Summary of QUANEX BUILDING PRODUCTS CORP

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements of the Company and the accompanying notes. Private Securities Litigation Reform Act Certain of the statements contained in this document and in documents incorporated by reference herein, including those made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" are "forward-looking" statements as defined under the Private Securities Litigation Reform Act of 1995. Generally, the words "expect," "believe," "intend," "estimate," "anticipate," "project," "will" and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements which address future operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to volume, sales, operating income and earnings per share, and statements expressing a general outlook about future operating results, are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present projections or expectations. As and when made, management believes that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made and there can be no assurance that such forward-looking statements will occur. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Factors exist that could cause the Company's actual results to differ materially from the expected results described in or underlying the Company's forward-looking statements. Such factors include domestic and international economic activity, prevailing prices of aluminum scrap and other raw material costs, the rate of change in prices for aluminum scrap, energy costs, interest rates, construction delays, market conditions, particularly in the home building and remodeling markets, any material changes in purchases by the Company's principal customers, labor supply and relations, environmental regulations, changes in estimates of costs for known environmental remediation projects and situations, world-wide political stability and economic growth, the Company's successful implementation of its internal operating plans, acquisition strategies and integration, performance issues with key customers, suppliers and subcontractors, and regulatory changes and legal proceedings. Accordingly, there can be no assurance that the forward-looking statements contained herein will occur or that objectives will be achieved. All written and verbal forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such factors. For more information, please see Item 1A, "Risk Factors".

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Separation and Merger
The Company operates two businesses: Engineered Products and Aluminum Sheet Products. The Engineered Products business produces window and door components for OEMs that primarily serve the North American residential construction and remodeling markets. The Aluminum Sheet Products business produces mill finished and coated aluminum sheet serving the broader building and construction markets, as well as other capital goods and transportation markets.
Prior to April 23, 2008, the Company also operated a Vehicular Products business which produced engineered steel bars for the light vehicle, heavy duty truck, agricultural, defense, capital goods, recreational and energy markets. As more fully described in Notes 1 and 3 of the consolidated financial statements in Item 8, on April 23, 2008, Quanex Corporation spun off its building products businesses in a taxable spin and merged its vehicular products business with a wholly-owned subsidiary of Gerdau S.A. (Gerdau). Notwithstanding the legal form of the transactions, because of the substance of the transactions, Quanex Building Products Corporation was the divesting entity and treated as the "accounting successor," and Quanex Corporation was the "accounting spinnee" for financial reporting purposes in accordance with Emerging Issues Task Force Issue (EITF) No. 02-11, "Accounting for Reverse Spinoffs" (EITF 02-11).
The spin-off and subsequent merger is hereafter referred to as the "Separation". For purposes of describing the events related to the Separation, as well as other events, transactions and financial results of Quanex Corporation and its subsidiaries related to periods prior to April 23, 2008, the term "the Company" refers to Quanex Building Products Corporation's accounting predecessor, or Quanex Corporation.
In accordance with the provisions of the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), effective with the Separation on April 23, 2008, the results of operations and cash flows related to the Company's vehicular products and non-building products related corporate items are reported as discontinued operations for all periods presented. In addition, the assets and liabilities of the Company's vehicular products and non-building products related corporate items have been segregated from the assets and liabilities related to the Company's continuing operations and presented separately on the Company's comparative balance sheet as of October 31, 2007. Unless otherwise noted, all disclosures in the notes accompanying the consolidated financial statements as well as all discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations reflect only continuing operations. Transaction Expenditures
In connection with the Separation, the Company recognized $16.8 million of transaction expenses during the twelve months ended October 31, 2008 that were expensed as incurred. Of the transaction expenses recognized for the year, $2.9 million is included in Selling, general and administrative expenses and $13.9 million is included in discontinued operations. In accordance with the Separation related agreements, transaction costs related to the merger were to be paid entirely by Gerdau, whereas the transaction costs related to the spin-off of Quanex Building Products were to be split 50/50 between Gerdau and Quanex Building Products Corporation. As such, Quanex Building Products' portion of the spin-off transaction costs is presented in Selling, general and administrative expenses and all merger related transaction costs and the remaining spin-off costs are presented in discontinued operations. Further details of the spin-off and merger transaction costs are presented in the Corporate & Other Results of Operations section below and in Notes 1 and 3 of Item 8.

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Results of Operations

                       Summary Information as % of Sales

                                                   Years Ended October 31,(1)
                                  2008                       2007                        2006
                          Dollar         % of        Dollar         % of         Dollar          % of
                          Amount        Sales        Amount        Sales         Amount         Sales
                                                      (Dollars in millions)

Net sales                 $ 868.9           100 %    $ 964.0           100 %    $ 1,043.8           100 %
Cost of sales(2)            717.3            83        767.1            80          829.7            79
Selling, general and
administrative               95.5            11         70.7             7           72.3             7
Depreciation and
amortization                 35.1             4         38.0             4           37.0             4

Operating income             21.0             2         88.2             9          104.8            10

Interest expense             (0.5 )           -         (0.6 )           -           (1.0 )           -
Other, net                    5.2             1          0.3             -            0.2             -
Income tax expense           (9.8 )          (1 )      (30.8 )          (3 )        (39.0 )          (4 )

Income from continuing
operations                $  15.9             2 %    $  57.1             6 %    $    65.0             6 %

(1) All periods presented exclude the Vehicular Products business and all non-Building Products related corporate accounts and Temroc, which are included in discontinued operations.

(2) Exclusive of items shown separately below.

Overview
The Company faced another year of significant market declines in 2008 and continues to find itself in a difficult housing market. Housing starts have declined significantly over the past three years from over 2.0 million in 2005. Fiscal 2008 housing starts were estimated to be 0.9 million units compared to 1.4 million units in 2007 and 1.9 million units in 2006. Additionally, residential remodeling was estimated to be down approximately 10% in fiscal 2008 compared to 2007. Despite these obstacles, the Company continues to demonstrate its ability to outperform the market by its deftness at developing new products, cultivating new customers as well as benefiting from its longstanding relationships with the leading participants in the industries Quanex serves. All of these factors, coupled with a continuous focus on the controllable internal factors, resulted in the Company not only performing relatively well in difficult times, but also positions the Company to take advantage when the housing market recovers and returns to the expected long-term growth trajectory. The Company works closely with its customers in all phases of their new product development which is an important component to increasing revenue and a significant factor for its success in this otherwise difficult period. Efforts are also ongoing to increase shipments to the repair and remodel sector of the building products market. Generally, demographics for long-term housing demand in the United States remain favorable when factoring the projected population increase and continuing immigration. These coupled with an eventual return to a normal housing market will benefit the segment over the long-term. Furthermore, the Company's presence in the vinyl and composite window market, which represents the fastest growing window segment, should continue to fuel growth over a long time frame.

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In addition to the negative housing market impact on the Company's operating income, transaction and other non-cash Separation expenses further negatively impacted the Company's Selling, general and administrative expense and overall operating income by $26.5 million in fiscal 2008. Partially offsetting this in fiscal 2008 is the recognition of $4.0 million in Other, net for the receipt of merger proceeds by the Company's Rabbi trust. Business Segments
Business segments are reported in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 requires that the Company disclose certain information about its operating segments, where operating segments are defined as "components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and in assessing performance". Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments.
Quanex has two reportable segments: Engineered Products and Aluminum Sheet Products. The Engineered Products segment produces engineered products and components serving the window and door industry, while the Aluminum Sheet Products segment produces mill finished and coated aluminum sheet serving the broader building products markets and secondary markets such as recreational vehicles and capital equipment. The main market drivers of the building products focused segments are residential housing starts and remodeling expenditures. For financial reporting purposes three of the Company's four operating segments, Homeshield, Truseal and Mikron, have been aggregated into the Engineered Products reportable segment. The remaining division, Nichols Aluminum (Aluminum Sheet Products), is reported as a separate reportable segment with the Corporate & Other comprised of corporate office expenses and certain inter-division eliminations. The sale of products between segments is recognized at market prices. The financial performance of the operations is based upon operating income. The segments follow the accounting principles described in the Summary of Significant Accounting Principles, see Item 8, Note 1. Note that the two reportable segments value inventory on a FIFO or weighted-average basis while the LIFO reserve relating to those operations accounted for under the LIFO method of inventory valuation is computed on a consolidated basis in a single pool and treated as a corporate item.
Engineered Products - Three Years Ended October 31, 2008 The following table sets forth selected operating data for the Engineered Products segment:

                                    Years Ended October 31,                        % Change
                                     (Dollars in millions)
                                                                           2008 vs.         2007 vs.
                               2008           2007           2006            2007             2006
Net sales                   $    407.9      $   457.8      $   524.6           (10.9 )%         (12.7 )%
Cost of sales1                   312.8          346.7          401.5            (9.8 )          (13.6 )
Selling, general and
administrative                    39.1           39.4           43.7            (0.8 )           (9.8 )
Depreciation and
amortization                      26.1           27.9           26.9            (6.5 )            3.7

Operating income            $     29.9      $    43.8      $    52.5           (31.7 )%         (16.6 )%
Operating income margin            7.3 %          9.6 %         10.0 %

1 Exclusive of items shown separately below.

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The primary market drivers for the Engineered Products segment are North American housing starts and residential remodeling activity. The U.S. housing market deteriorated 25% from fiscal 2006 to 2007 and an additional 31% from fiscal 2007 to 2008 while residential remodeling activity was estimated to be down 10% in fiscal 2008 compared to last year. Comparatively, 2008 net sales at Engineered Products were down only 10.9%. The Company's ability to consistently outperform the market, even in this very tough economic environment, is testimony to the market-leading positions our customers hold in the window and door industry, and of significant importance, our collaboration with them on a broad range of new product and program initiatives.
The 10.9% and 12.7% decrease in net sales at the Engineered Products segment in fiscal 2008 and fiscal 2007, respectively, is due to reduced volumes attributable to the continued falloff of housing starts and lower remodeling and repair expenditures. Offsetting the market falloff was the continued growth of the new programs started in fiscal 2007 and 2008 and targeted price increases that took effect across the segment throughout fiscal 2008. In 2008, new products at Engineered Products accounted for approximately $14 million in incremental sales. The new products and programs include invisible window screens, composite window profiles, weather proof entry door components, advanced insulating spacer systems and thin-film solar panel sealants. The Engineered Products segment continues to develop and is currently producing and selling products that position it very well for the anticipated increase in "Green Building" as the Company's thermal-efficient products are viewed more favorably by consumers when compared to less efficient competitive products. Additionally, the Company's current product offerings position it well when more stringent building codes or standards are instituted, the broadest of which are the new Energy Star standards that become effective over the next five years. Operating income and the corresponding margin decreased at Engineered Products from 2006 to 2008 as a direct result of reduced volumes from the depressed building products market and to a lesser extent from inflationary costs such as energy. The lower volumes resulted in fixed cost de-leveraging that are visible in the lower operating income and operating income margins. The segment continues to focus on maintaining pricing along with effectively managing its controllable costs. Selling, general and administrative costs have been reduced, but the ramp-up of costs attributable to new product efforts have offset some of the reductions. Aggressive reductions in labor costs, coupled with reductions in material costs and freight costs, were realized during fiscal 2007 that helped to minimize the impact of the lower volumes. During 2008, the Company began the consolidation of two fenestration component facilities into a single facility in order to help reduce operating costs and increase operating efficiencies. The consolidation effort will be completed in early 2009 and is expected to result in $1.2 million of annualized savings. Price realization, cost savings and product growth efforts are expected to yield future benefits. Aluminum Sheet Products - Three Years Ended October 31, 2008 The following table sets forth selected operating data for the Aluminum Sheet Products segment:

                                    Years Ended October 31,                        % Change
                                     (Dollars in millions)
                                                                           2008 vs.         2007 vs.
                               2008           2007           2006            2007             2006
Net sales                   $    479.9      $   524.2      $   539.8            (8.5 )%          (2.9 )%
Cost of sales1                   422.7          439.5          441.0            (3.8 )           (0.3 )
Selling, general and
administrative                     8.1            9.1            6.8           (11.0 )           33.8
Depreciation and
amortization                       8.8            9.9            9.8           (11.1 )            1.0

Operating income            $     40.3      $    65.7      $    82.2           (38.7 )%         (20.1 )%
Operating income margin            8.4 %         12.5 %         15.2 %

1 Exclusive of items shown separately below.

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The primary market drivers for the Aluminum Sheet Products segment are North American housing starts and residential remodeling activity which together represent about 65% of the segment's sales. As previously discussed, these primary market drivers declined from 2006 to 2008.
The decrease in net sales at the Aluminum Sheet Products segment in fiscal 2008 compared to 2007 was the result of an 8.3% volume decrease due to the very soft primary and secondary markets as average selling prices were relatively flat year-over-year. The net sales decline at the Aluminum Sheet Building Products segment in fiscal 2007 compared to 2006 resulted from lower volumes partially offset by higher average selling prices. Fiscal 2007 aluminum sheet volume decreased 7.2% from 2006 as North American new housing starts declined approximately 25%. Average selling prices in fiscal 2007 were 4.7% higher than fiscal 2006, in line with increases in aluminum ingot prices on the London Metal Exchange (LME). LME for aluminum ingot pricing is the most commonly used index for correlating aluminum sheet prices.
Similar to the Engineered Products segment, operating income and the corresponding margin decreased at the Aluminum Sheet Products segment from fiscal 2006 to 2008 as a direct result of reduced volumes from the depressed residential construction market. These lower volume levels resulted in fixed expense de-leveraging. Also contributing to the year-over-year decline are compressed spreads. Spread per pound in 2008 (selling price less material cost) was down approximately 7% compared to 2007 while 2007 spread was down approximately 2% from 2006. The decline in spread is primarily due to a lower mix of painted sheet and to a lesser extent in 2008 from pricing from over capacity pressures. Also contributing to the decline in operating income were increased utility and freight costs. Partially offsetting these increases in 2008 is a reduction in Selling, general and administrative costs primarily due to reduced salary expense and incentives coupled with declines in depreciation as capital expenditures are held in line by the current economic environment. Fiscal 2006 Selling, general and administrative results and operating income reflect a $1.9 million gain on the sale of Owens Corning receivables for which the Company had been carrying a reserve for several years.
The Aluminum Sheet Products' operating income and margins are impacted by changes in LME as material spreads are correlated with aluminum ingot prices over time. Declines in LME result in spread compression; however, as LME rebounds and increases, spread and profits expand. The Company expects spread compression in early 2009 as the LME has declined since October 31, 2008. Corporate and Other - Three Years Ended October 31, 2008

                                    Years Ended October 31,                        $ Change
                                     (Dollars in millions)
                                                                           2008 vs.        2007 vs.
                               2008           2007           2006            2007            2006

Net sales                   $    (18.9 )    $   (18.0 )    $   (20.6 )    $     (0.9 )    $      2.6
Cost of sales1                   (18.2 )        (19.1 )        (12.8 )           0.9            (6.3 )
Selling, general and
administrative                    48.3           22.2           21.8            26.1             0.4
Depreciation and
amortization                       0.2            0.2            0.3               -            (0.1 )

Operating income
(expense)                   $    (49.2 )    $   (21.3 )    $   (29.9 )    $    (27.9 )    $      8.6

1 Exclusive of items shown separately below.

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Corporate and other operating expenses, which are not in the segments mentioned above, include inter-segment eliminations, the consolidated LIFO inventory adjustments (calculated on a combined pool basis) corporate office expenses and Quanex Building Products Corporation's portion of transaction-related costs. Net sales amounts represent inter-segment eliminations between the Engineered Products segment and the Aluminum Sheet Products segment with an equal and offsetting elimination in Cost of sales. LIFO adjustments are reported in Corporate Cost of sales. As a result of changes in raw material cost and inventory levels, the Company incurred expense of $0.4 million, income of $1.3 million and expense of $8.1 million, during fiscal 2008, 2007 and 2006, respectively, in the form of LIFO inventory adjustments. Fluctuations associated with the LIFO inventory adjustment tend to comprise a majority of the change from year to year in the corporate and other Cost of sales.
Selling, general and administrative costs were higher during fiscal 2008 compared to 2007 as a direct result of transaction related expenses. Following is the breakdown of fiscal 2008 transaction-related expenses that contributed to the increased year-over-year Selling, general and administrative costs:

                                                                   (Dollars in
                                                                    millions)
  Quanex Building Products' share of spin-off transaction costs   $         2.9
  Stock-based compensation expense - modification impact                   22.8
  Acceleration of executive incentives and other benefits                   0.8

  Total transaction related expense                               $        26.5

Quanex Building Products Corporation's portion of spin-off transaction costs include investment banking fees paid upon consummation of the spin-off, legal fees and accounting related fees, amounting to $2.9 million. The Company effectively treated the Separation as though it constituted a change in control for purposes of the Company's stock option plans, restricted stock plans, long-term incentive plans and non-employee director retirement plan. As a result, all unvested stock options, restricted shares and long-term incentives vested as set forth in the Separation related agreements prior to completion of the Separation on April 23, 2008. Additionally, all outstanding stock options were to be cash settled by Gerdau following the Separation. The amounts presented above are only the incremental amount of expense that was recognized as a result of the accelerated vesting of the various awards and ultimate cash settlement of the stock options. Also, the amounts presented above represent only the expense associated with active Quanex Building Products Corporation employees and directors as of the time of the Separation. The same such expense related to Vehicular Products and former vehicular and corporate employees and directors is included in discontinued operations. Other Items - Three Years Ended October 31, 2008 Interest expense for fiscal 2008 was $0.5 million compared to $0.6 million in fiscal 2007 and $1.0 million in fiscal 2006. No amounts were borrowed against the revolving credit facility during either fiscal 2008, 2007 or 2006. The decrease from fiscal 2006 to fiscal 2007 was due primarily to declining principal balance.
Other, net (on the income statement) for fiscal 2008 was income of $5.2 million compared to $0.4 million in fiscal 2007 and $0.2 million in fiscal 2006. Other, net for fiscal 2008 reflects the positive impact of the Separation on the Company's Rabbi trust. Prior to the Separation, the Rabbi trust held Quanex Corporation common stock which was recorded as contra-equity at historical cost. Upon completion of the Separation the Rabbi trust was separated between Quanex Building Products Corporation and Gerdau. For each share held in the Quanex Building Products Rabbi trust, it received the merger proceeds of $39.20 per share and one share of Quanex Building Products common stock. The shares of Quanex Building Products common stock are recorded at the same historical cost as before as a contra-equity, whereas any cash held by the Rabbi trust is consolidated in Other current assets. The merger proceeds equated to $4.0 million to the Rabbi trust, which was recorded as income in Other, net in the second fiscal quarter of 2008.

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