QUANEX BUILDING PRODUCTS CORP Management’s Report of Financial Condition and Results of Operations (Form 10-Q)

The following discussion and analysis should be read in conjunction with the
accompanying unaudited condensed consolidated financial statements and related
notes as of January 31, 2022, and for the three months ended January 31, 2022
and 2021, 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
ended October 31, 2021.

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, vinyl 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 in North America and the U.K., and
also serve customers in international markets through our operating plants in
the U.K. and Germany, as well as through sales and marketing efforts in other
countries.

We continue to invest in organic growth initiatives and we intend to continue
evaluating business acquisitions that allow us to expand our existing
fenestration and cabinet component footprint, enhance our product offerings,
provide new complementary technology, enhance our leadership position within the
markets we serve and expand into new markets or service lines. We have disposed
of non-core businesses in the past, and continue to evaluate our business
portfolio to ensure that we are investing in markets where we believe there is
potential future growth.

We currently have three reportable business segments: (1) North American
Fenestration segment ("NA Fenestration"), comprising three operating segments,
manufacturing vinyl profiles, IG spacers, screens and other fenestration
components; (2) European Fenestration segment ("EU Fenestration"), comprising
our U.K.-based vinyl extrusion business, manufacturing vinyl profiles and
conservatories, and the European insulating glass business manufacturing IG
spacers; and (3) North American Cabinet Components segment ("NA Cabinet
Components"), comprising our North American cabinet door and components business
and two wood-manufacturing plants. 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, 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 corporate general
and administrative costs have been allocated to the reportable business
segments, based upon a relative measure of profitability in order to more
accurately reflect each reportable business segment's administrative costs. We
allocate corporate expenses to businesses acquired mid-year from the date of
acquisition. The accounting policies of our operating segments are the same as
those used to prepare our accompanying condensed consolidated financial
statements.

Recent transactions and events

On March 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 essential role the construction industry plays in providing
housing and necessary infrastructure.

As federal, state and local governments respond to the public health crisis, significant uncertainty has been created in the economy. The COVID-19 pandemic and its related effects continue to have a significant negative effect on many sectors of the economy and we could be further affected.

As part of our response to the COVID-19 pandemic, we have taken the following actions:

•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. However, local or regional hotspots of the pandemic could result
in other locations being temporarily idled

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due to the need to deep clean areas where an employee who has tested positive
for COVID-19 worked or any similar impacts in our supply chain. We work with our
customers to the extent idling affects fulfillment timing.

•We have taken precautionary measures intended to help minimize the risk of the
virus to our employees 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 monitor the rapidly evolving situation and the advice of international and national authorities, including federal, state and local public health authorities, and may take additional action based on their recommendations. In these circumstances, developments beyond our control may require us to adjust our operating plan.

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 the National Association of
Homebuilders (NAHB) with regard to housing starts, and published reports by
Ducker Worldwide, LLC (Ducker), a consulting and research firm, with regard to
window shipments in the U.S. We obtain market data from Catalina Research, a
consulting and research firm, for insight into the U.S. residential wood cabinet
demand.

In January 2022, the NAHB forecasted calendar-year housing starts to be 1.6
million for the 2022 and 2023 calendar-years. In February 2022, the Ducker
forecast indicated that total window shipments are expected to increase
approximately 9% for calendar-year 2021 and approximately 6% in 2022 and 2% in
2023. The estimated increase in window shipments for the year ended December 31,
2022 includes an increase in new construction shipments of approximately 5% and
an increase in R&R shipments of approximately 6%. In February 2022, Catalina
Research estimated that residential semi-custom cabinet demand in the U.S. is
estimated to increase 9% in 2021 and 4% in 2022.

Several commodities in our business are subject to pricing fluctuations,
including polyvinyl resin (PVC), titanium dioxide (TiO2), petroleum products,
aluminum and wood. For the majority of our customers and critical suppliers, we
have price adjusters in place which effectively share the base pass-through
price changes for our primary commodities with our customers commensurate with
the market at large. Our long-term exposure to these price fluctuations is
somewhat mitigated due to the contractual component of the adjuster programs.
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 in Europe, which
can affect the cost of the raw materials, a portion of which we may not be able
to fully recover.

On June 23, 2016, citizens of the U.K. voted to exit the European Union (E.U.)
(referred to as Brexit). In October 2019, the U.K. and E.U. ratified a
withdrawal agreement, and subsequently the U.K. left the E.U. on January 31,
2020. The E.U. rules for trade, travel, and business for the U.K. lapsed on
December 31, 2020. In early 2021, the U.K. and the E.U. agreed on a 100% tariff
liberalization trade agreement. There will be no tariffs or quotas on the
movement of goods produced between the U.K. and the E.U. During this settling in
period we could experience extended lead times for raw material imports.

Given the lack of comparable precedent, it is difficult for us to predict the
future impacts on our U.K. based operations, which accounted for approximately
20% of our total sales for the year ended October 31, 2021. Since we manufacture
and sell a majority of our U.K. products within the U.K., there is minimal risk
to our ability to physically deliver goods and complete sales. The primary risk
mitigation focus for our U.K. operations centers on the availability and pricing
of raw materials. While we source the majority of our raw materials from within
the U.K., many of the primary upstream raw materials our vendors use are being
sourced from outside of the U.K., which could expose us to cross-border issues
and raw material price impacts. We will mitigate this potential impact of Brexit
on the import of goods to the U.K. by strategically managing our inventory
levels and logistical channels.

The global economy remains uncertain due to currency devaluations, political
unrest, terror threats, global pandemics such as COVID-19, and even the
political landscape in the U.S. 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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Three months completed January 31, 2022 Compared to the three months ended January 31, 2021

                                                                                 Three Months Ended January 31,
                                                                2022               2021            Change $            % Variance
                                                                                     (Dollars in millions)
Net sales                                                  $     267.0          $ 230.1          $    36.9                      16  %

Cost of sales (excluding depreciation and impairment) 211.8

       176.4               35.4                     (20) %
Selling, general and administrative                               30.8             30.9               (0.1)                      -  %

Depreciation and amortization                                     10.3             11.0               (0.7)                      6  %

Operating income                                                  14.1             11.8                2.3                      19  %
Interest expense                                                  (0.5)            (0.7)               0.2                      29  %
Other, net                                                           -              0.2               (0.2)                   (100) %
Income tax expense                                                (2.4)            (3.4)               1.0                      29  %

Net income                                                 $      11.2          $   7.9          $     3.3                      42  %

Here are our period-over-period results by reportable segment.

Changes related to operating profit by segment to be presented:

NA Windows

                                                                                Three Months Ended January 31,
                                                                2022                2021            $ Change           % Variance
                                                                                     (Dollars in millions)
Net sales                                                  $     146.6           $ 128.1          $    18.5                14%

Cost of sales (excluding depreciation and impairment) 116.0

         99.4               16.6               (17)%
Selling, general and administrative                               14.4              12.4                2.0               (16)%

Depreciation and amortization                                      4.1               5.1               (1.0)               20%
Operating income                                           $      12.1           $  11.2          $     0.9                8%
Operating income margin                                              8   %             9  %


Net Sales. Net sales increased $18.5 million, or 14%, for the three months ended
January 31, 2022 compared to the same period in 2021, which was primarily driven
by an increase in price and raw material surcharges of $10.6 million and a $7.9
million increase in volumes.

Cost of Sales. The cost of sales increased $16.6 million, or 17%, for the three
months ended January 31, 2022 as compared to the same period in 2021. Cost of
sales, including labor, increased primarily due to higher volumes during the
period as well as the inflation of raw materials.

Selling, General and Administrative. Selling, general and administrative
expenses increased $2.0 million, or 16%, for the three months ended January 31,
2022 as compared to the same period in 2021. This increase was due primarily to
higher professional fees and compensation year-over-year.

Depreciation and Amortization. Depreciation and amortization expense decreased
$1.0 million, or 20%, for the three months ended January 31, 2022 as compared to
the same period in 2021, reflecting the run-off of depreciation expense related
to existing assets and disposals during the period.


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EU Fenestration

                                                                               Three Months Ended January 31,
                                                                2022              2021            $ Change           Variance %
                                                                                    (Dollars in millions)
Net sales                                                  $     58.9           $ 49.1          $     9.8                20%

Cost of sales (excluding depreciation and impairment) 41.2

       31.8                9.4               (30)%
Selling, general and administrative                               7.3              6.6                0.7               (11)%
Depreciation and amortization                                     2.6              2.5                0.1               (4)%
Operating income                                           $      7.8           $  8.2          $    (0.4)              (5)%
Operating income margin                                            13   %           17  %


Net Sales. Net sales increased $9.8 million, or 20%, comparing the three months
ended January 31, 2022 to the same period in 2021, which was primarily driven by
a $8.7 million increase in volumes, including a recovery from prior year
COVID-19 impacts, and $1.7 million of base price increases partially offset by
$0.6 million of foreign currency rate changes.

Cost of Sales. The cost of sales increased $9.4 million, or 30%, for the three
months ended January 31, 2022 compared to the same period in 2021. Cost of sales
increased primarily due to higher volumes during the period as well as the
inflation of raw materials.

Selling, General and Administrative. Selling, general and administrative expense
increased $0.7 million, or 11%, for the three months ended January 31, 2022
compared to the same period in 2021. The increase is primarily due to higher
compensation, general expenses and foreign currency impacts year-over-year.

NA Cabinet Components

                                                                               Three Months Ended January 31,
                                                                2022              2021            $ Change           Variance %
                                                                                    (Dollars in millions)
Net sales                                                  $     62.4           $ 54.0          $     8.4                16%

Cost of sales (excluding depreciation and impairment) 55.0

       45.9                9.1               (20)%
Selling, general and administrative                               5.2              4.9                0.3               (6)%

Depreciation and amortization                                     3.5              3.3                0.2               (6)%

Operating loss                                             $     (1.3)          $ (0.1)         $    (1.2)            (1,200)%
Operating loss margin                                              (2)  %            -  %


Net Sales. Net sales increased $8.4 million, or 16%, for the three months ended
January 31, 2022 compared to the same period in 2021, which was driven by a
$14.3 million increase in price and raw material indexes partially offset by
$6.0 million decrease in volumes.

Cost of Sales. Cost of sales increased $9.1 million, or 20%, for the three
months ended January 31, 2022 compared with the same period in 2021, primarily
as a result of higher volumes and lumber price inflation, which are recovered on
a lag, partially offset by a decrease in volumes.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.3 millionor 6%, for the three months ended January 31, 2022
compared to the same period in 2021 due to higher overhead costs year-over-year.

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Unallocated Corporate & Other

                                                                               Three Months Ended January 31,
                                                                2022              2021            $ Change           Variance %
                                                                                    (Dollars in millions)
Net sales                                                  $      (0.9)         $ (1.1)         $     0.2                18%
Cost of sales (excluding depreciation and amortization)           (0.4)           (0.7)               0.3               (43)%
Selling, general and administrative                                3.9             7.0               (3.1)              (44)%
Depreciation and amortization                                      0.1             0.1                  -                -%
Operating loss                                             $      (4.5)         $ (7.5)         $     3.0                40%

Net sales. Unallocated Corporate & Other net sales represent the elimination of inter-segment sales for the three months ended January 31, 2022
and 2021.

Cost of sales. Cost of sales for Corporate Unallocated and Other includes the elimination of inter-segment sales, profit on inventory and other costs.

Selling, General and Administrative. Selling, general and administrative
expenses decreased $3.1 million, or 44%, for the three months ended January 31,
2022 compared to the same period in 2021. This decrease is attributable to $2.3
million of decreased compensation expense related to the valuations of our stock
based compensation awards during the three months ended January 31, 2022 as
compared to the prior year period. Additionally, we recorded a $1.4 million loss
on the sale of a plant during the three months ended January 31, 2021, for which
we did not have a comparable expense in the corresponding three months ended
January 31, 2022. These decreases were partially offset by an increase in
medical expenses of $0.5 million due to higher claims activity year over year.

Changes related to non-operating items:

Interest Expense. Interest expense decreased $0.2 million for the three months
ended January 31, 2022 compared to the same period in 2021 as a result of lower
borrowings outstanding during the period and lower interest rates.

Income Taxes. We recorded income tax expense of $2.4 million on pre-tax income
of $13.6 million for the three months ended January 31, 2022, an effective rate
of 17.7%, and income tax expense of $3.4 million on a pre-tax income of $11.3
million for the three months ended January 31, 2021, an effective rate of 30.4%.
The $1.0 million decrease in income tax expense year-over-year was primarily
driven by the benefit from the vesting or exercise of equity-based compensation
awards.

Cash and capital resources

Overview

Historically, our primary sources of funds have been cash, 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 three months ended January 31, 2022 was LIBOR +
1.25%. 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 $0.5
million straight-line over the remaining term of the facility. For further
details of the Credit Facility, refer to Note 4, "Debt and Finance Lease
Obligations" to the accompanying unaudited condensed consolidated financial
statements contained elsewhere herein.

From January 31, 2022we have had $31.7 million cash and cash equivalents, $63.0 million outstanding under the credit facility, $4.5 million outstanding letters of credit and $15.0 million outstanding under finance leases and other debts. We have had $257.5 million available for use under the Credit Facility at
January 31, 2022.

In December 2021, our Board of Directors approved a stock repurchase program
that authorized the repurchase of up to $75.0 million worth of shares of our
common stock. Repurchases under the new program will be made in open market
transactions or privately negotiated transactions, subject to market conditions,
applicable legal requirements and other relevant factors. The program does not
have an expiration date or a limit on the number of shares that may be
purchased.

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We repatriated $1.2 million and $1.0 million of foreign cash during the three
months ended January 31, 2022 and 2021, respectively. We expect to repatriate
excess cash moving forward and use the funds to retire debt or meet current
working capital needs. In the U.K., we insure against a portion of our credit
losses. 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.

Cash flow analysis

The following table summarizes our cash flow results for the three months ended
January 31, 2022 and 2021:

                                                              Three Months Ended
                                                                 January 31,
                                                               2022             2021
                                                                (In millions)
     Cash used for operating activities                 $     (21.7)          $ (3.4)
     Cash used for investing activities                 $      (7.4)          $ (5.2)
     Cash provided by (used for) financing activities   $      20.9           $ (0.6)


Operating Activities. Cash used for operating activities for the three months
ended January 31, 2022 increased $18.3 million compared to the three months
ended January 31, 2021. The increase in cash used for operating activities is
primarily due to an increase in working capital partially offset by higher net
income year-over-year due to increased demand. The increase in working capital
was largely driven by an inventory build and raw material price inflation and a
higher payout of accrued incentives.

Investing Activities. Cash used for investing activities increased $2.2 million
for the three months ended January 31, 2022 compared to the same period in 2021,
primarily as a result an increase in capital expenditures.

Financing Activities. Cash provided by financing activities was $20.9 million
for the three months ended January 31, 2022, which included $24.8 million of net
debt borrowings partially offset by $2.6 million of dividends paid to our
shareholders and $1.4 million of payroll tax paid to settle shares forfeited
upon vesting of stock.

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 three months ended
January 31, 2022 and 2021, we repatriated $1.2 million and $1.0 million,
respectively, of foreign earnings from our foreign locations. We maintain cash
balances in foreign countries which total $9.0 million as of January 31, 2022.

Significant 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.

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, 2021. Our
critical accounting policies and estimates have not changed materially during
the three months ended January 31, 2022.

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.
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New accounting statements

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 three months ended January 31, 2022. As of January 31,
2022, we believe the impact of any recently issued standards that are not yet
effective are either not applicable to us at this time or will not have a
material impact on our condensed consolidated financial statements upon
adoption.


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