to fruition, and that the results could materially impact our financial position and results of operations. Our total gross deferred tax assets as of October 31, 2024 and 2023 were $60.3 million and $18.1 million, respectively, for which we reserved a valuation allowance of $4.4 million and $0.6 million for the corresponding periods. The deferred tax assets, net of valuation allowance, offset the deferred liability within a jurisdiction.
Inventory
We record inventory at the lower of cost or net realizable value. Inventories are valued using the first-in first-out (FIFO) method. Fixed costs related to excess manufacturing capacity have been expensed in the period, and therefore, are not capitalized into inventory. Inventory quantities are regularly reviewed and provisions for excess or obsolete inventory are recorded primarily based on our forecast of future demand and market conditions. Significant unanticipated changes to our forecasts or changes in the net realizable value of our inventory would require a change in the provision for excess or obsolete inventory. For the years ended October 31, 2024 and 2023, our inventory reserves are approximately 1% and 3% of gross inventory, respectively.
Retirement Plans
We have historically sponsored a defined benefit pension plan. On January 1, 2020, we enacted changes to our pension plan whereby the benefits for all participants were frozen and thereafter those participants will receive increased benefits in the company sponsored defined contribution plan in lieu of participation in a defined benefit plan. During the three months ended October 31, 2023, we contributed $6.3 million to the pension plan and settled the pension benefit obligation and the defined benefit pension plan as terminated. During the year ended October 31, 2024, we received a $0.9 million settlement reimbursement related to the 2023 contribution.
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Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments include unconditional purchase obligations which consist of commitments to buy miscellaneous parts, inventory, and expenditures related to capital projects in progress.
Our supplemental benefit plan was terminated in June 2023. As a result, our liability for this plan was distributed in June 2024 in accordance with IRS requirements. As of October 31, 2024, our liability under the deferred compensation plan was approximately $4.7 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined in the rules promulgated by the SEC, that we believe would be material to investors and for which it is reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Effects of Inflation
We have experienced the impact of inflation on our cost of raw materials, labor, freight and overhead, particularly during the years ended October 31, 2024 and 2023. Although we use contractual price indexing along with periodic base price increases to minimize the effect of inflation on our results, we have not been able to fully recover all of the inflationary cost increases. We cannot provide assurance that our results of operations and financial position will not be materially impacted by inflation in the future.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standards setting bodies that we adopt as of the specified effective date. We did not adopt any new accounting pronouncements during the twelve months ended October 31, 2024.
Accounting Standards Not Yet Adopted
In November 2023, the FASB issued “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 with early adoption is permitted. The guidance is to be applied retrospectively to all prior periods presented in the financial statements. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.
In December 2023, the FASB issued “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which includes updates to the income tax disclosures related to the rate reconciliation and disaggregation of income taxes paid by jurisdiction. The amendments are effective for fiscal years beginning after December 15, 2024 with early adoption permitted. The amendments should be applied prospectively, however retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.