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(Exact name of registrant as specified in its charter)
____________________________
British Columbia, Canada
i98-0377314
(State or other jurisdiction of incorporation
or organization)
(I.R.S. Employer Identification No.)
i2771 Rutherford Road
iConcord, iOntarioiL4K 2N6iCanada
(Address of principal executive offices)
(i800)
i895-2723
(Registrant's telephone number, including area code)
____________________________
Securities registered pursuant to Section 12(b) of the Act:
iCommon
Stock (no par value)
iDOOR
iNew York Stock Exchange
(Title of class)
(Trading symbol)
(Name of exchange on which registered)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☑ No ☐
Indicate by check mark
whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYes☑ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☑
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and product development efforts under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may,""might,""could,""will,""would,""should,""expect,""believes,""outlook,""predict,""forecast,""objective,""remain,""anticipate,""estimate,""potential,""continue,""plan,""project,""targeting," and other similar expressions. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under "Risk Factors" in our Annual Report on Form 10-K for the year ended January 2, 2022, subsequent reports on Form 10-Q, and elsewhere in this Quarterly Report.
The following list represents some, but not necessarily all, of the factors that could cause
actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:
•downward trends in our end markets and in economic conditions;
•reduced levels of residential new construction; residential repair, renovation and remodeling; and non-residential building construction activity due to increases in mortgage rates, changes in mortgage interest deductions and related tax changes and reduced availability of financing;
•competition;
•the continued success of, and our ability to maintain relationships with, certain key customers in light of customer concentration and consolidation;
•our
ability to accurately anticipate demand for our products;
•impacts on our business including seasonality, weather and climate change;
•the scale and scope of the ongoing coronavirus ("COVID-19") pandemic and its impact on our operations, customer demand and supply chain;
•increases in prices of raw materials and fuel;
•tariffs and evolving trade policy and friction between the United States and other countries, including China, and the impact of anti-dumping and countervailing duties;
•increases in labor costs, the availability of labor or labor relations (i.e., disruptions, strikes or work stoppages);
•our
ability to manage our operations including potential disruptions, manufacturing realignments (including related restructuring charges) and customer credit risk;
•product liability claims and product recalls;
•our ability to generate sufficient cash flows to fund our capital expenditure requirements, to meet our pension obligations and to meet our debt service obligations, including our obligations under our senior notes and our asset-based revolving credit facility ("ABL Facility");
•limitations on operating our business as a result of covenant restrictions under our existing and future indebtedness, including our senior notes and ABL Facility;
•fluctuating foreign exchange and interest rates;
•our
ability to replace our expiring patents and to innovate, keep pace with technological developments and successfully integrate acquisitions;
•the continuous operation of our information technology and enterprise resource planning systems and management of potential cyber security threats and attacks;
•political, economic and other risks that arise from operating a multinational business;
•uncertainty relating to the United Kingdom's exit from the European Union;
•retention of key management personnel; and
•environmental and other government regulations, including the United States Foreign Corrupt Practices Act ("FCPA"), and
any changes in such regulations.
We caution you that the foregoing list of important factors is not all-inclusive. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Quarterly Report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Share
capital: unlimited shares authorized, no par value, ii22,259,356/
and ii23,623,887/ shares issued and outstanding as
of July 3, 2022, and January 2, 2022, respectively
i521,243
i543,400
Additional
paid-in capital
i216,653
i222,177
Retained
earnings
i46,271
i24,244
Accumulated
other comprehensive loss
(i132,721)
(i101,582)
Total
equity attributable to Masonite
i651,446
i688,239
Equity
attributable to non-controlling interests
i11,619
i11,539
Total
equity
i663,065
i699,778
Total
liabilities and equity
$
i2,219,237
$
i2,246,618
See
accompanying notes to the condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iBusiness
Overview and Significant Accounting Policies
Unless we state otherwise or the context otherwise requires, references to "Masonite,""we,""our,""us" and the "Company" in these notes to the condensed consolidated financial statements refer to Masonite International Corporation and its subsidiaries.
Description of Business
Masonite International Corporation is one of the largest manufacturers of doors in the world, with significant market share in both interior and exterior door products. Masonite operates i59
manufacturing and distribution facilities in iseven countries and sells doors to customers throughout the world with our largest markets being the United States, Canada and the United Kingdom.
Basis of Presentation
We prepare these unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") and applicable rules and regulations of the U.S. Securities and
Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the results for the interim periods presented have been included. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. These estimates are based on information available as of the date of the unaudited condensed consolidated financial statements; therefore, actual results could differ from those estimates. Interim results are not necessarily indicative of the results for a full year.
These
unaudited condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2022, as filed with the SEC (the "Annual Report"). Our fiscal year is the 52- or 53-week period ending on the Sunday closest to December 31. In a 52-week year, each fiscal quarter consists of 13 weeks. For ease of disclosure, the 13-week periods are referred to as three-month periods and the 52- or 53-week periods are referred to as year.
Changes in Accounting Standards and Policies
There have been no changes in the significant accounting policies from those that were disclosed in the fiscal year 2021 audited consolidated financial statements, other than as noted below.
i
Adoption
of Recent Accounting Pronouncements
In December 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2021-10, "Government Assistance," which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions and (3) the effect of those transactions on an entity's financial statements. The guidance is effective for annual periods beginning after December 15, 2021, with early adoption permitted. We have adopted the new guidance as of January 3, 2022, the beginning of fiscal year 2022, and the adoption did not have a material impact on our financial statements. We do not anticipate the adoption will have a material impact on our annual disclosures.
In
December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes," as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes. This standard removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. We have adopted the new guidance prospectively as of January 4, 2021, the beginning of fiscal year 2021, and the adoption did not have a material impact on our financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
2. iAcquisitions and Divestitures
On June 14, 2021, we completed the sale of all of the capital stock of our Czech business ("Czech") for
consideration of $i7.0 million, net of cash disposed. The divestiture of this business resulted in a loss on disposal of subsidiaries of $i8.6 million,
which was recognized in the second quarter of 2021 in the Europe segment. The total charge consists of $i5.1 million relating to the write-off of the net assets sold and other professional fees and $i3.5 million
relating to the recognition of the cumulative translation adjustment out of accumulated other comprehensive loss.
3. iAccounts Receivable
Our customers consist mainly of retailers, distributors and contractors. Our iiten/
largest customers accounted for i62.5% and i56.7% of total accounts receivable as of July 3, 2022, and January 2, 2022, respectively.
Our largest customer, The Home Depot, Inc., accounted for more than ii10/% of the consolidated gross
accounts receivable balance as of July 3, 2022, and January 2, 2022. The allowance for doubtful accounts balance was $i2.5 million and $i2.1
million as of July 3, 2022, and January 2, 2022, respectively.
We maintain an accounts receivable sales program with a third party (the "AR Sales Program"). Under the AR Sales Program, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to a third party who assumes the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the condensed consolidated balance sheets and are included in cash flows from operating activities in the condensed consolidated statements of cash flows. The discounts
on the sales of trade accounts receivable sold, if any, under the AR Sales Program were not material for any of the periods presented and were recorded in selling, general and administration expenses within the condensed consolidated statements of income and comprehensive income.
In most countries we pay and collect value-added tax ("VAT") when procuring goods and services within the normal course of business. VAT receivables are established in jurisdictions where VAT paid exceeds VAT collected and are recoverable through the filing of refund claims.
4. iInventories
iThe
amounts of inventory on hand were as follows as of the dates indicated:
Interest
expense related to our consolidated indebtedness under our senior unsecured notes was $i10.4 million and $i20.7 million for the three and six months ended July 3,
2022, respectively, and $i11.4 million and $i22.9 million for the three and six months ended July 4, 2021, respectively.
i3.50%
Senior Notes due 2030
On July 26, 2021, we issued $i375.0 million aggregate principal senior unsecured notes (the "2030 Notes"). The 2030 Notes bear interest at i3.50%
per annum, payable in cash semiannually in arrears on February 15 and August 15 of each year and are due February 15, 2030. The 2030 Notes were issued at par.
Information concerning obligations under the 2030 Notes and the indenture governing them are described in detail in our Annual Report. As of July 3, 2022, we were in compliance with all covenants under the indenture governing the 2030 Notes.
i5.375%
Senior Notes due 2028
On July 25, 2019, we issued $i500.0 million aggregate principal senior unsecured notes (the "2028 Notes"). The 2028 Notes bear interest at i5.375%,
payable in cash semiannually in arrears on February 1 and August 1 of each year and are due February 1, 2028. The 2028 Notes were issued at par.
Information concerning obligations under the 2028 Notes and the indenture governing them are described in detail in our Annual Report. As of July 3, 2022, we were in compliance with all covenants under the indenture governing the 2028 Notes.
ABL Facility
On January 31, 2019, we and certain of our subsidiaries
entered into a $i250.0 million asset-based revolving credit facility (the "ABL Facility") maturing on January 31, 2024, which replaced the previous facility. Borrowings under the ABL Facility bear interest at a rate equal to, at our option, (i) the United States, Canadian or United Kingdom Base Rate (each as defined in the credit agreement relating to the ABL Facility, the "Amended and Restated Credit Agreement") plus a margin ranging from i0.25%
to i0.50% per annum, or (ii) the Adjusted LIBO Rate or BA Rate (each as defined in the Amended and Restated Credit Agreement), plus a margin ranging from i1.25% to
i1.50% per annum. In addition to paying interest on any outstanding principal under the ABL Facility, a commitment fee is payable on the undrawn portion of the ABL Facility in an amount equal to i0.25%
per annum of the average daily balance of unused commitments during each calendar quarter.
The ABL Facility contains various customary representations, warranties by us and covenants that are described in detail in our Annual Report. As of July 3, 2022, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $i249.0 million under our ABL Facility and there were ino
amounts outstanding as of July 3, 2022.
7. iCommitments and Contingencies
The following discussion describes material developments in our legal proceedings since January 2, 2022. Refer to Note 10. Commitments and Contingencies in the consolidated financial
statements in our Annual Report for a full description of previously disclosed legal proceedings.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Indemnifications
We have provided customary indemnifications to our landlords under certain property lease agreements for claims by third parties in connection with their use of the premises. We also
have provided routine indemnifications against adverse effects related to changes in tax laws and patent infringements by third parties. The maximum amount of these indemnifications cannot be reasonably estimated due to their nature. In some cases, we have recourse against other parties to mitigate the risk of loss from these indemnifications. Historically, we have not made any significant payments relating to such indemnifications.
Antitrust Class Action Proceedings - Canada
On May 19, 2020, an intended class proceeding was commenced in the Province of Québec, Canada naming as defendants Masonite Corporation, Masonite International Corporation, JELD-WEN, Inc., JELD-WEN Holding, Inc. and JELD-WEN of Canada, Ltd. The plaintiff alleges that the Masonite and JELD-WEN defendants engaged in anticompetitive conduct, including price-fixing
involving interior molded doors. The intended class proceeding seeks damages, punitive damages and other relief. On December 22, 2020, the parties filed a motion with the court seeking to stay the proceeding.
Also, on October 2, 2020, an intended class proceeding was commenced in the Federal Court of Canada naming as defendants Masonite International Corporation, Masonite Corporation, JELD-WEN, Inc., JELD-WEN Holding, Inc. and JELD-WEN of Canada, Ltd. The plaintiff alleges that the Masonite and JELD-WEN defendants engaged in anticompetitive conduct, including price-fixing involving interior molded doors. The intended class proceeding seeks damages, punitive damages and other relief. This proceeding is at an early stage. The plaintiff served its certification record on March 31, 2021.
The parties have written to the Federal Court asking for available dates in late June 2023 to schedule a two-day certification hearing. We have not recognized an expense related to damages in connection with this matter because, although an adverse outcome is reasonably possible, the amount or range of any potential loss cannot be reasonably estimated.
While we intend to defend against these claims vigorously, there can be no assurance that the ultimate resolution of this litigation will not have a material, adverse effect on our consolidated financial condition or results of operations.
General
In addition to the above, from time to time, we are involved in various claims and legal actions, including but not limited to wage and hour and labor lawsuits. In the opinion of management, the ultimate disposition of these matters, individually
and in the aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows.
8. iShare Based Compensation Plans
Share based compensation expense was $i6.0
million and $i10.7 million for the three and six months ended July 3, 2022, respectively, and $i4.7 million and $i9.1
million for the three and six months ended July 4, 2021, respectively. As of July 3, 2022, the total remaining unrecognized compensation expense related to share based compensation amounted to $i28.0 million, which will be amortized over the weighted average remaining requisite service period of i1.9
years.
Equity Incentive Plans
Our equity incentive plans under the 2021 Equity Plan and 2012 Plan are described in detail and defined in our Annual Report. The aggregate number of common shares that can be issued with respect to equity awards under the 2021 Equity Plan cannot exceed i880,000 shares; plus the number of shares reserved for the 2012 Plan that
is in excess of the number of shares related to outstanding grants; plus the number of shares subject to existing grants under the 2012 Plan that may expire or be forfeited or cancelled. As of July 3, 2022, there were i1,240,237 shares of common stock available for future issuance under the 2021 Equity Plan.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Deferred Compensation Plan
We offer to certain of our employees and directors a Deferred Compensation Plan, which is further described in our Annual Report. As of July 3, 2022, the liability and asset relating to deferred compensation had a fair value of $i7.5
million and $i8.2 million, respectively. As of July 3, 2022, participation in the deferred compensation plan is limited and no restricted stock awards have been deferred into the deferred compensation plan. All plan investments are categorized as having Level 1 valuation inputs as established by the FASB’s Fair Value Framework.
Stock Appreciation Rights
We have granted Stock Appreciation Rights ("SARs")
to certain employees under both the 2021 Equity Plan and the 2012 Plan, which entitle the recipient to the appreciation in value of a number of common shares over the exercise price over a period of time, each as specified in the applicable award agreement. The exercise price of any SAR granted may not be less than the fair market value of our common shares on the date of grant. The compensation expense for the SARs is measured based on the fair value of the SARs at the date of grant and is recognized over the requisite service period. The SARs vest over a maximum of ithree
years, have a life of iten years and settle in common shares. It is assumed that all time-based SARs will vest. We recognize forfeitures of SARs in the period in which they occur.
The total fair value of SARs vested was $i0.8
million during the six months ended July 3, 2022.i
The
value of SARs granted is determined using the Black-Scholes-Merton valuation model, and the corresponding expense is expected to be recognized over the average requisite service period of i2.0 years. Expected volatility is based upon the historical volatility of our common shares amongst other considerations. The expected term is calculated based upon historical employee exercise behavior and the contractual term of the options amongst other considerations. iThe
weighted average grant date assumptions used for the SARs granted were as follows for the periods indicated:
2022 Grants
SAR value (model conclusion)
$
i26.52
Risk-free
rate
i2.0
%
Expected dividend yield
i0.0
%
Expected
volatility
i26.5
%
Expected term (years)
i6.0
Restricted
Stock Units
We have granted Restricted Stock Units ("RSUs") to directors and certain employees under the 2012 and 2021 Plans. The RSUs confer the right to receive shares of our common stock at a specified future date or when certain conditions are met. The compensation expense for the RSUs awarded is based on the fair value of the RSUs at the date of grant, which is equal to the stock price on the date of grant, and is recognized over the requisite service period. The RSUs vest over a maximum of ithree
years and call for the underlying shares to be delivered no later than 30 days following the vesting date unless the participant is subject to a blackout period. In such case, the shares are to be
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
delivered once the blackout restriction has been lifted. It is assumed that all time-based RSUs will vest. We recognize forfeitures of RSUs in the period in which they occur.i
(1)
Performance-based RSUs are presented as outstanding, granted and forfeited in the table above assuming targets are met, and the awards pay out at 100%. These awards are settled with payouts ranging from zero to 200% of the target award value depending on achievement. The performance adjustment represents the difference in shares ultimately awarded due to performance attainment above or below target.
(2) A portion of the vested RSUs delivered were net shares settled to cover statutory requirements for income and other employment taxes. We remit the equivalent cash to the appropriate taxing authorities. These net share settlements had the effect of share repurchases by us as we reduced and retired the number of shares that would have otherwise been issued as a result of the vesting.
Approximately two-thirds of the RSUs granted during the six months ended July 3,
2022, vest at specified future dates with only service requirements, while the remaining portion of the RSUs vest based on both performance and service requirements. The value of RSUs granted in the six months ended July 3, 2022, is being recognized over the weighted average requisite service period of i2.3 years. During the six months ended July 3, 2022, i213,297
RSUs vested at a fair value of $i15.3 million.
9. iRestructuring
Costs
In May 2021, we initiated further actions to improve overall business performance that includes the reorganization of our specialty door manufacturing capacity in our Architectural reportable segment. The reorganization of our manufacturing capacity resulted in the closure of one existing stile and rail facility and related headcount reductions beginning in the second quarter of 2021 (collectively, the "2021 Plan"). Costs associated with the 2021 Plan include severance and closure charges. As of July 3, 2022, we do not expect to incur any material future charges related to the 2021 Plan.
In November 2020, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce
primarily in our Architectural reportable segment as well as limited actions in the North American Residential reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the closure of these facilities and related headcount reductions began taking place in the fourth quarter of 2020 (collectively, the "2020 Plan"). Costs associated with the 2020 Plan include severance and closure charges. As of July 3, 2022, we do not expect to incur any material future charges related to the 2020 Plan.
In February 2019, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce across all of our reportable segments and in our head offices.
The reorganization of our manufacturing capacity involves specific plants in the North American Residential and Architectural segments and costs associated with the closure of these plants and related headcount reductions began taking place in the first quarter of 2019 (collectively, the "2019 Plan"). Costs associated with the 2019 Plan include severance, retention and closure charges. As of July 3, 2022, we do not expect to incur any material future charges related to the 2019 Plan.
During the three and six months ended July 4, 2021, we recognized asset impairment charges of $ii10.4/
million related to assets in the Architectural segment and an asset in the Corporate & Other category, as a result of announced plant closures under the 2021 and 2020 Plans. This amount was determined based upon the excess of the carrying values of property, plant and equipment over the respective fair values of such assets, determined using a discounted cash flows approach for each asset group. Each of these valuations was performed on a non-recurring basis and is categorized as having Level 3 valuation inputs as established by the FASB's Fair Value Framework. The Level 3 unobservable inputs include an estimate of future cash flows and the salvage value for each of the assets. The fair value of the assets was determined to be $i6.3
million, compared to a book value of $i16.7 million, with the difference representing the asset impairment charges recorded in the condensed consolidated statements of income and comprehensive income.
11. iIncome
Taxes
The effective tax rate differs from the Canadian statutory rate of i26.5% primarily due to mix of earnings in foreign jurisdictions that are subject to tax rates which differ from the Canadian statutory rate. In addition, we recognized $i0.0 million
and $i1.1 million of income tax benefit due to the exercise and delivery of share based awards during the three and six months ended July 3, 2022, respectively, compared to $i0.3
million and $i2.3 million of income tax benefit during the three and six months ended July 4, 2021.
12. iEarnings
Per Share
Basic earnings per share ("EPS") is calculated by dividing earnings attributable to Masonite by the weighted average number of our common shares outstanding during the period. Diluted EPS is calculated by dividing earnings attributable to Masonite by the weighted average number of common shares plus the incremental number of shares issuable from non-vested and vested RSUs and SARs outstanding during the period.
The weighted average number of shares outstanding utilized for the diluted EPS calculation contemplates the exercise of all currently outstanding SARs and the conversion of all RSUs. The dilutive effect of such equity awards is calculated based on the weighted average share price for each fiscal period using the treasury stock method.
Incremental shares issuable under share compensation plans
i179,620
i391,477
i254,628
i423,716
Shares
used in computing diluted earnings per share
i22,704,953
i24,842,019
i23,058,031
i24,883,814
Basic
earnings per common share attributable to Masonite
$
i2.60
$
i1.43
$
i5.53
$
i3.35
Diluted
earnings per common share attributable to Masonite
$
i2.58
$
i1.41
$
i5.47
$
i3.30
Anti-dilutive
instruments excluded from diluted earnings per common share
i104,332
i31,432
i79,764
i31,432
/
The Company's Board of Directors has approved ifive share repurchase authorizations, the most recent being an incremental $i200.0 million
share repurchase program approved on February 21, 2022. In addition, the Company announced that its Board of Directors authorized it to enter into an accelerated share repurchase ("ASR") transaction as part of the new share repurchase program. The Company entered into an ASR transaction during the first quarter of 2022 with a third-party financial institution for the repurchase of $i100.0 million
of its outstanding common shares. At inception, pursuant to the agreement, the Company paid $i100.0 million to the financial institution using cash on hand and received an initial delivery of i848,087
common shares on the same day. As of July 3, 2022, the $i100.0 million ASR transaction was completed with a total delivery of i1,167,765
common shares at a volume-weighted average price (“VWAP”) per share minus an agreed upon discount totaling $i85.63 per share. The final delivery of i319,678
common shares were delivered in the second quarter. The cash paid was reflected as a reduction of equity at the initial delivery of shares and the number of shares outstanding were reduced at the dates of physical delivery.
13. iSegment Information
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural.
The Corporate & Other category includes unallocated corporate costs and the results of immaterial operating segments which were not aggregated into any reportable segment. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
Our management reviews net sales and Adjusted EBITDA (as defined below) to evaluate segment performance and allocate resources. Net assets are not allocated to the reportable segments. Adjusted EBITDA is a non-GAAP financial measure which does not have a standardized meaning under GAAP and is unlikely to be comparable to similar measures used by other
companies. Adjusted EBITDA should not be considered as an alternative to either net income or operating cash flows determined in accordance with GAAP. Adjusted EBITDA is defined as net income (loss) attributable to Masonite adjusted to exclude the following items:
• depreciation;
• amortization;
• share based compensation expense;
• loss (gain) on disposal of property, plant and equipment;
• loss (income) from discontinued operations, net of tax;
and
• net income (loss) attributable to non-controlling interest.
This definition of Adjusted EBITDA differs from the definitions of EBITDA contained in the indentures governing the 2030 Notes and 2028 Notes and the credit agreement governing the ABL Facility. Although Adjusted EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, it is used to evaluate and compare the operating performance of the segments and it is one of the primary measures used to determine employee incentive compensation. Intersegment sales are recorded using market prices.
i
Certain
information with respect to reportable segments is as follows for the periods indicated:
Accumulated foreign currency translation losses, beginning of period
$
(i100,152)
$
(i91,613)
$
(i96,919)
$
(i93,684)
Foreign
currency translation (loss) gain
(i28,392)
i2,495
(i30,497)
i4,723
Income
tax benefit on foreign currency translation (loss) gain
(i24)
i8
(i13)
i22
Cumulative
translation adjustment recognized upon deconsolidation of subsidiary
i—
i3,544
i—
i3,544
Less:
foreign currency translation gain attributable to non-controlling interest
(i498)
i98
i641
i269
Accumulated
foreign currency translation losses, end of period
(i128,070)
(i85,664)
(i128,070)
(i85,664)
Accumulated
pension and other post-retirement adjustments, beginning of period
(i4,658)
(i18,113)
(i4,663)
(i18,379)
Amortization
of actuarial net losses
i6
i332
i12
i666
Income
tax expense on amortization of actuarial net losses
i1
(i67)
i—
(i135)
Accumulated
pension and other post-retirement adjustments
(i4,651)
(i17,848)
(i4,651)
(i17,848)
Accumulated
other comprehensive loss
$
(i132,721)
$
(i103,512)
$
(i132,721)
$
(i103,512)
Other
comprehensive (loss) income, net of tax
$
(i28,409)
$
i6,312
$
(i30,498)
$
i8,820
Less:
other comprehensive income attributable to non-controlling interest
(i498)
i98
i641
i269
Other
comprehensive (loss) income attributable to Masonite
$
(i27,911)
$
i6,214
$
(i31,139)
$
i8,551
/
Cumulative
translation adjustments are reclassified out of accumulated other comprehensive loss into loss on disposal of subsidiaries in the condensed consolidated statements of income and comprehensive income. Actuarial net losses are reclassified out of accumulated other comprehensive loss into cost of goods sold in the condensed consolidated statements of income and comprehensive income.
Foreign currency translation losses as a result of translating our foreign assets and liabilities into U.S. dollars during the three months ended July 3, 2022, were $i28.4
million, primarily driven by weakening of the Pound Sterling, the Euro, and the Canadian Dollar in comparison to the U.S. Dollar during the period. During the six months ended July 3, 2022, foreign currency translation losses were $i30.5 million primarily driven by weakening of the Pound Sterling, the
Euro, and the Canadian Dollar in comparison to the U.S. Dollar during the period.
Property,
plant and equipment additions in accounts payable were $i7.7 million and $i10.7 million as of July 3,
2022, and January 2, 2022, respectively.
16. iFair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable, income taxes receivable, accounts payable, accrued expenses and income taxes payable approximate fair value because of the short-term maturity of those instruments.
iThe estimated fair values and carrying values of our long-term debt instruments were as follows for the periods indicated:
These
estimates are based on market quotes and calculations based on current market rates available to us and are categorized as having Level 2 valuation inputs as established by the FASB's Fair Value Framework. Market quotes used in these calculations are based on bid prices for our debt instruments and are obtained from and corroborated with multiple independent sources. The market quotes obtained from independent sources are within the range of management's expectations.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon accounting principles generally accepted in the United States of America and discusses the financial condition and results of operations for Masonite International Corporation for the three and six months ended July 3, 2022, and July 4, 2021. In this MD&A, "Masonite,""we,""us,""our" and the "Company" refer to Masonite International Corporation and its subsidiaries.
This discussion should be read in conjunction with (i) the unaudited
condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and (ii) the annual audited consolidated financial statements, including the accompanying notes and MD&A, which are included in our Annual Report on Form 10-K for the year ended January 2, 2022 (the "Annual Report"). The following discussion should also be read in conjunction with the disclosure under "Special Note Regarding Forward Looking Statements" elsewhere in this Quarterly Report on Form 10-Q. Our actual results could differ materially from the forward-looking statements as a result of these risks and uncertainties.
Overview
We are a leading global designer, manufacturer,
marketer and distributor of interior and exterior doors for the new construction and repair, renovation and remodeling sectors of the residential and the non-residential building construction markets. Since 1925, we have provided our customers with innovative products and superior service at compelling values. Through innovative door solutions, a better door buying experience for our customers and partners
and advanced manufacturing and service delivery, we deliver a commitment of Doors That Do MoreTM.
We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale, retail and direct distribution channels as part of our cross-merchandising strategy. Customers are provided a broad product offering of interior and
exterior doors and entry systems at various price points. We manufacture a broad line of interior doors, including residential molded, flush, stile and rail, louver and specially-ordered commercial and architectural doors; door components for internal use and sale to other door manufacturers; and exterior residential steel, fiberglass and wood doors and entry systems.
We operate 59 manufacturing and distribution facilities in seven countries in North America, South America, Europe and Asia, which are strategically located to serve our customers through multiple distribution channels. These distribution channels include: (i) direct distribution to retail home center customers; (ii) one-step distribution that sells directly to homebuilders and contractors; and (iii) two-step distribution through wholesale distributors. For retail home center customers, numerous door fabrication facilities provide value-added fabrication and logistical
services, including pre-finishing and store delivery of pre-hung interior and exterior doors. We believe our ability to provide: (i) a broad product range; (ii) frequent, rapid, on-time and complete delivery; (iii) consistency in products and merchandising; (iv) national service; and (v) special order programs enables retail customers to increase comparable store sales and helps to differentiate us from our competitors. We believe investments in innovative new product manufacturing and distribution capabilities, coupled with an ongoing commitment to operational excellence, provide a strong platform for future growth.
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. In the six months ended July 3, 2022, we generated net sales of $1,176.3 million or 79.1%, $154.3 million or 10.4% and $146.4 million
or 9.8% in our North American Residential, Europe and Architectural segments, respectively.
During the second quarter, we were negatively impacted by rising energy and fuel costs, partly attributable to the war between Russia and Ukraine. In addition, continued logistics constraints and supply chain disruptions reduced production in some of our facilities and impacted our ability to service customers, particularly in our Architectural segment. Base volumes increased in our North American Residential segment as a result of operational execution and steady demand, while consumer sentiment, inflationary pressures, and strengthening of the US Dollar impacted our Europe segment. The extent to which labor and logistics constraints, supply chain disruptions, rising energy and fuel costs, consumer sentiment, interest rates and global inflation impact our business, results of operations and financial condition will depend on future
developments, which are highly uncertain and cannot be predicted.
There are numerous factors that influence overall market demand for our products. Demand for
new homes, home improvement products and other building construction products have a direct impact on our financial condition and results of operations. Demand for our products may be impacted by changes in United States, Canadian, European, Asian or other global economic conditions, including inflation, deflation, interest rates, availability of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions. Additionally, trends in residential new construction, repair, renovation and remodeling and architectural building construction may directly impact our financial performance. Accordingly, the following factors may have a direct impact on our business in the countries and regions in which our products are sold:
•the strength of the economy;
•the amount
and type of residential and commercial construction;
•housing sales and home values;
•the age of existing home stock, home vacancy rates and foreclosures;
•non-residential building occupancy rates;
•increases in the cost of raw materials or wages or any shortage in supplies or labor;
•the availability and cost of credit;
•employment rates and consumer confidence; and
•demographic factors such as immigration and migration of the population and trends in household formation.
Product
Pricing and Mix
The building products industry is highly competitive, and we therefore face pressure on sales prices of our products. In addition, our competitors may adopt more aggressive sales policies and devote greater resources to the development, promotion and sale of their products than we do, which could result in a loss of customers. Our business in general is subject to changing consumer and industry trends, demands and preferences. Trends within the industry change often and our failure to anticipate, identify or quickly react to changes in these trends could lead to, among other things, rejection of a new product line and reduced demand and price reductions for our products, which could materially adversely affect us. Changes in consumer preferences may also lead to increased demand for our lower margin products relative to our higher margin products, which could reduce our future profitability.
Business
Wins and Losses
Our customers consist mainly of wholesalers and retail home centers. Net sales from customers that have accounted for a significant portion of our net sales in past periods, individually or as a group, may not continue in future periods, or if continued, may not reach or exceed historical levels in any period. Certain customers perform periodic product line reviews to assess their product offerings, which have, on past occasions, led to business wins and losses. In addition, as a result of competitive bidding processes, we may not be able to increase or maintain the margins at which we sell our products to our customers.
Organizational Restructuring
Over the past several years, we have engaged in a series of restructuring programs related to exiting certain geographies and non-core businesses, consolidating certain internal
support functions and engaging in other actions designed to reduce our cost structure and improve productivity. These initiatives primarily consist of severance actions and lease termination costs. Management continues to evaluate our business; therefore, in future years, there may be additional provisions for new plan initiatives, as well as changes in previously recorded estimates, as payments are made, or actions are completed. Asset impairment charges were also incurred in connection with these restructuring actions for those assets sold, abandoned or made obsolete as a result of these programs.
In May 2021, we initiated further actions to improve overall business performance that includes the reorganization of our specialty door manufacturing capacity in our Architectural reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with
the reorganization of these facilities, which resulted in the closure of an existing specialty door assembly facility and related
headcount reductions beginning in the second quarter of 2021 (collectively, the "2021 Plan"). Costs associated with the 2021 Plan include severance and closure charges and continued through 2021. The actions taken as part of the 2021 Plan are expected to increase our annual earnings and cash flows by approximately $2 million.
In
November 2020, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce primarily in our Architectural reportable segment as well as limited actions in the North American Residential reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the closure of these facilities and related headcount reductions began taking place in the fourth quarter of 2020 (collectively, the "2020 Plan"). Costs associated with the 2020 Plan include severance and closure charges and continued through 2021. The actions taken as part of the 2020 Plan are expected to increase our annual earnings and cash flows by approximately $3 million.
In February 2019, we began implementing a plan to improve
overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce across all of our reportable segments and in our head offices. The reorganization of our manufacturing capacity involved specific plants in the North American Residential and Architectural segments and costs associated with the closure of these plants and related headcount reductions began taking place in the first quarter of 2019 (collectively, the "2019 Plan"). Costs associated with the 2019 Plan include severance, retention and closure charges and continued through 2020. The actions taken as part of the 2019 Plan are substantially complete and the annual earnings and cash flow savings realized were materially in line with expectations.
Inflation
In 2021 and the first half of 2022, we realized higher costs across
the various materials we purchase as a result of macroeconomic factors as well as increased logistics costs, wages, anti-dumping and countervailing duties and energy and fuel costs. Additionally, rising interest rates may impact the ability of end consumers to purchase our products. We expect the macroeconomic pressures on wood, resins and other certain key product categories and supply chain costs will continue at least through the remainder of fiscal year 2022. Our profitability, margins and net sales could be adversely affected if we are not able to pass these costs on to our customers or otherwise mitigate the impact of these inflationary pressures.
Seasonality
Our business is moderately seasonal, and our net sales vary from quarter to quarter based upon the timing of the building season in our markets. Severe weather conditions in any quarter, such as unusually prolonged warm
or cold conditions, rain, blizzards or hurricanes, could accelerate, delay or halt construction and renovation activity.
Acquisitions and Divestitures
We are pursuing a strategic initiative of optimizing our global business portfolio. On a continual basis, we evaluate and consider strategic acquisitions, divestitures and joint ventures to create shareholder value and enhance financial performance.
On June 14, 2021, we completed the sale of all of the capital stock of our Czech business ("Czech") for consideration of $7.0 million, net of cash disposed. The divestiture of this business resulted in a loss on sale of subsidiaries
of $8.6 million, which was recognized during the second quarter of 2021 in the Europe segment.
Net sales in the three months ended July 3, 2022, were $761.9 million, an increase of $99.5 million or 15.0% from $662.4 million in the three months ended July 4, 2021. Foreign exchange rate fluctuations negatively impacted net sales in the second quarter of 2022 by $12.8 million. Excluding this exchange rate impact, net sales would have increased by $112.3 million or 17.0% due to changes in volume, average unit price, impact of divestitures, and sales of components. Average unit price increased net sales in the second quarter of 2022 by $127.4 million or 19.2% compared to the 2021 period. Lower volumes
excluding the incremental impact of divestitures ("base volume") decreased net sales by $7.6 million or 1.1% in the second quarter of 2022 compared to the 2021 period. Our 2021 divestiture of our Czech business decreased net sales by $5.4 million or 0.8% in the three months ended July 3, 2022. Net sales of components to external customers decreased $2.1 million or 0.3% in the second quarter of 2022 compared to the 2021 period.
Net Sales and Percentage of Net Sales by Reportable Segment
Net sales to external customers from facilities in the North American Residential segment in the three months ended July 3, 2022, were $607.8 million, an increase of $114.4 million or 23.2% from $493.4 million in the three months ended July 4, 2021. Foreign exchange rate fluctuations negatively impacted net sales in the second quarter of 2022 by $3.8 million. Excluding this exchange rate impact, net sales would have increased by $118.2 million or 24.0% due to changes in volume, average unit price and sales of components. Average unit price increased net sales in the second quarter of 2022 by $102.2 million or 20.7% compared to the 2021 period. Higher base volume increased net sales in the second quarter of 2022 by $16.1 million or 3.3% compared to the 2021 period. Net sales of components to external customers
were $0.1 million lower in the second quarter of 2022 compared to the 2021 period.
Europe
Net sales to external customers from facilities in the Europe segment in the three months ended July 3, 2022, were $73.9 million, a decrease of $13.9 million or 15.8% from $87.8 million in the three months ended July 4, 2021. Foreign exchange rate fluctuations negatively impacted net sales in the second quarter of 2022 by $8.6 million. Excluding this exchange rate impact, net sales would have decreased by $5.3 million or 6.0% due to changes in volume, average unit price, divestitures and sales of components. Lower base volume decreased net sales by $14.0 million or 15.9% in the second quarter of 2022 compared to the 2021 period due to demand softness driven by weakening consumer confidence in
the United Kingdom, which we believe is affecting major purchase decisions. Our 2021 divestiture of our Czech business decreased net sales by $5.4 million or 6.2% in the second quarter of 2022. Average unit price increased net sales in the second quarter of 2022 by $14.0 million or 15.9% compared to the 2021 period. Net sales of components to external customers were $0.1 million higher in the second quarter of 2022 compared to the 2021 period.
Architectural
Net sales to external customers from facilities in the Architectural segment in the three months ended July 3, 2022, were $75.4 million, a decrease of $0.4 million or 0.5% from $75.8 million in the three months ended July 4, 2021. Foreign exchange rate fluctuations negatively impacted net sales in the second quarter of 2022 by
$0.3 million. Excluding this exchange rate impact, net sales would have decreased by $0.1 million or 0.1% due to changes in volume, average unit price and sales of components. Lower base volume decreased net sales in the second quarter of 2022 by $9.8 million or 12.9% compared to the 2021 period due to material availability challenges. Net sales of components to external customers were $0.2 million lower in the second quarter of 2022 compared to the 2021 period. Average unit price increased net sales in the second quarter of 2022 by $9.9 million or 13.1% compared to the 2021 period.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 76.4% and 75.2% for the three months ended July 3, 2022, and July 4, 2021, respectively. Material cost of sales as a percentage of
net sales increased by 2.6% compared to the 2021 period. Overhead, direct labor, depreciation, and distribution as a percentage of sales decreased by 0.5%, 0.4%, 0.4%, and 0.1%, respectively, compared to the second quarter of 2021. The increase in material cost of sales as a percentage of net sales was driven by commodity inflation and an increase in inbound logistics costs, partially offset by higher average unit prices and material cost savings projects. Overhead as a percentage of net sales decreased due to higher average unit prices, partially offset by wage inflation, higher factory costs and increased plant maintenance as compared to the 2021 period. Direct labor as a percentage of net sales decreased due to higher average unit prices, partially offset by
manufacturing wage and benefit inflation and startup costs. The decrease in depreciation as a percentage of net sales was driven by higher average unit prices as compared to the 2021 period. Distribution as a percentage of net sales decreased due to higher average unit prices, partially offset by increased outbound logistics and personnel costs.
Selling, General and Administration Expenses
In the three months ended July 3, 2022, selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 11.9%, as compared to 12.5% in the three months ended July 4,
2021, a decrease of 60 basis points.
SG&A expenses in the three months ended July 3, 2022, were $90.3 million, an increase of $7.8 million from $82.5 million in the three months ended July 4, 2021. The overall increase was driven by a $5.7 million increase in personnel costs primarily driven by increased incentive compensation, wage and benefit inflation and resource investments to support growth; a $1.8 million increase in travel expense as business activities fully returned to pre-pandemic levels; a $1.2 million increase in non-cash items in SG&A expenses, including loss (gain) on disposal of property, plant and equipment, deferred compensation, depreciation and amortization and share based compensation; and a $0.7 million increase in professional and other fees; These increases were partially offset by favorable
foreign exchange impacts of $1.1 million, and incremental SG&A savings from our 2021 divestiture of our Czech business of $0.5 million.
Restructuring (Benefit) Costs
Restructuring (benefit) costs in the three months ended July 3, 2022, were minimal, compared to $2.2 million in the three months ended July 4, 2021. Restructuring costs in the prior year period related primarily to the 2021 and 2020 Plans.
Asset Impairment
There were no asset impairment charges in the three months ended July 3, 2022. Asset impairment charges in the three months ended July 4, 2021, were $10.4 million, and resulted
from actions associated with the 2021 and 2020 Plans in our Architectural reporting unit. Refer to Note 10. Asset Impairment, in Item 1 of this Quarterly Report for additional information.
There was no loss on disposal of subsidiaries in the three months ended July 3, 2022, compared to $8.6 million in the three months ended July 4, 2021. The prior year loss arose as a result of the sale of our Czech business and is comprised of $5.1 million relating to the write-off of net assets sold and other professional fees and $3.5 million relating to the recognition of the cumulative
translation adjustment out of accumulated other comprehensive loss.
Interest Expense, Net
Interest expense, net, in the three months ended July 3, 2022, was $10.6 million, compared to $11.9 million in the three months ended July 4, 2021. The decrease in interest expense, net is primarily due to the refinancing of our senior notes in 2021.
Other (Income) Expense, Net
Other (income) expense, net includes profits and losses related to our non-majority owned unconsolidated subsidiaries that we recognize under the equity method of accounting, unrealized gains and losses on foreign currency remeasurements, pension
settlement charges and other miscellaneous non-operating expenses. Other (income) expense, net, in the three months ended July 3, 2022, was $0.4 million of income, compared to $1.6 million of income in the three months ended July 4, 2021, remaining relatively flat as compared to the 2021 period.
Income Tax Expense
Income tax expense in the three months ended July 3, 2022, was $19.6 million, compared to $14.2 million in the three months ended July 4, 2021. The increase in income tax expense is primarily due to the mix of income or losses within the tax jurisdictions with various tax rates in which we operate.
Net
income attributable to non-controlling interest
764
—
—
287
1,051
Adjusted EBITDA
$
100,045
$
16,584
$
480
$
(6,545)
$
110,564
Adjusted
EBITDA in our North American Residential segment was $125.0 million in the three months ended July 3, 2022, an increase of $24.9 million, or 24.9%, from $100.0 million in the three months ended July 4, 2021. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $21.7 million and $19.3 million, in the second quarter of 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development, marketing and share based compensation.
Adjusted EBITDA in our Europe segment was $8.6 million in the three months ended July 3, 2022, a decrease of $8.0 million, or 48.3%, from $16.6 million in the three months ended July 4,
2021. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $1.7 million and $1.0 million, in the second quarter of 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, marketing and share based compensation.
Adjusted EBITDA in our Architectural segment was $0.1 million in the three months ended July 3, 2022, a decrease of $0.4 million, or 83.8%, from $0.5 million in the three months ended July 4, 2021. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $2.9 million and $2.8 million, in the second quarter of 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research
and development, marketing and share based compensation.
Net sales in the six months ended July 3, 2022, were $1,488.1 million, an increase of $179.4 million or 13.7% from $1,308.7 million in the six months ended July 4, 2021. Foreign exchange rate fluctuations negatively impacted net sales in the first six months of 2022 by $15.8 million. Excluding this exchange rate impact, net sales would have increased by $195.2 million or 14.9% due
to changes in volume, average unit price, impact of divestitures and sales of components. Average unit price increased net sales in the first six months of 2022 by $227.3 million or 17.4% compared to the same period in 2021. Lower volumes excluding the incremental impact of divestitures ("base volume") decreased net sales by $16.5 million or 1.3% in the first six months of 2022 compared to the same period in 2021. Net sales of components to external customers decreased $3.9 million or 0.3% in the first six months of 2022 compared to the same
Net sales to external customers from facilities in the North American Residential segment in the six months ended July 3, 2022, were $1,176.3 million, an increase of $206.4 million or 21.3% from $969.9 million in the six months ended July 4, 2021. Foreign exchange rate fluctuations negatively impacted net sales in the first six months of 2022 by $4.1 million. Excluding this exchange rate impact, net sales would have increased by $210.5 million or 21.7% due to changes in volume, average unit price and sales of components. Average unit price increased net sales in the first six months of 2022 by $181.7 million or 18.7% compared to the 2021 period. Higher base volume increased net sales by $28.5 million or 2.9% in the first six months of 2022 compared to the same period in 2021. Net sales of components to external
customers were $0.3 million higher in the first six months of 2022 compared to the same period in 2021.
Europe
Net sales to external customers from facilities in the Europe segment in the six months ended July 3, 2022, were $154.3 million, a decrease of $22.0 million or 12.5% from $176.3 million in the six months ended July 4, 2021. Foreign exchange rate fluctuations negatively impacted net sales in the first six months of 2022 by $11.3 million. Excluding this exchange rate impact, net sales would have decreased by $10.7 million or 6.1% due to changes in volume, average unit price, divestitures and sales of components. Lower base volume decreased net sales in the first six months of 2022 by $27.8 million or 15.8% compared to the same period in 2021, due to demand softness driven by
weakening consumer confidence in the United Kingdom, which we believe is affecting major purchase decisions. Our 2021 divestiture of our Czech business decreased net sales by $11.7 million or 6.6% in the first six months of 2022. Average unit price increased net sales in the first six months of 2022 by $28.0 million or 15.9% compared to the 2021 period. Net sales of components to external customers were $0.8 million higher in the first six months of 2022 compared to the same period in 2021.
Architectural
Net sales to external customers from facilities in the Architectural segment in the six months ended July 3, 2022, were $146.4 million, a decrease of $4.4 million or 2.9% from $150.8 million in the six months ended July 4, 2021. Foreign exchange rate fluctuations negatively impacted
net sales in the first six months of 2022 by $0.3 million. Excluding this exchange rate impact, net sales would have decreased by $4.1 million or 2.7% due to changes in volume, average unit price and sales of components. Lower base volume decreased net sales in the first six months of 2022 by $17.3 million or 11.5% compared to the 2021 period resulting from production challenges due to material availability
and the impacts of labor constraints as a result of COVID-19. Net
sales of components to external customers were $3.1 million lower in the first six months of 2022 compared to the same period in 2021. Average unit price increased net sales in the first six months of 2022 by $16.3 million or 10.8% compared to the 2021 period.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 75.6% and 75.3% for the six months ended July 3, 2022, and July 4, 2021, respectively. Material cost of sales as a percentage of net sales increased by 2.1%, compared to the 2021 period. Direct labor, overhead, depreciation, and distribution as a percentage of net sales decreased by 0.7%, 0.7%, 0.2%, and 0.2%, respectively, compared to the 2021 period. The increase in material cost of sales as a percentage of net sales was driven by commodity inflation and
an increase in logistics costs and tariffs, partially offset by higher average unit prices and material cost savings projects. Direct labor as a percentage of net sales decreased due to higher average unit prices, partially offset by manufacturing wage inflation. Overhead as a percentage of net sales decreased due to higher average unit prices, partially offset by wage inflation, increased plant maintenance and increased investment in the business as compared to the 2021 period. The decrease in depreciation in the first six months of 2022 was driven by higher average unit prices as compared to the first six months of 2021. Distribution as a percentage of net sales decreased due to higher logistics costs and personnel costs including wage inflation.
Selling, General and Administration Expenses
In the six months ended July 3, 2022,
selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 11.7% compared to 12.7% the six months ended July 4, 2021, a decrease of 100 basis points.
SG&A expenses in the six months ended July 3, 2022, were $173.6 million, an increase of $7.5 million from $166.1 million in the six months ended July 4, 2021. The overall increase was driven by an $8.0 million increase in personnel costs primarily driven by increased incentive compensation, wage and benefit inflation and resource investments to support growth; a $3.2 million increase in travel expense as business activities fully returned to pre-pandemic levels; and a $1.4 million increase in professional and other fees. These increases were partially offset by a $2.6 million decrease
in non-cash items including depreciation and amortization, deferred compensation, loss on disposal of property, plant and equipment and share based compensation; foreign exchange impacts of $1.5 million; and incremental SG&A savings from our 2021 divestiture of $1.0 million.
Restructuring Costs
Restructuring costs in the six months ended July 3, 2022, were minimal, compared to $3.8 million in the six months ended July 4, 2021. Restructuring costs in the prior year period related primarily to the 2021 and 2020 Plans.
Asset Impairment
There were no asset impairment charges in the six months ended July 3, 2022. Asset impairment charges in the
six months ended July 4, 2021, were $10.4 million, and resulted from actions associated with the 2021 and 2020 Plans in our Architectural reporting unit. Refer to Note 10. Asset Impairment, in Item 1 of this Quarterly Report for additional information.
There was no loss on disposal of subsidiaries in the six months ended July 3, 2022, compared to $8.6 million in the six months ended July 4, 2021. The prior year loss arose as a result of the sale of our Czech business and is comprised of $5.1 million relating to the write-off
of net assets sold and other professional fees and $3.5 million relating to the recognition of the cumulative translation adjustment out of accumulated other comprehensive loss.
Interest Expense, Net
Interest expense, net, in the six months ended July 3, 2022, was $20.8 million, compared to $23.9 million in the six months ended July 4, 2021, remaining relatively flat as compared to the 2021 period.
Other (income) expense, net, in the six months ended July 3, 2022, was $1.8 million, compared to $2.9 million in the six months ended July 4, 2021. The change in other (income) expense, net is primarily due to a change in the fair value of plan assets in the deferred compensation rabbi trust and a change in our portion of the net gains and losses related to our non-majority owned unconsolidated subsidiaries that are recognized under the equity method of accounting, partially offset by an increase in pension expense.
Income Tax Expense
Income tax expense in the six months ended July 3, 2022,
was $43.1 million, compared to $28.9 million in the six months ended July 4, 2021. The increase in income tax expense is primarily due to the mix of income or losses within the tax jurisdictions with various tax rates in which we operate.
Net
income attributable to non-controlling interest
1,620
—
—
598
2,218
Adjusted EBITDA
$
194,527
$
33,339
$
2,474
$
(17,751)
$
212,589
Adjusted
EBITDA in our North American Residential segment was $252.6 million in the six months ended July 3, 2022, an increase of $58.1 million, or 29.9%, from $194.5 million in the six months ended July 4, 2021. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $44.2 million and $38.5 million in the first six months of 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development, marketing and share based compensation.
Adjusted EBITDA in our Europe segment was $20.4 million in the six months ended July 3, 2022, a decrease of $12.9 million, or 38.8%, from $33.3 million in the six months ended July 4,
2021. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $3.4 million and $2.0 million in the first six months of 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, marketing and share based compensation.
Adjusted EBITDA in our Architectural segment was a loss of $2.8 million in the six months ended July 3, 2022, a decrease of $5.3 million, or 214.0%, from $2.5 million of earnings in the six months ended July 4, 2021. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $5.7 million and $5.6 million in the first six months of 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information
technology, research and development, marketing and share based compensation.
Liquidity and Capital Resources
Our liquidity needs for operations vary throughout the year. Our principal sources of liquidity are cash flows from operating activities, the borrowings under our ABL Facility and an accounts receivable sales program with a third party ("AR Sales Program"), as well as our existing cash balance. Our anticipated uses of cash in the near term include working capital needs, capital expenditures for critical maintenance, safety and regulatory projects, and share repurchases. On a continual basis, we evaluate and consider strategic acquisitions, divestitures, and joint ventures to create shareholder value and enhance financial performance.
We
believe that our cash balance on hand, future cash generated from operations, the use of our AR Sales Program, our ABL Facility, and ability to access the capital markets will provide adequate liquidity for the foreseeable future. As of July 3, 2022, we had $231.5 million of cash and cash equivalents, availability under our ABL Facility of $249.0 million and availability under our AR Sales Program of $1.8 million.
Cash provided by operating activities was $34.1 million during the six months ended July 3, 2022, compared to $33.2 million of cash provided by operating activities in the six months ended July 4, 2021. This $0.9 million increase in cash provided by operating activities was due to a $6.6 million increase in net income attributable to Masonite, adjusted for non-cash and non-operating items, offset by a $5.7 million increase in working capital and other assets and liabilities in the first six months of 2022 compared to the same period in 2021.
Cash used in investing activities was $34.7 million during the six months ended July 3, 2022, compared to $20.7 million in the six months ended July 4,
2021. This $14.0 million increase in cash used in investing activities was driven by a $10.3 million increase in cash additions to property, plant and equipment, the absence of $6.8 million of proceeds from sale of subsidiaries, net of cash disposed, partially offset by a $3.0 million increase in proceeds from the sale of property, plant and equipment and a $0.1 million decrease in other investing activities in the first six months of 2022 compared to the same period in 2021.
Cash used in financing activities was $145.7 million during the six months ended July 3, 2022, compared to $48.7 million during the six months ended July 4, 2021. This $97.0 million increase in cash used in financing activities was driven by a $98.0 million increase
in cash used for repurchases of common shares and a $0.8 million increase in distributions to non-controlling interests, partially offset by a $0.9 million decrease in cash used for repayments of long-term debt and a $0.8 million decrease in cash used for tax withholding on share based awards in the first six months of 2022 compared to the same period in 2021.
Share Repurchases
The Company's Board of Directors has approved five share repurchase authorizations, the most recent being an incremental $200.0 million share repurchase program approved on February 21, 2022. In addition, the Company announced that its Board of Directors authorized it to enter into an accelerated
share repurchase ("ASR") transaction
as part of the new share repurchase program. The Company entered into an ASR transaction during the first quarter of 2022 with a third-party financial institution for the repurchase of $100.0 million of its outstanding common shares. At inception, pursuant to the agreement, the Company paid $100.0 million to the financial institution using cash on hand and received an initial delivery of 848,087 common shares on the same day. As of July 3, 2022, the initial $100.0 million ASR transaction was completed with a total delivery of 1,167,765 common shares at a volume-weighted average price (“VWAP”) per share minus an agreed upon discount totaling $85.63 per share. The final
delivery of 319,678 common shares were delivered in the second quarter. The cash paid was reflected as a reduction of equity at the initial delivery of shares and the number of shares outstanding were reduced at the dates of physical delivery. During the six months ended July 3, 2022, we repurchased 1,556,008 of our common shares at an aggregate cost of $140.0 million as part of the share repurchase programs and ASR. During the six months ended July 4, 2021, we repurchased 368,695 of our common shares in the open market at an aggregate cost of $42.0 million. As of July 3, 2022, there was $256.4 million available for repurchase in accordance with the share repurchase programs.
Other Liquidity Matters
Our cash and cash equivalents balance
includes cash held in foreign countries in which we operate. Cash held outside Canada, in which we are incorporated, is free from significant restrictions that would prevent the cash from being accessed to meet our liquidity needs including, if necessary, to fund operations and service debt obligations in Canada. However, earnings from certain jurisdictions are indefinitely reinvested in those jurisdictions. Upon the repatriation of any earnings to Canada, in the form of dividends or otherwise, we may be subject to Canadian income taxes and withholding taxes payable to the various foreign countries. As of July 3, 2022, we do not believe adverse tax consequences exist that restrict our use of cash or cash equivalents in a material manner.
We also routinely monitor the changes in the financial condition of our customers and the potential impact on our results of operations. There
has not been a change in the financial condition of any customer that has had a material adverse effect on our results of operations. However, if economic conditions were to deteriorate, it is possible there could be an impact on our results of operations in a future period and this impact could be material.
Accounts Receivable Sales Program
Under the AR Sales Program, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to a third party who assumes the full risk of collection, without recourse to us in
the event of a loss. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the condensed consolidated balance sheets and are included in cash flows from operating activities in the condensed consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold, if any, under the AR Sales Program were not material for any of the periods presented and were recorded in selling, general and administration expenses within the condensed consolidated statements of income and comprehensive income.
3.50% Senior Notes due 2030
On
July 26, 2021, we issued $375.0 million aggregate principal senior unsecured notes (the "2030 Notes"), all of which was outstanding as of July 3, 2022. The 2030 Notes bear interest at 3.50% per annum. The 2030 Notes were issued under an indenture which contains limited covenants that are described in detail in our Annual Report. As of July 3, 2022, we were in compliance with all covenants under the indenture governing the 2030 Notes.
5.375% Senior Notes due 2028
On July 25, 2019, we issued $500.0 million
aggregate principal senior unsecured notes (the "2028 Notes"), all of which was outstanding as of July 3, 2022. The 2028 Notes bear interest at 5.375% per annum. The 2028 Notes were issued under an indenture which contains restrictive covenants that are described in detail in our Annual Report. As of July 3, 2022, we were in compliance with all covenants under the indenture governing the 2028 Notes.
ABL Facility
On January 31, 2019, we and certain of our subsidiaries
entered into a $250.0 million asset-based revolving credit facility (the "ABL Facility") maturing on January 31, 2024, which replaced the previous facility. Borrowings under the ABL Facility bear interest at a rate which is described in more detail in Note 6. The ABL Facility contains various customary representations, warranties by us and covenants that are described in detail in our Annual Report. As of July 3, 2022, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $249.0 million under our ABL Facility and there were no amounts outstanding as of July 3, 2022.
Supplemental Guarantor Financial Information
Our obligations under the 2030 Notes, 2028 Notes and
the ABL Facility are fully and unconditionally guaranteed, jointly and severally, by certain of our directly or indirectly wholly-owned subsidiaries. The following unaudited supplemental financial information for our non-guarantor subsidiaries is presented:
Our non-guarantor subsidiaries generated external net sales of $680.8 million and $1,321.4 million for the three and six months ended July 3, 2022, respectively, and $590.7 million and $1,159.9 million for the three and six months ended July 4, 2021, respectively. Our non-guarantor subsidiaries
generated Adjusted EBITDA of $99.3 million and $201.0 million for the three and six months ended July 3, 2022, respectively, and $93.4 million and $170.4 million for the three and six months ended July 4, 2021, respectively. Our non-guarantor subsidiaries had total assets of $2.4 billion and $2.3 billion as of July 3, 2022, and January 2, 2022, respectively, and total liabilities of $997.5 million and $980.6 million as of July 3, 2022, and January 2, 2022, respectively.
Changes
in Accounting Standards and Policies
Changes in accounting standards and policies are discussed in Note 1. Business Overview and Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during
the reported period.
Please refer to “Critical Accounting Policies and Estimates” described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, from which there have been no material changes.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
For our disclosures about market risk, please see Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk," in our Annual Report. We believe there have been no material changes to the information provided therein.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial
reporting during the fiscal quarter covered by this report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
The information required with respect to this item can be found
in Note 7. Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report and is incorporated by reference into this Part II, Item 1. Such information should be read in conjunction with the information contained under Part I, Item 3 "Legal Proceedings" included in our Annual Report.
Item 1A. Risk Factors
You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results as set forth under Item 1A "Risk Factors" in our Annual Report. There have been no material changes from the risk factors disclosed in such Annual Report on
Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sale of Equity Securities.
None.
(b) Use of Proceeds.
Not applicable.
(c) Repurchases of Our Equity Securities.
The following table provides information about our share repurchase activity for the three months ended July 3, 2022.
Total
Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
The
Company's Board of Directors has approved five share repurchase authorizations, the most recent being an incremental $200.0 million share repurchase program approved on February 21, 2022. In addition, the Company announced that its Board of Directors authorized it to enter into an accelerated share repurchase ("ASR") transaction as part of the new share repurchase program. The Company entered into an ASR transaction during the first quarter of 2022 with a third-party financial institution for the repurchase of $100.0 million of its outstanding common shares. At inception, pursuant to the agreement, the Company paid $100.0 million to the financial institution
using cash on hand and received an initial delivery of 848,087 common shares on the same day. As of July 3, 2022, the $100.0 million ASR transaction was completed with a total delivery of 1,167,765 common shares at a volume-weighted average price (“VWAP”) per share minus an agreed upon discount totaling $85.63 per share. The final delivery of 319,678 common shares were delivered in the second quarter. The cash paid was reflected as a reduction of equity at the initial delivery of shares and the number of shares outstanding were reduced at the dates of physical delivery. The share repurchase programs have no specified end date, and the timing and amount of any share repurchases will be determined by management based on our evaluation of market conditions and other factors. As of July 3, 2022, $256.4 million was available for repurchase in accordance with the share
repurchase programs.
On August 3, 2022, the Human Resources and Compensation Committee (the “Committee”) of the Company’s Board of Directors made a special one-time grant of performance-vesting restricted stock units (“PRSUs”) under the Company’s 2021 Omnibus Incentive Plan to each of Howard C. Heckes, our President and Chief Executive Officer, Russell T. Tiejema, our Executive Vice President and Chief Financial Officer, Randal A. White, our Senior Vice President, Global Operations and Supply Chain, and Robert A. Paxton, our Senior Vice President, Human Resources (collectively, the “NEOs”).
This special PRSU grant is designed to enhance our ability to retain each NEO by motivating our senior leaders to achieve and maintain record levels of EBITDA performance.
The total number of PRSUs granted is as follows:
•Mr. Heckes: An amount of PRSUs equivalent to $2.5 million divided by the closing price of the Company’s Common Stock on August 3, 2022;
•Mr. Tiejema: An amount of PRSUs equivalent to $1.5 million divided by the closing price of the Company’s Common Stock on August 3, 2022;
•Mr.
Paxton: An amount of PRSUs equivalent to $1.0 million divided by the closing price of the Company’s Common Stock on August 3, 2022; and
•Mr. White: An amount of PRSUs equivalent to $1.0 million divided by the closing price of the Company’s Common Stock on August 3, 2022.
This special PRSU grant will vest upon the satisfaction of a “Performance Vesting Condition” (as set forth herein), subject to the NEO’s continued employment with the Company on August 3, 2025.
Thirty-four percent (34%) of the PRSUs will satisfy the Performance Vesting Condition if, and only if, MIP Adjusted EBITDA (as that term is defined in the “MIP and LTIP Definitions and Reconciliation” section of the Company’s proxy statement filed with the SEC on March 25, 2022) for the Company’s 2022 fiscal year equals or exceeds $500 million (excluding payments under a cash retention program adopted by the Committee on the same date on which the special PRSU grants were made and in which the NEOs are not eligible to participate) and the remaining sixty-six percent (66%) of the PRSUs will satisfy the Performance Vesting Condition if, and only if, MIP Adjusted EBITDA for either the
Company’s 2023 or 2024 fiscal years equals or exceeds $500 million. Any PRSUs for which the Performance Vesting Condition is not satisfied are automatically forfeited on the date on which the Committee confirms that the applicable level of MIP Adjusted EBITDA was not achieved (and is no longer capable of being achieved within the applicable time period). Except as is described in the following sentence, even if a PRSU has satisfied the Performance Vesting Condition, PRSUs will be automatically forfeited upon the NEO’s termination of employment with the Company for any reason if such termination occurs prior to August 3, 2025. The agreements governing the PRSUs include the same accelerated vesting provisions related to death and disability and in connection with a change in control that apply to the
Company’s annual equity award agreements.
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*
Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language ("Inline XBRL"): (i) the Registrant's Condensed Consolidated
Statements of Income and Comprehensive Income for the three and six months ended July 3, 2022, and July 4, 2021; (ii) the Registrant's Condensed Consolidated Balance Sheets as of July 3, 2022, and January 2, 2022; (iii) the Registrant's Condensed Consolidated Statements of Changes in Equity for the three and six months ended July 3, 2022, and July 4, 2021; (iv) the Registrant's Condensed Consolidated Statements of Cash Flows
for the six months ended July 3, 2022, and July 4, 2021; and (v) the notes to the Registrant's Condensed Consolidated Financial Statements
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
