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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 1, 2023, 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 from weather and climate change;
•our ability to successfully consummate and integrate acquisitions and execute dispositions;
•changes 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 and to meet our debt service obligations, including our obligations under our senior notes, our term loan credit agreement (the "Term Loan Facility") and our asset-based revolving credit facility (the "ABL Facility");
•limitations on operating our business as a result of covenant restrictions under our existing and future indebtedness, including our senior notes, the Term Loan Facility and the ABL Facility;
•fluctuating
foreign exchange and interest rates;
•the continuous operation of our information technology and enterprise resource planning systems and management of potential cyber security threats and attacks and data privacy requirements;
•political, economic and other risks that arise from operating a multinational business;
•retention of key management personnel;
•environmental and other government regulations, including the United States Foreign Corrupt Practices Act ("FCPA"), and any changes in such regulations;
•the scale and scope of public health issues and their impact on our operations, customer demand and supply chain; and
•our
ability to replace our expiring patents and to innovate and keep pace with technological developments.
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, ii21,903,821/ and ii22,155,035/
shares issued and outstanding as of October 1, 2023, and January 1, 2023, respectively
i525,709
i520,003
Additional
paid-in capital
i226,950
i226,514
Retained
earnings
i227,298
i127,826
Accumulated
other comprehensive loss
(i134,201)
(i142,224)
Total
equity attributable to Masonite
i845,756
i732,119
Equity attributable
to non-controlling interests
i10,963
i10,663
Total equity
i856,719
i742,782
Total
liabilities and equity
$
i2,685,906
$
i2,248,178
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 a leading global designer, manufacturer, marketer and distributor of interior and exterior doors, door system components and door systems for the new construction and repair, renovation and remodeling sectors of the residential and non-residential building construction markets. Masonite operates i63
manufacturing locations 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 1, 2023, 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 a 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 2022 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 Accounting Standards Update ("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 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.
In October 2021, the FASB issued ASU 2021-08,
"Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASU 2014-09, "Revenue from Contracts with Customers" as if the entity had originated the contracts.
We adopted the new guidance as of January 1, 2023, the beginning of fiscal year 2023, 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
Acquisitions
On January 3, 2023, we completed the acquisition of i100% of the outstanding equity of EPI Holdings, Inc. ("Endura"), for total consideration of approximately$i403.3
million, including an $i18.0 million holdback which is payable 24 months after the acquisition date and was recorded in the consolidated balance sheets as a component of other liabilities. Endura is a leading innovator and manufacturer of high-performance door frames and door system components in the United States. Endura’s product offerings include engineered frames, self-adjusting sill systems, weather sealing, multi-point locks and installation accessories used by builders and contractors in residential new construction as well as repair and remodeling applications. The acquisition is
intended to accelerate our Doors That Do MoreTM strategy and maximize our growth potential. The $i182.9 million excess purchase price over the fair value of tangible and intangible assets acquired was allocated to goodwill. The goodwill principally represents anticipated synergies to be gained from the integration into our existing business and acquisition of the assembled workforce. This goodwill is not deductible for tax purposes and relates to the North American Residential segment.
The
Company has accounted for the acquisition as a business combination and allocated the preliminary estimated purchase price to the estimated fair values of assets acquired and liabilities assumed utilizing various valuation methods including replacement cost, market values and the income approach. The Company has not yet completed its evaluation and determination of certain assets acquired and liabilities assumed, primarily (i) the final valuation of intangible assets related to customers relationships, patents and trade names, and (ii) the final assessment and valuation of certain other assets acquired and liabilities assumed, including inventory, property, plant and equipment, leases, and deferred income taxes, which could also impact goodwill during the measurement period.
i
The
allocation of the purchase price to assets acquired and liabilities assumed is as follows:
(In thousands)
Initial Purchase Price Allocation
Measurement Period Adjustments
Preliminary Purchase Price Allocation
Cash acquired
$
i32,501
$
(i100)
$
i32,401
Accounts
receivable, net
i7,871
i290
i8,161
Inventories,
net
i44,183
i35
i44,218
Property,
plant and equipment, net
i54,373
i10,576
i64,949
Goodwill
i189,938
(i7,044)
i182,894
Intangible
assets
i135,800
(i7,400)
i128,400
Accounts
payable and accrued expenses
(i15,088)
(i190)
(i15,278)
Deferred
income taxes
(i44,345)
(i946)
(i45,291)
Other
assets and liabilities, net
i2,868
(i35)
i2,833
Total
purchase price
$
i408,101
$
(i4,814)
$
i403,287
/
The
fair values of intangible assets acquired are based on management's estimates and assumptions including the income approach, the cost approach and the market approach. The intangible assets acquired are not expected to have any residual value. The gross contractual value of acquired trade receivables was $i8.3 million.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
i
Intangible assets acquired from the Endura acquisition consist of the following:
Fair
Value (in thousands)
Expected Useful Life (Years)
Customer relationships
$
i108,600
i10
Trademarks
and trade names
i6,600
i10
Patents
i13,200
i12
Total
intangible assets acquired
$
i128,400
/
Endura's results of operations were included in the condensed consolidated statements of income and comprehensive income for the period subsequent to the acquisition date.
For the three and nine months ended October 1, 2023, Endura had net sales of $i59.7 million and $i178.9 million,
respectively. For the three and nine months ended October 1, 2023, Endura had $i1.7 million in net income attributable to Masonite and $i1.5 million
in net loss attributable to Masonite, respectively.
Pro Forma Information
i
The following unaudited pro forma financial information represents the consolidated financial information as if the Endura acquisition had been included in our consolidated results beginning on January 2, 2022, the first day of the fiscal year prior to the respective acquisition date. The pro forma results have been calculated after adjusting the results of the acquired entities to remove intercompany transactions and to reflect the additional depreciation,
amortization and interest expense that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets and the additional debt incurred to fund the acquisition had been applied on the first day of the fiscal year prior to the respective acquisition date, together with the consequential tax effects. The pro forma results do not reflect any cost savings, operating synergies or revenue enhancements that the combined companies may achieve as a result of the acquisition; the costs to combine the companies' operations; or the costs necessary to achieve these costs savings, operating synergies and revenue enhancements. As a result, the pro forma information below does not purport to represent actual results had the acquisition been consummated on the date indicated and it is not necessarily indicative of future results of operations.
As
previously disclosed, we are actively reviewing strategic alternatives for our Architectural segment, including a potential sale of some or all of the business. There can be no assurance that a potential transaction will be
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
consummated or on what terms. If a transaction is consummated, depending on the sale price, we could incur an impairment charge related to the book value of the segment's
assets. This charge could be material.
3. iAccounts Receivable
Our customers consist mainly of retailers, distributors and contractors. Our iiten/
largest customers accounted for i59.4% and i62.3% of total accounts receivable as of October 1, 2023, and January 1, 2023, respectively. Our largest customer, The Home Depot, Inc., accounted for more than ii10/%
of the consolidated gross accounts receivable balance as of October 1, 2023, and January 1, 2023. In addition, Lowe's Companies, Inc. accounted for more than ii10/%
of the consolidated gross accounts receivable balance as of October 1, 2023. The allowance for doubtful accounts balance was $i2.9 million and $i2.5 million as
of October 1, 2023, and January 1, 2023, 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 AR Sales 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.
Certain wood moldings and millwork products being imported into the U.S. are subject to import tariffs. Tariff deposits are paid to the government and are recoverable through an assessment process.
4.
iInventories
iThe amounts of inventory on hand were as follows as of the dates indicated:
Senior unsecured notes, interest rate of i3.50%, due 2030
$
i375,000
$
i375,000
Senior
unsecured notes, interest rate of i5.375%, due 2028
i500,000
i500,000
Term
Loan Facility, interest rate of SOFR plus i2.25%, due 2027
i231,250
i—
Debt
issuance costs
(i10,540)
(i8,884)
Total
debt (including current portion)
i1,095,710
i866,116
Less:
debt due within one year
(i37,500)
i—
Total
long-term debt (excluding current portion)
$
i1,058,210
$
i866,116
/
Interest
expense related to our consolidated indebtedness under our senior unsecured notes, Term Loan Facility and ABL Facility was $i13.5 million and $i43.0 million for the three and nine months ended October 1, 2023, respectively, and $i10.4 million
and $i31.1 million for the three and nine months ended October 2, 2022, 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 October 1, 2023, 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 October 1, 2023, we were in compliance with all covenants under the indenture governing the 2028 Notes.
Term Loan Facility
On December 13, 2022, we and certain of our subsidiaries
entered into a new delayed-draw term loan credit agreement (the "Term Loan Credit Agreement") maturing on December 12, 2027 (the "Term Loan Maturity Date"). The Term Loan Credit Agreement provides for a senior secured ifive-year delayed-draw term loan facility of $i250.0 million
(the "Term Loan Facility"). Loans under the Term Loan Facility (the "Term Loans") will bear interest at a rate equal to, at our option, (1) the Adjusted Term SOFR Rate (as defined in the Term Loan Credit Agreement) plus an applicable margin of i2.25% or (2) an alternate base rate equal to the greatest of (i) the "Prime Rate" in the U.S. last quoted by The Wall Street Journal, (ii) i0.50%
above the greater of the federal funds rate and the rate comprised of both overnight federal funds and overnight Eurodollar transactions denominated in U.S. dollars, (iii) i1.00% above the Adjusted Term SOFR Rate for a one month interest period and (iv) i1.00%,
plus, in each case, an applicable margin of i1.25%, subject to, in each of cases (1) and (2), an agreed interest rate floor. The Term Loans are repayable in equal quarterly installments for an annual aggregate amortization payment equal to i15% of the aggregate
principal amount of the Term Loans, with the balance of the principal being due on the Term Loan Maturity Date.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Obligations under the Term Loan Credit Agreement are fully and unconditionally guaranteed, jointly and severally, by us and by certain of our directly or indirectly wholly owned subsidiaries
organized in the U.S. and are secured by the equity in, and substantially all the assets of, such subsidiaries. The Term Loans were funded in an amount of $i250.0 million and applied to finance a portion of the consideration payable in connection with the consummation of the Endura acquisition on January 3, 2023. We received net proceeds of $i246.4 million
after deducting $i3.6 million of debt issuance costs. The debt issuance costs were capitalized as a reduction to the carrying value of debt and are being accreted to interest expense over the term of the Term Loan using the effective interest method.
The Term Loan Credit Agreement contains various customary representations, warranties by us and covenants that are described in detail in our Annual Report. As of October 1, 2023, we were in compliance with all covenants under the indenture
governing the Term Loan Credit Agreement.
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. On October
28, 2022, we and certain of our subsidiaries entered into an amendment which, among other things, (i) increased the revolving credit commitments available thereunder by $i100.0 million to an aggregate amount of $i350.0 million
and (ii) replaced the LIBOR-based interest rate applicable to borrowings thereunder in U.S. dollars with an interest rate based on the sum of (x) a "Term SOFR" rate published by the CME Group Benchmark Administration Limited (CBA) plus (y) 10 basis points ("Adjusted Term SOFR"). Additionally, on December 12, 2022, we entered into an amendment to the ABL Facility, which, among other things, extended the maturity of the ABL Facility from January 31, 2024 to December 12, 2027. The terms of the ABL Facility remained otherwise substantially unchanged and are described in detail in our Annual Report. On January 3, 2023, we borrowed $i100.0 million
under our ABL Facility in order to fund a portion of the cash consideration paid for the acquisition of Endura. During the first quarter of 2023, we repaid all amounts outstanding under the ABL Facility.
The ABL Facility contains various customary representations, warranties by us and covenants that are described in detail in our Annual Report. As of October 1, 2023, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $i276.0
million under our ABL Facility, and there were ino amounts outstanding as of October 1, 2023.
7. iCommitments
and Contingencies
We may become involved from time-to-time in litigation and regulatory compliance matters incidental to our business, including employment and wage and hour claims, antitrust, tax, product liability, environmental, health and safety, commercial disputes, intellectual property, contracts and other matters arising out of the normal conduct of our business. Since litigation is inherently unpredictable and unfavorable resolutions can occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review and accrue for contingencies related to litigation and regulatory compliance matters, if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on current information, in the opinion of management, the ultimate resolution
of these matters, individually or in the aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows.
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, Corporation Internationale Masonite, 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.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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. The plaintiff served its certification record on March 31, 2021.
On
November 3, 2023, the Company entered into a preliminary settlement agreement with the plaintiff class that would result in the resolution of all the plaintiffs’ underlying claims and lawsuits in exchange for a payment by the Company of approximately $i0.9 million. As a result, for the three and nine months ended October 1,
2023, we accrued approximately $i0.9 million in selling, general and administrative expense in the condensed consolidated statement of income and comprehensive income in connection with this matter. The preliminary settlement agreement is subject to court approval. A settlement approval hearing date has not yet been set.
8. iShare
Based Compensation Plans
Share based compensation expense was $i4.3 million and $i17.4 million for the three and nine months ended October 1, 2023, respectively, and $i5.6
million and $i16.3 million for the three and nine months ended October 2, 2022, respectively. As of October 1, 2023, the total remaining unrecognized compensation expense related to share based compensation amounted to $i31.8
million, which will be amortized over the weighted average remaining requisite service period of i1.7 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 October 1, 2023, there were i766,368 shares of common stock available for future issuance under the 2021 Equity Plan.
Deferred
Compensation Plan
We offer to certain of our employees and directors a Deferred Compensation Plan, which is further described and defined in our Annual Report. As of October 1, 2023, the liability and asset relating to deferred compensation had a fair value of $i8.0 million and $i7.3
million, respectively. As of October 1, 2023, 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, which entitle the recipient to the appreciation in value of granted 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
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 SAR amongst other considerations. iThe
weighted average grant date assumptions used for the SARs granted were as follows for the periods indicated:
2023 Grants
SAR value (model conclusion)
$
i32.63
Risk-free
rate
i4.1
%
Expected dividend yield
i0.0
%
Expected
volatility
i28.4
%
Expected term (years)
i6.0
Restricted
Stock Units
We have granted Restricted Stock Units ("RSUs") to directors and certain employees under the 2021 Equity Plan and the 2012 Plan. 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 granted 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 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.
(1)
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.
RSUs granted during the nine months ended October 1, 2023, vest at specified future dates with only service requirements. The value of RSUs granted in the nine months ended October 1, 2023, was $i19.1
million and is being recognized over the weighted average requisite service period of i2.0 years. During the nine months ended October 1, 2023, i123,672
RSUs vested at a fair value of $i11.3 million.
Performance-based Restricted Stock Units
We have granted certain Performance-based Restricted Stock Units ("PRSUs") under the 2021 Equity Plan and the 2012 Plan. These PRSUs are settled with payouts ranging from zero to 200% of the target award value depending
on performance goal achievement. The compensation expense for the PRSUs awarded is based on the fair value of the PRSUs 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 compensation expense for certain PRSUs is determined using the Monte Carlo simulation method. The PRSUs 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 delivered once the blackout restriction has been lifted.
Total Performance Restricted Stock Units Outstanding
Weighted
Average Grant Date Fair Value
Outstanding, beginning of period
i310,678
$
i90.15
Granted
i92,743
i104.36
Performance
adjustment (1)
i17,139
i79.25
Delivered
(i63,432)
i79.25
Withheld
to cover (2)
(i5,224)
Forfeited
(i30,376)
i94.50
Outstanding,
end of period
i321,528
$
i95.58
___________
(1)
PRSUs are presented as outstanding, granted and forfeited in the table above assuming targets are met and the awards pay out at 100%. Certain 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 PRSUs 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.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
PRSUs granted during the nine months ended October 1, 2023, vest at specified future dates based on both performance and service requirements. The value of PRSUs granted in the nine months ended October 1, 2023, was $i9.7
million and is being recognized over the weighted average requisite service period of i3.0 years. During the nine months ended October 1, 2023, i68,656
PRSUs vested at a fair value of $i5.4 million.
9. iRestructuring
Costs
In December 2022, we began implementing a plan intended to improve overall business performance that includes the optimization of our manufacturing capacity and reduction of our overhead and selling, general and administration workforce primarily in our North American Residential reportable segment as well as actions in the Architectural reportable segment and in our head offices (collectively, the "2022 Plan"). The optimization of our manufacturing capacity involves specific plants in the North American Residential segment and costs associated with the closure of these plants and related headcount reductions. Costs associated with the 2022 Plan include severance and closure charges which continue throughout 2023. As of October 1, 2023, we expect to incur approximately $i4 million
to $i9 million of additional charges related to the 2022 Plan.
i
The following tables summarize the restructuring (benefit) costs recorded for the periods indicated:
The effective tax rate differs from the Canadian statutory rate of i26.13% 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 izero income tax benefit due to the exercise and delivery of share based awards during both the three and nine months ended October 1, 2023, compared to izero
and $i1.1 million of income tax benefit during the three and nine months ended October 2, 2022, respectively.
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 ("IRA") into law. The IRA includes several changes to existing tax law, including a minimum tax on adjusted financial statement income of applicable corporations
and an excise tax on certain corporate stock buybacks. The tax provisions included in the IRA were generally effective beginning January 1, 2023, and no significant impact to the consolidated financial statements resulted from their adoption as of October 1, 2023.
11. 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.
i
(In
thousands, except share and per share information)
Incremental shares issuable under share compensation plans
i346,660
i224,190
i307,262
i248,197
Shares
used in computing diluted earnings per share
i22,339,173
i22,491,874
i22,389,678
i22,873,027
Basic
earnings per common share attributable to Masonite
$
i1.89
$
i2.56
$
i5.81
$
i8.09
Diluted
earnings per common share attributable to Masonite
$
i1.86
$
i2.54
$
i5.73
$
i8.01
Anti-dilutive
instruments excluded from diluted earnings per common share
i58,817
i212,197
i98,145
i223,660
/
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.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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. Under this program, the Company may repurchase shares from time to time, depending on market conditions and alternate uses of capital. The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions and alternate uses of capital. The share repurchase program may be effected through Rule 10b5-1 plans, open market purchases, each in compliance with Rule 10b-18 under the Exchange Act, or privately negotiated transactions. The program may be suspended or discontinued at any time and does not have an expiration date. The Company entered into an accelerated share repurchase ("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. The final delivery of i319,678 common shares occurred in the second quarter. The $i100.0
million ASR transaction was therefore completed in the second quarter of 2022 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
cash paid was reflected as a reduction of equity at the initial delivery of shares and the number of common shares outstanding were reduced at the dates of physical delivery.
12. 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, as applicable:
• 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 the 2028 Notes and the credit agreements governing the Term Loan Facility and 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 our reportable segments and it is one of the primary measures used to determine employee incentive compensation. Intersegment sales are recorded using market prices.
Loss
(gain) on disposal of property, plant and equipment
i1,779
i155
i3,319
(i1,245)
Restructuring
costs (benefit)
i1,900
(i141)
i8,643
(i221)
Interest
expense, net
i11,913
i10,266
i39,653
i31,098
Other
(income) expense, net
(i1,083)
i211
(i1,581)
(i1,604)
Income
tax expense
i12,041
i16,376
i38,074
i59,502
Other
items (1)
i3,760
i—
i6,349
i—
Net
income attributable to non-controlling interest
i817
i745
i2,470
i2,743
Adjusted
EBITDA
$
i107,236
$
i111,922
$
i331,858
$
i354,799
/
(1)
Other items include $i3,760 and $i6,349 in acquisition and due diligence related costs in the three and nine months ended October 1, 2023, and were recorded in selling, general and administration
expenses within the condensed consolidated statements of comprehensive income.
Accumulated foreign currency translation losses, beginning of period
$
(i114,657)
$
(i128,070)
$
(i132,001)
$
(i96,919)
Foreign
currency translation (loss) gain
(i9,837)
(i29,021)
i7,653
(i59,518)
Income
tax (benefit) expense on foreign currency translation loss
(i6)
(i45)
i4
(i58)
Less:
foreign currency translation (loss) gain attributable to non-controlling interest
(i83)
(i45)
i73
i596
Accumulated
foreign currency translation losses, end of period
(i124,417)
(i157,091)
(i124,417)
(i157,091)
Accumulated
pension and other post-retirement adjustments, beginning of period
(i9,924)
(i4,651)
(i10,223)
(i4,663)
Amortization
of actuarial net losses
i191
i6
i574
i18
Income
tax expense on amortization of actuarial net losses
(i51)
i—
(i135)
i—
Accumulated
pension and other post-retirement adjustments
(i9,784)
(i4,645)
(i9,784)
(i4,645)
Accumulated
other comprehensive loss
$
(i134,201)
$
(i161,736)
$
(i134,201)
$
(i161,736)
Other
comprehensive (loss) income, net of tax
$
(i9,703)
$
(i29,060)
$
i8,096
$
(i59,558)
Less:
other comprehensive (loss) income attributable to non-controlling interest
(i83)
(i45)
i73
i596
Other
comprehensive (loss) income attributable to Masonite
$
(i9,620)
$
(i29,015)
$
i8,023
$
(i60,154)
/
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 October 1, 2023, were $i9.8
million, primarily driven by the weakening of the British pound sterling, the Canadian dollar, and the Euro in comparison to the U.S. dollar during the period. Foreign currency translation gains as a result of translating our foreign assets and liabilities into U.S. dollars during the nine months ended October 1, 2023, were $i7.7 million, primarily driven by the strengthening
of the British pound sterling, the Mexican peso, and the Canadian dollar, partially offset by the weakening of the Euro in comparison to the U.S. dollar during the period.
Property,
plant and equipment additions in accounts payable were $i10.2 million and $i10.4 million as of October 1, 2023, and January 1, 2023,
respectively.
During the fourth quarter of 2018, we provided debt financing to a distribution company via an interest-bearing note that was scheduled to mature in 2028. The interest-bearing note receivable was carried at amortized cost, with the interest payable in kind at the election of the borrower. The note receivable balance was $i12.6 million as of January 1, 2023, and was recorded in the consolidated balance sheets as a component of prepaid expenses and other assets. On January
26, 2023, the note receivable was redeemed and fully repaid.
15. 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. The carrying amount of our Term Loan Facility approximates fair value as the interest rates are
variable and reflective of market rates. iThe estimated fair values and carrying values of our long-term senior note 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.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
16. iSubsequent Event
Acquisition of Fleetwood
On October 19, 2023, the Company completed the acquisition of all of the issued and outstanding limited liability company interests of Fleetwood Aluminum Products, LLC (“Fleetwood”), for $i285 million
in cash. The Company held back approximately $i26 million from the Base Purchase Price to secure the obligations of Sellers to Buyer with respect to any purchase price adjustment and indemnification claims. The total consideration was funded with a combination of cash on hand and borrowings under the ABL facility. Fleetwood is a leading designer and manufacturer of premium, aluminum-framed glass door and window solutions for luxury homes. Their products include multi-slide and pocket glass patio doors,
pivot and hinged glass entry doors and folding glass door wall systems, as well as accompanying premium window products. The acquisition aligns with the Doors That Do MoreTM strategy focused on bringing differentiated door systems to the residential market. The acquisition will be accounted for as a business combination, with the goodwill being non-deductible for tax purposes.
The allocation of the purchase price to the underlying assets acquired and liabilities assumed is subject to a formal valuation process, which has not yet been completed. The major classes of assets acquired will include trade receivables, inventories, trade payables and goodwill and intangibles. Our 2023 operating results will include the results from Fleetwood from the date of acquisition. Based on the timing of the acquisition and lack of available information, we determined it to be impracticable to
disclose a preliminary purchase price allocation at this time.
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 nine months ended October 1, 2023, and October 2, 2022. 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 1, 2023 (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, door system components and door systems for the new construction and repair, renovation and remodeling sectors of the residential and 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 an extensive range of interior and exterior doors in a wide array of designs, materials and sizes. Our interior doors are made with wood and related materials such as hardboard (including wood composite molded
and flat door facings). Our exterior doors are made primarily of steel, fiberglass or composite materials. Our residential doors are molded panel, flush, stile and rail, steel or fiberglass.
We operate 63 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 enable 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 nine months ended October 1, 2023, we generated net sales of $1,707.0 million or 78.7%, $194.3 million or 9.0% and $256.4 million or 11.8% in our North American Residential, Europe and Architectural segments, respectively.
During the third quarter, we
continued to experience lower end market demand and negative impacts from macro-economic conditions such as rising interest rates and unfavorable consumer sentiment. Base volumes, excluding the acquisition of Endura on January 3, 2023, decreased in our North American Residential segment due to expected new housing softness and declines in the residential repair, renovation and remodeling channel compared to the prior year period. Net sales and Adjusted EBITDA in our Europe segment declined as compared to the third quarter of 2022 due to the aforementioned macro-economic factors, partially offset by favorable foreign exchange. Net sales growth in the Architectural segment was largely driven by increases in average unit price. The extent to which changes in interest
rates, rising energy and fuel costs, and consumer sentiment impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
Key Factors Affecting Our Results of Operations
Product Demand
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 global economic conditions, including inflation, deflation, interest rates, availability of capital, supply chain constraints, 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
represent 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, optimizing our manufacturing capacity, 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
December 2022, we began implementing a plan intended to improve overall business performance that includes the optimization of our manufacturing capacity and reduction of our overhead and selling, general and administration workforce primarily in our North American Residential reportable segment as well as actions in the Architectural reportable segment and in our head offices (collectively, the "2022 Plan"). The optimization of our manufacturing capacity involves specific plants in the North American Residential segment and costs associated with the closure of these plants and related headcount reductions. Costs associated with the 2022 Plan also include severance and closure charges which will continue throughout 2023.
Inflation
In 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, and these higher costs not previously recognized were realized in the first half of 2023. We expect the macroeconomic pressures on wood, resins and other certain key product categories and supply chain costs will moderate throughout 2023. Rising interest rates may impact the ability of our end consumers to purchase our products. Our profitability, margins and net sales could be adversely affected if inflationary trends do not moderate as expected and if interest rates continue to rise.
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 January 3, 2023, we completed the acquisition of 100% of the outstanding equity of EPI Holdings, Inc. ("Endura"), for total consideration of approximately $403.3 million. Endura is a leading innovator and manufacturer of high-performance door frames and door system components in the United States. Endura’s product offerings include engineered frames, self-adjusting sill systems, weather sealing, multi-point locks and installation accessories used by builders and contractors in residential new construction as well as repair and remodeling applications. The acquisition is intended to accelerate our Doors That Do MoreTM strategy and maximize our growth potential.
On October
19, 2023, the Company completed the acquisition of all of the issued and outstanding limited liability company interests of Fleetwood Aluminum Products, LLC (“Fleetwood”), for $285 million in cash. The Company held back approximately $26 million from the Base Purchase Price to secure the obligations of Sellers to Buyer with respect to any purchase price adjustment and indemnification claims. The total consideration was funded with a combination of cash on hand and borrowings under the ABL facility. Fleetwood is a leading designer and manufacturer of premium, aluminum-framed glass door and window solutions for luxury homes. Their products include multi-slide and pocket glass patio doors, pivot and hinged glass entry doors and folding glass door wall systems, as well as accompanying premium
window products. The acquisition aligns with the Doors That Do MoreTM strategy focused on bringing differentiated door systems to the residential market.
As previously disclosed, we are actively reviewing strategic alternatives for our Architectural segment, including a potential sale of some or all of the business. There can be no assurance that a potential transaction will be consummated or on what terms. If a transaction is consummated, depending on the sale price, we could incur an impairment charge related to the book value of the segment's assets. This charge could be material.
Net sales in the three months ended October 1, 2023, were $702.2 million, a decrease of $25.4 million from $727.6 million in the three months ended October 2, 2022. Foreign exchange rate fluctuations positively impacted net sales in the third quarter of 2023 by $2.5 million. The acquisition of Endura increased net sales by $59.7 million or 8.2%. Excluding the impact of foreign currency and our 2023 acquisition of Endura, net sales would have decreased by $87.6 million or 12.0% due to changes in volume, sales of components and average unit price. Lower volumes excluding the incremental impact of
acquisitions or divestitures ("base volume") decreased net sales by $93.1 million or 12.8% in the third quarter of 2023 compared to the 2022 period. Net sales of components to external customers decreased $2.6 million or 0.4% in the third quarter of 2023 compared to the 2022 period. Average unit price increased net sales in the third quarter of 2023 by $8.1 million or 1.1% compared to the 2022 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 October 1, 2023, were $553.0 million, a decrease of $26.4 million or 4.6% from $579.4 million in the three months ended October 2, 2022. Foreign exchange rate fluctuations negatively impacted net sales in the third quarter of 2023 by $1.8 million. The acquisition of Endura increased net sales by $59.7 million or 10.3% in the third quarter of 2023. Excluding the impact of foreign currency and our 2023 acquisition of Endura, net sales would have decreased by $84.3 million or 14.5% due to changes in volume, average unit price and sales of components. Lower base volume decreased net sales in the third quarter of 2023 by $81.0 million or 14.0% compared to the 2022 period due to softening end market
demand in new construction and residential repair, renovation and remodeling channels. Average unit price decreased net sales in the third quarter of 2023 by $3.9 million or 0.7% compared to the 2022 period. Net sales of components to external customers were $0.6 million higher in the third quarter of 2023 compared to the 2022 period.
Europe
Net sales to external customers from facilities in the Europe segment in the three months ended October 1, 2023, were $64.6 million, a decrease of $1.1 million or 1.7% from $65.7 million in the three months ended October 2, 2022. Foreign exchange rate fluctuations positively impacted net sales in the third quarter of 2023 by $4.7 million. Excluding this exchange rate impact, net sales would have decreased by $5.8 million or 8.8% due to changes
in volume, average unit price and sales of components. Lower base volume decreased net sales by $4.3 million or 6.5% in the third quarter of 2023 compared to the 2022 period due to overall economic trends in the United Kingdom. Average unit price decreased net sales in the third quarter of 2023 by $1.1 million or 1.7% compared to the 2022 period. Net sales of components to external customers were $0.4 million lower in the third quarter of 2023 compared to the 2022 period.
Architectural
Net sales to external customers from facilities in the Architectural segment in the three months ended October 1, 2023, were $80.7 million, an increase of $2.9 million or 3.7% from $77.8 million in the three months ended October 2, 2022. Foreign exchange rate fluctuations negatively impacted net sales
in the third quarter of 2023 by $0.3 million. Excluding this exchange rate impact, net sales would have increased by $3.2 million or 4.1% due to changes in average unit price, volume and sales of components. Average unit price increased net sales in the third quarter of 2023 by $14.0 million or 18.0% compared to the 2022 period. Lower base volume decreased net sales in the third quarter of 2023 by $7.8 million or 10.0% compared to the 2022 period. Net sales of components to external customers were $3.0 million lower in the third quarter of 2023 compared to the 2022 period.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 76.4% and 77.0% for the three months ended October 1, 2023, and October 2, 2022, respectively. Material cost of sales and distribution as a
percentage of net sales decreased by 3.9% and 0.1%, respectively, compared to the third quarter of 2022. Overhead, direct labor and depreciation as a percentage of net sales increased by 2.0%, 0.8% and 0.6%, respectively, compared to the 2022 period. The decrease in material cost of sales as a percentage of net sales was driven by lower inbound freight, tariff reductions and material cost savings projects. Distribution as a percentage of net sales remained relatively flat as compared to the 2022 period. Overhead as a percentage of net sales increased due to increased factory costs and wage inflation as compared to the 2022 period. Direct labor as a percentage of net sales increased due to higher manufacturing wage and benefit inflation.
The increase in depreciation as a percentage of net sales was driven by the acquisition of Endura fixed assets as compared to the 2022 period.
Selling, General and Administration Expenses
In the three months ended October 1, 2023, selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 14.0%, as compared to 11.4% in the three months ended October 2, 2022, an increase of 260 basis points.
SG&A expenses in the three months ended October 1,
2023, were $98.6 million, an increase of $15.9 million from $82.7 million in the three months ended October 2, 2022. The overall increase was driven by incremental SG&A from the acquisition of Endura of $8.7 million; a $3.8 million increase in acquisition and due diligence related costs; a $1.9 million increase in non-cash items including loss (gain) on disposal of property, plant and equipment, deferred compensation, depreciation and amortization, and share based compensation; a $1.6 million increase in professional and other fees to support growth; and a $0.5 million of unfavorable foreign exchange impacts. These increases were partially offset by a $0.6 million decrease in personnel costs.
Restructuring Costs (Benefit)
Restructuring costs (benefit) in the three months ended October 1,
2023, was $1.9 million of costs, compared to minimal benefit in the three months ended October 2, 2022. Restructuring costs in the current year period related primarily to the 2022 Plan.
Interest Expense, Net
Interest expense, net, in the three months ended October 1, 2023, was $11.9 million, compared to $10.3 million in the three months ended October 2, 2022. The increase in interest expense, net, is primarily due to the incremental borrowings under the Term Loan Facility related to the Endura acquisition.
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 and other miscellaneous non-operating expenses. Other (income) expense, net, in the three months ended October 1, 2023, was $1.1 million of income, compared to $0.2 million of expense in the three months ended October 2, 2022. 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 hedging gains and losses, partially offset by a change in unrealized gains and losses on foreign currency remeasurements, the absence of pension expense 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.
Income Tax Expense
Income tax expense in the three months ended October 1, 2023, was $12.0 million, compared to $16.4 million in the three months ended October 2, 2022. The decrease in income tax expense is primarily due to the mix of income and losses within the tax jurisdictions in which we operate.
Net
income attributable to non-controlling interest
541
—
—
276
817
Adjusted EBITDA
$
108,999
$
3,698
$
5,132
$
(10,593)
$
107,236
(1)
Other items include $3,760 in acquisition and due diligence related costs in the three months ended October 1, 2023, and were recorded in selling, general and administration expenses within the condensed consolidated statements of income and comprehensive income.
Net income attributable to non-controlling interest
660
—
—
85
745
Adjusted
EBITDA
$
115,092
$
3,898
$
(219)
$
(6,849)
$
111,922
Adjusted
EBITDA in our North American Residential segment was $109.0 million in the three months ended October 1, 2023, a decrease of $6.1 million, or 5.3%, from $115.1 million in the three months ended October 2, 2022. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $23.5 million and $21.9 million in the third quarter of 2023 and 2022, 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 $3.7 million in the three months ended October 1, 2023, a decrease of $0.2 million, or 5.1%, from $3.9 million in the three months ended October 2,
2022. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $1.8 million and $1.7 million in the third quarter of 2023 and 2022, 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 $5.1 million in the three months ended October 1, 2023, an increase of $5.4 million, or 2,443.4%, from a loss of $0.2 million in the three months ended October 2, 2022. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $2.4 million and $2.9 million in the third quarter of 2023 and 2022, 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 nine months ended October 1, 2023, were $2,170.1 million, a decrease of $45.6 million or 2.1% from $2,215.7 million in the nine months ended October 2, 2022. Foreign exchange rate fluctuations negatively impacted net sales in the first nine months of 2023 by $12.5 million. The acquisition of Endura increased net sales by $178.9 million or 8.1%. Excluding
the impact of foreign currency and our 2023 acquisition of Endura, net sales would have decreased by $212.0 million or 9.6% due to changes in volume, sales of components and average unit price. Lower base volume decreased net sales by $328.1 million or 14.8% in the first nine months of 2023 compared to the same period in 2022. Net sales of components to external customers decreased $13.2 million or 0.6% in the first nine months of 2023 compared to the same period in 2022. Average unit price increased net sales in the first nine months of 2023 by $129.3 million or 5.8% compared to the same period in 2022.
Net sales to external customers from facilities in the North American Residential segment in the nine months ended October 1, 2023, were $1,707.0 million, a decrease of $48.8 million or 2.8% from $1,755.8 million in the nine months ended October 2, 2022. Foreign exchange rate fluctuations negatively impacted net sales in the first nine months of 2023 by $9.2 million. The acquisition of Endura increased net sales by $178.9 million or 10.2% in the first nine months of 2023. Excluding the impact of foreign currency and our 2023 acquisition of Endura, net sales would have decreased by $218.5 million or 12.4% due to changes in volume, average unit price and sales of components. Lower base volume decreased net sales by $293.4 million or 16.7% in the first nine months of 2023 compared to the same period in 2022
due to softening end market demand in new construction and residential repair, renovation and remodeling channels. Average unit price increased net sales in the first nine months of 2023 by $74.0 million or 4.2% compared to the 2022 period. Net sales of components to external customers were $0.9 million higher in the first nine months of 2023 compared to the same period in 2022.
Europe
Net sales to external customers from facilities in the Europe segment in the nine months ended October 1, 2023, were $194.3 million, a decrease of $25.7 million or 11.7% from $220.0 million in the nine months ended October 2, 2022. Foreign exchange rate fluctuations negatively impacted net sales in the first nine months of 2023 by $1.6 million. Excluding this exchange rate impact, net sales would have
decreased by $24.1 million or 11.0% due to changes in volume, sales of components and average unit price. Lower base volume decreased net sales in the first nine months of 2023 by $23.7 million or 10.8% compared to the same period in 2022 due to overall economic trends in the United Kingdom. Net sales of components to external customers were $2.6 million lower in the first nine months of 2023 compared to the same period in 2022. Average unit price increased net sales in the first nine months of 2023 by $2.2 million or 1.0% compared to the 2022 period.
Architectural
Net sales to external customers from facilities in the Architectural segment in the nine months ended October 1, 2023, were $256.4 million, an increase of $32.1 million or 14.3% from $224.3 million in the nine months ended October 2,
2022. Foreign exchange rate fluctuations negatively impacted net sales in the first nine months of 2023 by $1.6 million. Excluding this exchange rate impact, net sales would have increased by $33.7 million or 15.0% due to changes in average unit price, volume and sales of components. Average unit price increased net sales in the first nine months of 2023 by $52.0 million or 23.2% compared to the 2022 period. Lower base volume decreased net sales in the
first nine months
of 2023 by $11.0 million or 4.9% compared to the 2022 period. Net sales of components to external customers were $7.3 million lower in the first nine months of 2023 compared to the same period in 2022.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 76.3% and 76.0% for the nine months ended October 1, 2023, and October 2, 2022, respectively. Overhead, depreciation and direct labor as a percentage of net sales increased by 2.0%, 0.5% and 0.5%, respectively, compared to the 2022 period. Material cost of sales and distribution as a percentage of net sales decreased by 2.4% and 0.3%, respectively, compared to the 2022 period. Overhead as a percentage of net sales increased due to lower volumes, wage inflation and higher factory costs as compared to the 2022 period.
The increase in depreciation as a percentage of net sales was driven by the acquisition of Endura fixed assets as compared to the first nine months of 2022. Direct labor as a percentage of net sales increased due to manufacturing wage and benefit inflation and increased factory costs. The decrease in material cost of sales as a percentage of net sales was driven by higher average unit prices, lower inbound freight and material cost savings projects, partially offset by commodity inflation. Distribution as a percentage of net sales decreased due to higher average unit prices and lower outbound freight, partially offset by lower volumes.
Selling, General and Administration Expenses
In the nine months ended October 1, 2023, selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 13.8% compared
to 11.6% in the nine months ended October 2, 2022, an increase of 220 basis points.
SG&A expenses in the nine months ended October 1, 2023, were $299.1 million, an increase of $42.8 million from $256.3 million in the nine months ended October 2, 2022. The overall increase was driven by incremental SG&A from the acquisition of Endura of $27.7 million; a $10.0 million increase in non-cash items including (gain) loss on disposal of property, plant and equipment, deferred compensation, depreciation and amortization, and share based compensation; a $6.4 million increase in acquisition and due diligence related costs; and a $5.0 million increase in professional and other fees to support growth. These increases were partially offset by a $5.7 million decrease in personnel costs
primarily driven by savings from our 2022 Plan and lower incentive compensation along with favorable foreign exchange impacts of $0.6 million.
Restructuring Costs (Benefit)
Restructuring costs (benefit) in the nine months ended October 1, 2023, were $8.6 million of costs, compared to minimal benefit in the nine months ended October 2, 2022. Restructuring costs in the current year period relate primarily to the 2022 Plan.
Interest Expense, Net
Interest expense, net, in the nine months ended October 1, 2023, was $39.7 million, compared to $31.1 million in the nine months ended October 2, 2022. The
increase in interest expense, net, is primarily due to the incremental borrowings under the Term Loan Facility and ABL Facility related to the Endura acquisition.
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 and other miscellaneous non-operating expenses. Other (income) expense, net, was $1.6 million of income in each of the nine months ended October 1, 2023 and October 2, 2022.
Income Tax Expense
Income
tax expense in the nine months ended October 1, 2023, was $38.1 million, compared to $59.5 million in the nine months ended October 2, 2022. The decrease in income tax expense is primarily due to the mix of income and losses within the tax jurisdictions in which we operate.
Net
income attributable to non-controlling interest
1,804
—
—
666
2,470
Adjusted EBITDA
$
334,451
$
11,540
$
17,768
$
(31,901)
$
331,858
(1)
Other items include $6,349 in acquisition and due diligence related costs in the nine months ended October 1, 2023, and were recorded in selling, general and administration expenses within the condensed consolidated statements of income and comprehensive income.
Loss (gain) on disposal of property, plant and equipment
1,873
(13)
(3,037)
(68)
(1,245)
Restructuring
(benefit) costs
(359)
—
71
67
(221)
Interest
expense, net
—
—
—
31,098
31,098
Other (income) expense, net
(792)
304
—
(1,116)
(1,604)
Income
tax expense
—
—
—
59,502
59,502
Net income attributable to non-controlling interest
1,856
—
—
887
2,743
Adjusted
EBITDA
$
367,733
$
24,307
$
(3,039)
$
(34,202)
$
354,799
Adjusted
EBITDA in our North American Residential segment was $334.5 million in the nine months ended October 1, 2023, a decrease of $33.2 million, or 9.0%, from $367.7 million in the nine months ended October 2, 2022. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $69.0 million and $66.1 million in the first nine months of 2023 and 2022, 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 $11.5 million in the nine months ended October 1, 2023, a decrease of $12.8 million, or 52.5%, from $24.3 million in the nine months ended October 2,
2022. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $5.3 million and $5.1 million in the first nine months of 2023 and 2022, 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 $17.8 million of earnings in the nine months ended October 1, 2023, an increase of $20.8 million, or 683.3%, from a loss of $3.0 million in the nine months ended October 2, 2022. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $7.7 million and $8.6 million in the first nine months of 2023 and 2022, 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. As
of October 1, 2023, we do not have any material commitments for capital expenditures.
We believe that our cash balance on hand, future cash generated from operations, the use of our AR Sales Program and our ABL Facility, along with our ability to access the capital markets, will provide adequate liquidity for the foreseeable future. As of October 1, 2023, we had $360.5 million of cash and cash equivalents, $276.0 million of availability under our ABL Facility and $26.9 million of availability under our AR Sales Program.
Cash provided by operating activities was $310.4 million during the nine months ended October 1, 2023, compared to $82.9 million in the nine months ended October 2, 2022. This $227.5 million increase in cash provided by operating activities was due to $261.9 million in cash provided by working capital and other assets and liabilities, partially offset by a $34.4 million decrease in net income attributable to Masonite, adjusted for non-cash and non-operating items in the first nine months of 2023 compared to the same period in 2022.
Cash used in investing activities was $432.9 million during the nine months ended October 1,
2023, compared to $61.5 million in the nine months ended October 2, 2022. This $371.4 million increase in cash used in investing activities was primarily driven by a $352.9 million increase in cash used in the acquisition of Endura (net of cash acquired), a $20.4 million increase in cash additions to property, plant and equipment, the absence of $6.3 million of proceeds from the sale of property, plant and equipment, and a $3.8 million increase in cash used in other investing activities, partially offset by $12.0 million of proceeds from repayment of a note receivable in the first nine months of 2023 compared to the same period in 2022.
Cash provided by financing activities was $184.0 million during the nine months ended October 1, 2023, compared to $145.8 million of cash used in financing activities during the nine months
ended October 2, 2022. This $329.8 million increase in cash provided by financing activities was driven by a $227.6 million increase in cash provided by debt-related transactions, a $100.9 million decrease in cash used for repurchases of common shares, a $1.0 million decrease in cash used for tax withholding on share based awards and a $0.3 million decrease in distributions to non-controlling interests in the first nine months of 2023 compared to the same period in 2022.
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. Under this program,
the Company may repurchase shares from time to time, depending on market conditions and alternate uses of capital. The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions and alternate uses of capital. The share repurchase program may be effected through Rule 10b5-1 plans, open market purchases, each in compliance with Rule 10b-18 under the Exchange Act, or privately negotiated transactions. The program may be suspended or discontinued at any time and does not have an expiration date. The Company entered into an accelerated share repurchase ("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. The final delivery of 319,678 common shares occurred in the second quarter. The $100.0 million ASR transaction was therefore completed in the second quarter of 2022 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 cash paid was reflected as a reduction of equity at the initial delivery of shares and the number of common shares outstanding were reduced at the dates of physical delivery. During the nine months ended October 1, 2023, we repurchased 433,997 of our common shares in the open market at an aggregate cost of $39.1 million as part
of the share repurchase programs. During the nine months ended October 2, 2022, we repurchased and retired 1,556,008 of our common shares in the open market at an aggregate cost of $140.0 million as part of the share repurchase programs and ASR. As of October 1, 2023, there was $207.8 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 October 1, 2023, 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 AR Sales 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 October 1, 2023. 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 October 1, 2023, 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 October 1, 2023. 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 October 1, 2023, we were in compliance with all covenants under the indenture governing the 2028 Notes.
Term Loan Facility
On December 13, 2022, we and certain of our subsidiaries entered into a new delayed-draw term loan credit agreement (the "Term Loan Credit Agreement") maturing on December 12, 2027 (the "Term Loan Maturity Date"). The Term Loan Credit Agreement provides for a senior secured five-year delayed-draw term loan facility of $250.0 million
(the "Term Loan Facility"). Loans under the Term Loan Facility (the "Term Loans") will bear interest at a rate equal to, at our option, (1) the Adjusted Term SOFR Rate (as defined in the Term Loan Credit Agreement) plus an applicable margin of 2.25% or (2) an alternate base rate equal to the greatest of (i) the "Prime Rate" in the U.S. last quoted by The Wall Street Journal, (ii) 0.50% above the greater of the federal funds rate and the rate comprised of both overnight federal funds and overnight Eurodollar transactions denominated in U.S. dollars, (iii) 1.00% above the Adjusted Term SOFR Rate for a one month interest period and (iv) 1.00%, plus, in each case, an applicable margin of 1.25%, subject to, in each of cases (1) and (2), an agreed interest rate floor. The Term Loans are repayable in equal quarterly installments for an annual aggregate amortization payment equal to 15% of the aggregate principal amount of the Term Loans, with the balance
of the principal being due on the Term Loan Maturity Date.
Obligations under the Term Loan Credit Agreement are fully and unconditionally guaranteed, jointly and severally, by us and by certain of our directly or indirectly wholly-owned subsidiaries organized in the United States and are secured by the equity in, and substantially all the assets of, such subsidiaries. The Term Loans were funded in an amount of $250.0 million and applied to finance a portion of the consideration paid in connection with the consummation of the Endura acquisition on January 3, 2023. We received net proceeds of $246.4 million after deducting $3.6 million of debt issuance costs. The debt issuance costs were capitalized
as a reduction to the carrying value of debt and are being accreted to interest expense over the term of the loan using the effective interest method.
The Term Loan Credit Agreement contains various customary representations, warranties by us and covenants that are described in detail in our Annual Report. As of October 1, 2023, we were in compliance with all covenants under the indenture governing the Term Loan Credit Agreement.
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. On October 28, 2022, we and certain of our subsidiaries entered into an amendment which, among other things, (i) increased the revolving credit commitments available thereunder by $100.0 million to an aggregate amount of $350.0 million
and (ii) replaced the LIBOR-based interest rate applicable to borrowings thereunder in U.S. dollars with an interest rate based on the sum of (x) a "Term SOFR" rate published by the CME Group Benchmark Administration Limited (CBA) plus (y) 10 basis points ("Adjusted Term SOFR"). Additionally, on December 12, 2022, we entered into an amendment to the ABL Facility, which, among other things, extended the maturity of the ABL Facility from January 31, 2024 to December 12, 2027. The terms of the ABL Facility remained otherwise substantially unchanged and are described in detail in our Annual Report. On January 3, 2023, we borrowed $100.0 million under our ABL Facility in order to fund a portion of the cash consideration paid for the acquisition of Endura. During
the first quarter of 2023, we repaid all amounts outstanding under the ABL Facility.
The ABL Facility contains various customary representations, warranties by us and covenants that are described in detail in our Annual Report. As of October 1, 2023, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $276.0 million under our ABL Facility, and there were no amounts outstanding as of October 1, 2023.
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 are 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, Use of Proceeds and Issuer Purchases of Equity Securities
(a) Unregistered Sale of Equity Securities.
None.
(b) Use of Proceeds.
Not applicable.
(c) Repurchases of
Our Equity Securities.
During the three months ended October 1, 2023, we repurchased 106,329 of our common shares in the open market.
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. Under this program, the Company may repurchase shares from time to time, depending on market conditions and alternate uses of capital. The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions and alternate uses of capital. The share repurchase program may be effected through Rule 10b5-1 plans, open market purchases, each in compliance with Rule 10b-18 under the Exchange Act, or privately negotiated transactions. The program may be suspended or discontinued at any time and does not have an expiration date. As of October 1,
2023, $207.8 million was available for repurchase in accordance with the share repurchase programs.
During the three months ended October 1, 2023, no director or Section 16 officer (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) iiadopted/
or iiterminated/ any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements in each case, as defined in Item 408 of Regulation S-K.
Item
6. Exhibits
The following is a list of all exhibits filed or furnished as part of this report:
Securities Purchase Agreement, dated as of November 2, 2022, by and among Masonite, Endura, Endura Stockholders,
Endura Warrant Holders and Endura’s equityholders’ representative (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on November 3, 2022)
Securities Purchase Agreement, dated as of October 19, 2023, by and among Masonite Corporation, Fleetwood Aluminum Products, LLC, the sellers listed on Schedule I of the agreement, and Gary
Gumbleton, as the sellers' representative (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K (File No.011-11796) filed with the Securities and Exchange Commission on October 19, 2023)
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 nine months ended October 1, 2023, and October 2, 2022; (ii) the Registrant's Condensed Consolidated Balance Sheets as of October 1, 2023, and January 1, 2023; (iii) the Registrant's Condensed Consolidated Statements of Changes in Equity for the three and nine months ended October 1,
2023, and October 2, 2022; (iv) the Registrant's Condensed Consolidated Statements of Cash Flows for the nine months ended October 1, 2023, and October 2, 2022; 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)
Schedules and certain exhibits have been omitted pursuant to Item 601 (b)(2) of Regulation S-K. The registrant hereby agrees to supplementally furnish to the SEC upon request.
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.
