UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
For the quarterly period ended March 31, 2024
or
For the transition period from _____ to _____
Commission File Number: 001-11796
____________________________
 | ||
(Exact name of registrant as specified in its charter)
____________________________
| British Columbia, Canada | ||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices)
(800 ) 895-2723
(Registrant's telephone number, including area code)
____________________________
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| (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. Yes ☑ 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). Yes ☑ 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.
| ☑ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
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 ☐ No ☑
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
The registrant had outstanding 21,983,958 shares of Common Stock, no par value, as of May 3, 2024.
| ||
MASONITE INTERNATIONAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2024
| PART I | Page | ||||||||||
| Item 1 | |||||||||||
| Item 2 | |||||||||||
| Item 3 | |||||||||||
| Item 4 | |||||||||||
| PART II | |||||||||||
| Item 1 | |||||||||||
| Item 1A | |||||||||||
| Item 2 | |||||||||||
| Item 3 | |||||||||||
| Item 4 | |||||||||||
| Item 5 | |||||||||||
| Item 6 | |||||||||||
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 December 31, 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:
•restrictions during the pendency of the Acquisition (as defined herein) that may impact our ability to pursue certain business opportunities or strategic transactions;
•risks related to diverting management’s attention from ongoing business operations and disrupting our relationships with third-parties and employees during the pendency of the Acquisition;
•the risk that the Acquisition may not be completed in a timely manner or at all, which may adversely affect our business and the price of our common stock;
•the outcome of any legal proceedings that may be instituted against us related to the Arrangement Agreement (as defined herein) or the Acquisition;
•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 mergers, acquisitions and dispositions, including the pending disposition of our Architectural reporting segment;
•our inability to remediate an identified material weakness on a timely basis;
•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 current information technology and enterprise resource planning ("ERP") systems, implementation of new ERPs 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;
ii
•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.
The Company may use its website and/or social media outlets, such as LinkedIn, as distribution channels of material Company information. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at http://investor.masonite.com and its LinkedIn page at https://www.linkedin.com/company/masonitedoors/mycompany/. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” section at http://investor.masonite.com.
iii
PART I – FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands of U.S. dollars, except per share amounts)
(Unaudited)
| Three Months Ended | |||||||||||
| March 31, 2024 | April 2, 2023 | ||||||||||
| Net sales | $ | $ | |||||||||
| Cost of goods sold | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administration expenses | |||||||||||
| Restructuring costs | |||||||||||
| Operating income | |||||||||||
| Interest expense, net | |||||||||||
| Other (income) expense, net | ( | ||||||||||
| Income before income tax expense | |||||||||||
| Income tax expense | |||||||||||
| Net income | |||||||||||
| Less: net income attributable to non-controlling interests | |||||||||||
| Net income attributable to Masonite | $ | $ | |||||||||
| Basic earnings per common share attributable to Masonite | $ | $ | |||||||||
| Diluted earnings per common share attributable to Masonite | $ | $ | |||||||||
| Comprehensive income: | |||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive (loss) income: | |||||||||||
| Foreign currency translation (loss) gain | ( | ||||||||||
| Amortization of actuarial net losses | |||||||||||
| Income tax expense related to other comprehensive (loss) income | ( | ( | |||||||||
| Other comprehensive (loss) income, net of tax: | ( | ||||||||||
| Comprehensive income | |||||||||||
| Less: comprehensive income attributable to non-controlling interests | |||||||||||
| Comprehensive income attributable to Masonite | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements.
1
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
| ASSETS | March 31, 2024 | December 31, 2023 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Income taxes receivable | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Investment in equity investees | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Income taxes payable | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and Contingencies (Note 7) | |||||||||||
| Equity: | |||||||||||
Share capital: unlimited shares authorized, no par value, | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total equity attributable to Masonite | |||||||||||
| Equity attributable to non-controlling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements.
2
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
| Three Months Ended | |||||||||||
| March 31, 2024 | April 2, 2023 | ||||||||||
| Total equity, beginning of period | $ | $ | |||||||||
| Share capital: | |||||||||||
| Beginning of period | |||||||||||
| Common shares issued for delivery of share based awards | |||||||||||
| Common shares issued under employee stock purchase plan | |||||||||||
| Common shares repurchased | ( | ||||||||||
| End of period | |||||||||||
| Additional paid-in capital: | |||||||||||
| Beginning of period | |||||||||||
| Share based compensation expense | |||||||||||
| Common shares issued for delivery of share based awards | ( | ( | |||||||||
| Common shares withheld to cover income taxes payable due to delivery of share based awards | ( | ( | |||||||||
| Common shares issued under employee stock purchase plan | ( | ( | |||||||||
| End of period | |||||||||||
| Retained earnings: | |||||||||||
| Beginning of period | |||||||||||
| Net income attributable to Masonite | |||||||||||
| Common shares repurchased | ( | ||||||||||
| End of period | |||||||||||
| Accumulated other comprehensive loss: | |||||||||||
| Beginning of period | ( | ( | |||||||||
| Other comprehensive (loss) income attributable to Masonite, net of tax | ( | ||||||||||
| End of period | ( | ( | |||||||||
| Equity attributable to non-controlling interests: | |||||||||||
| Beginning of period | |||||||||||
| Net income attributable to non-controlling interests | |||||||||||
| Other comprehensive loss attributable to non-controlling interests, net of tax | ( | ( | |||||||||
| Dividends to non-controlling interests | ( | ( | |||||||||
| End of period | |||||||||||
| Total equity, end of period | $ | $ | |||||||||
| Common shares outstanding: | |||||||||||
| Beginning of period | |||||||||||
| Common shares issued for delivery of share based awards | |||||||||||
| Common shares issued under employee stock purchase plan | |||||||||||
| Common shares repurchased | ( | ||||||||||
| End of period | |||||||||||
See accompanying notes to the condensed consolidated financial statements.
3
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)
| Three Months Ended | |||||||||||
| Cash flows from operating activities: | March 31, 2024 | April 2, 2023 | |||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash flow provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Share based compensation expense | |||||||||||
| Deferred income taxes | |||||||||||
| Unrealized foreign exchange gain | ( | ( | |||||||||
| Share of income from equity investees, net of tax | ( | ( | |||||||||
| Pension and post-retirement funding, net of expense | ( | ( | |||||||||
| Non-cash accruals and interest | |||||||||||
| Loss on sale of property, plant and equipment | |||||||||||
| Changes in assets and liabilities, net of acquisitions: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | |||||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Other assets and liabilities | ( | ||||||||||
| Net cash flow provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property, plant and equipment | ( | ( | |||||||||
| Acquisition of businesses, net of cash acquired | ( | ( | |||||||||
| Proceeds from sale of property, plant and equipment | |||||||||||
| Proceeds from repayment of note receivable | |||||||||||
| Other investing activities | ( | ( | |||||||||
| Net cash flow used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Repayments of long-term debt | ( | ||||||||||
| Payment of debt issuance costs | ( | ||||||||||
| Proceeds from borrowings on revolving credit facilities | |||||||||||
| Repayments of borrowings on revolving credit facilities | ( | ||||||||||
| Tax withholding on share based awards | ( | ( | |||||||||
| Distributions to non-controlling interests | ( | ( | |||||||||
| Repurchases of common shares | ( | ||||||||||
| Net cash flow (used in) provided by financing activities | ( | ||||||||||
| Net foreign currency translation adjustment on cash | ( | ||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, at end of period | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements.
4
MASONITE INTERNATIONAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business 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 and door solutions for the residential and non-residential building construction markets' new construction and repair, renovation and remodeling sectors. Masonite operates 64 manufacturing locations in seven countries and sells doors to customers throughout the world, including 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.
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 2023 audited consolidated financial statements, other than as noted below.
Adoption of Recent Accounting Pronouncements
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.
In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures," which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, with early application permitted. We adopted the new guidance as of January 1, 2024, the beginning of fiscal year 2024, and the adoption did not have a material impact on our financial statements.
Other Recent Accounting Pronouncements not yet Adopted
In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740) - Improvements to Income Tax Disclosures," which requires public business entities to annually disclose specific categories in the rate reconciliation and
5
provide additional information for reconciling items that meet a quantitative threshold. The guidance is effective for fiscal years beginning after December 15, 2024, with early application permitted. We did not early adopt and believe the adoption of this new guidance will not have a material impact on our financial statements.
2. Acquisitions and Divestitures
Arrangement Agreement with Owens Corning
On February 8, 2024, we entered into an Arrangement Agreement (the “Arrangement Agreement”) with Owens Corning (“Owens Corning”), a Delaware corporation, and MT Acquisition Co LLC (“Purchaser”), a British Columbia unlimited liability company and a wholly owned subsidiary of Owens Corning. Subject to the terms and conditions of the Arrangement Agreement, Owens Corning, through Purchaser, agreed to acquire the Company for $133.00 per issued and outstanding share of our common stock, no par value (the “Shares”), in an all-cash transaction. Pursuant to the Arrangement Agreement, following consummation of implementation of a court-approved plan of arrangement under the Business Corporations Act (British Columbia) (the “Transaction”), the Company will be a wholly owned subsidiary of Owens Corning.
Pursuant to the terms of the Arrangement Agreement, and subject to the terms and conditions set forth therein, at the effective time of the Transaction (the “Effective Time”), each Share (other than any Share that is held by Owens Corning or any of its subsidiaries or any Share as to which dissent rights have been properly exercised by the holder thereof in accordance with British Columbia law) issued and outstanding immediately prior to the Effective Time will be cancelled and automatically converted into the right to receive $133.00 in cash, without interest.
If the Arrangement Agreement is terminated under certain specified circumstances, we or Owens Corning will be required to pay a termination fee. We will be required to pay Owens Corning a termination fee of $75.0 million under specified circumstances, including (a) termination of the Arrangement Agreement in connection with our entry into an agreement with respect to a Superior Proposal (as defined in the Arrangement Agreement) prior to us receiving stockholder approval of the Transaction, (b) termination by Owens Corning upon an Adverse Recommendation Change (as defined in the Arrangement Agreement), or (c) termination in certain circumstances by either Owens Corning or us upon failure to obtain Masonite Shareholder Approval (as defined in the Arrangement Agreement) or by Owens Corning if we breach our representations, warranties or covenants in a manner that would result in a failure of an applicable closing condition to be satisfied and, if curable, we fail to cure such breach during specific time periods, in each case, if certain other conditions are met. Owens Corning will be required to pay us a reverse termination fee under specified circumstances, including termination of the Arrangement Agreement due to a permanent injunction arising from Competition Laws (as defined in the Arrangement Agreement) when we are not then in material breach of any provision of the Arrangement Agreement and if certain other conditions are met, in an amount equal to $150.0 million.
The consummation of the Transaction is subject to customary closing conditions, including, among others, (1) the adoption of a resolution approving the Transaction by at least two-thirds of the votes cast by our shareholders represented in person or by proxy at the special meeting, (2) the issuance of interim and final orders by the Supreme Court of British Columbia approving the Transaction, (3) the expiration or termination of any applicable waiting period or periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and the receipt of certain required regulatory clearances and approvals in other jurisdictions under applicable antitrust and foreign direct investment laws and regulations, including in Canada, Mexico and the United Kingdom, and (4) the absence of any law, injunction, order or other judgment prohibiting, rendering illegal or permanently enjoining the consummation of the Transaction, certain of which are still pending. On April 25, 2024, Masonite shareholders approved the Transaction at a special meeting of shareholders and the applicable waiting period under the HSR Act expired at 11:59 p.m. on April 26, 2024. Each of Masonite’s and Owens Corning’s obligation to consummate the Transaction is also subject to the accuracy of the other party’s representations and warranties contained in the Arrangement Agreement (subject, with specified exceptions, to materiality or “Material Adverse Effect” standards), the other party’s performance of its covenants and agreements in the Arrangement Agreement in all material respects, and in the case of Purchaser’s obligation to consummate the Transaction, the absence of any “Material Adverse Effect” relating to us. The Transaction is currently expected to close by mid-2024, subject to the satisfaction (or waiver, if applicable) of each closing condition.
6
Acquisitions
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”). The total consideration for this acquisition amounted to approximately $279.5 million, inclusive of $26.2 million designated for potential purchase price adjustments and indemnification claims and which is currently held in an escrow account controlled by a third party. 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 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 the value of certain assets acquired and liabilities assumed, primarily involving (i) certain historical information used in the final valuation of intangible assets, and (ii) the final assessment and valuation of inventory and deferred income taxes, which could impact goodwill during the measurement period. The $73.9 million excess purchase price over the fair value of tangible and intangible assets acquired was allocated to goodwill. Goodwill represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized, such as the delivery of luxury products, which supports our Doors That Do MoreTM strategy. This goodwill is deductible for tax purposes and relates to the North American Residential segment.
The allocation of the purchase price to assets acquired and liabilities assumed is as follows:
| (In thousands) | Initial Purchase Price Allocation | Measurement Period Adjustments | Purchase Price Allocation | ||||||||
| Cash acquired | $ | $ | — | $ | |||||||
| Accounts receivable, net | — | ||||||||||
| Inventories, net | — | ||||||||||
| Prepaid expenses and other | — | ||||||||||
| Property, plant and equipment, net | — | ||||||||||
| Right-of-use asset | — | ||||||||||
| Intangible assets | — | ||||||||||
| Total assets acquired | — | ||||||||||
| Accounts payable and accrued expenses | ( | — | ( | ||||||||
| Operating lease liability | ( | — | ( | ||||||||
| Total liabilities assumed | ( | — | ( | ||||||||
| Goodwill | |||||||||||
| Total purchase price | $ | $ | $ | ||||||||
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. Customer relationships and patents acquired are not expected to have any residual value. The gross contractual value of acquired trade receivables was $5.6 million.
7
Endura
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, including an $18.0 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. The total consideration was funded with borrowings under our Term Loan Facility and ABL Facility. 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 $181.2 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 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 allocation of the purchase price to assets acquired and liabilities assumed is as follows:
| (In thousands) | Initial Purchase Price Allocation | Measurement Period Adjustments | Purchase Price Allocation | ||||||||
| Cash acquired | $ | $ | ( | $ | |||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Intangible assets | ( | ||||||||||
| Other assets and liabilities, net | ( | ||||||||||
| Total assets acquired | |||||||||||
| Accounts payable and accrued expenses | ( | ( | ( | ||||||||
| Deferred income taxes | ( | ( | |||||||||
| Total liabilities assumed | ( | ( | |||||||||
| Goodwill | ( | ||||||||||
| Total purchase price | $ | $ | ( | $ | |||||||
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 $8.3 million.
8
Intangible assets acquired from the 2023 acquisitions consist of the following:
| (In thousands, except useful life amounts) | Endura | Expected Useful Life (Years) | Fleetwood | Expected Useful Life (Years) | |||||||||||||||||||
| Customer relationships | $ | $ | |||||||||||||||||||||
| Trademarks and trade names | Indefinite | ||||||||||||||||||||||
| Patents | |||||||||||||||||||||||
| Backlog | |||||||||||||||||||||||
| Total intangible assets acquired | $ | $ | |||||||||||||||||||||
The following schedule represents the amounts of net sales and net income (loss) attributable to Masonite from the 2023 acquisitions that have been included in the consolidated statements of income and comprehensive income for the periods indicated subsequent to the acquisition date.
| Three Months Ended March 31, 2024 | |||||||||||||||||
| (In thousands) | Endura | Fleetwood | Total 2023 Acquisitions | ||||||||||||||
| Net sales | $ | $ | $ | ||||||||||||||
| Net income attributable to Masonite | |||||||||||||||||
For the three months ended April 2, 2023, Endura had $59.8 million in net sales and $4.5 million in net loss attributable to Masonite.
Pro Forma Information
The following unaudited pro forma financial information represents the consolidated financial information as if the Fleetwood acquisition had been included in our consolidated results beginning on the first day of the fiscal year prior to the acquisition date. The pro forma results have been calculated after adjusting the results of the acquired entity 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 acquisition date, together with the consequential tax effects. The pro forma results do not reflect any cost savings 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 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.
| Three Months Ended | |||||
| (In thousands, except per share information) | April 2, 2023 | ||||
| Net sales | $ | ||||
| Net income attributable to Masonite | |||||
| Basic earnings per common share attributable to Masonite | $ | ||||
| Diluted earnings per common share attributable to Masonite | $ | ||||
Divestitures
On April 23, 2024, we entered into an agreement to sell our Architectural reporting segment for a purchase price of approximately $75 million subject to customary post-closing adjustments. We expect to complete the transaction in the second quarter of 2024. Refer to Note 16. Subsequent Events for additional information.
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3. Accounts Receivable
Our customers consist mainly of retailers, distributors and contractors. Our ten 62.5 % and 65.2 % of total accounts receivable as of March 31, 2024, and December 31, 2023, respectively. Each of our two largest customers, The Home Depot, Inc. and Lowe's Companies, Inc., accounted for more than 10 1.8 million and $3.1 million as of March 31, 2024, and December 31, 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.
4. Inventories
The amounts of inventory on hand were as follows as of the dates indicated:
| (In thousands) | March 31, 2024 | December 31, 2023 | |||||||||
| Raw materials | $ | $ | |||||||||
| Finished goods | |||||||||||
| Provision for obsolete or aged inventory | ( | ( | |||||||||
| Inventories, net | $ | $ | |||||||||
5. Accrued Expenses
The details of our accrued expenses were as follows as of the dates indicated:
| (In thousands) | March 31, 2024 | December 31, 2023 | |||||||||
| Accrued payroll | $ | $ | |||||||||
| Accrued rebates | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Accrued interest | |||||||||||
| Other accruals | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
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6. Long-Term Debt
| (In thousands) | March 31, 2024 | December 31, 2023 | |||||||||
Senior unsecured notes, interest rate of | $ | $ | |||||||||
Senior unsecured notes, interest rate of | |||||||||||
Term Loan Facility, interest rate of SOFR plus | |||||||||||
| Debt issuance costs | ( | ( | |||||||||
| Total debt (including current portion) | |||||||||||
| Less: debt due within one year | ( | ( | |||||||||
| Total long-term debt (excluding current portion) | $ | $ | |||||||||
Interest expense related to our consolidated indebtedness under our senior unsecured notes, Term Loan Facility and ABL Facility was $12.1 million and $15.4 million for the three months ended March 31, 2024 and April 2, 2023, respectively.
On July 26, 2021, we issued $375.0 million aggregate principal senior unsecured notes (the "2030 Notes"). The 2030 Notes bear interest at 3.50 % 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 March 31, 2024, we were in compliance with all covenants under the indenture governing the 2030 Notes.
On July 25, 2019, we issued $500.0 million aggregate principal senior unsecured notes (the "2028 Notes"). The 2028 Notes bear interest at 5.375 %, 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 March 31, 2024, 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 payable in connection with the consummation of the Endura acquisition on January 3, 2023. We received net proceeds of $246.4 million after deducting
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$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 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 March 31, 2024, 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 $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 March 31, 2024, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $249.1 million under our ABL Facility, and there were no amounts outstanding as of March 31, 2024.
Debt Maturities
The following table summarizes the stated debt maturities and scheduled amortization payments for all outstanding debt as of March 31, 2024:
| (In thousands) | Scheduled Amortization Payments | ||||
| Fiscal year: | |||||
| 2024 (remainder) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total aggregated principal value | $ | ||||
7. Commitments 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
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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.
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 $0.9 million. As a result, for the year ended December 31, 2023, we paid approximately $0.9 million and recorded a charge 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. Share Based Compensation Plans
Share based compensation expense was $6.9 million and $6.1 million for the three months ended March 31, 2024 and April 2, 2023, respectively. As of March 31, 2024, the total remaining unrecognized compensation expense related to share based compensation amounted to $41.4 million, which will be amortized over the weighted average remaining requisite service period of 1.8 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 880,000 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 March 31, 2024, there were 649,363 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 March 31, 2024, the liability and asset relating to deferred compensation had a fair value of $9.8 million and $8.2 million, respectively. As of March 31, 2024, 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 three
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The total fair value of SARs vested was $0.8 million during the three months ended March 31, 2024.
| Three Months Ended March 31, 2024 | Stock Appreciation Rights | Aggregate Intrinsic Value (in thousands) | Weighted Average Exercise Price | Average Remaining Contractual Life (Years) | |||||||||||||||||||
| Outstanding, beginning of period | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Cancelled and forfeited | ( | ||||||||||||||||||||||
| Outstanding, end of period | $ | $ | |||||||||||||||||||||
| Exercisable, end of period | $ | $ | |||||||||||||||||||||
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 2.0 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. As of March 31, 2024, there were no SARs granted.
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 three 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.
___________
| Three Months Ended March 31, 2024 | Total Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||||||
| Outstanding, beginning of period | $ | ||||||||||
| Granted | |||||||||||
| Delivered | ( | ||||||||||
Withheld to cover (1) | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding, end of period | $ | ||||||||||
(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 three months ended March 31, 2024, vest at specified future dates with only service requirements. The value of RSUs granted in the three months ended March 31, 2024, was $24.0 million and is being recognized over the weighted average requisite service period of 2.0 years. During the three months ended March 31, 2024, 116,368 RSUs vested at a fair value of $10.9 million.
Performance-based Restricted Stock Units
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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. In 2023, we granted certain PRSUs with an additional condition measured by Relative Total Shareholder Return ("TSR"). The compensation expense for these PRSUs is determined using the Monte Carlo simulation method. The PRSUs vest over a maximum of three 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.
| Three Months Ended March 31, 2024 | Total Performance Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||||||
| Outstanding, beginning of period | $ | ||||||||||
| Granted | |||||||||||
Performance adjustment (1) | |||||||||||
| Delivered | ( | ||||||||||
Withheld to cover (2) | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding, end of period | $ | ||||||||||
(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.
9. Restructuring Costs
In December 2023, we began implementing a plan 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 Europe reportable segment (collectively, the "2024 Plan"). The optimization of our manufacturing capacity involves specific plants in the Europe segment and costs associated with the closure of these plants and related headcount reductions. Costs associated with the 2024 Plan include severance and closure charges and will continue throughout 2024. As of March 31, 2024, we expect to incur approximately $5 million to $8 million of additional charges related to the 2024 Plan.
In December 2022, we began implementing a plan 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 and will continue throughout 2024. As of March 31, 2024, we expect to incur approximately $2 million to $7 million of additional charges related to the 2022 Plan.
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The following tables summarize the restructuring (benefit) costs recorded for the periods indicated:
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| 2024 Plan | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 2022 Plan | ( | ||||||||||||||||||||||||||||
| Total Restructuring Costs | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| Three Months Ended April 2, 2023 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| 2022 Plan | $ | $ | — | $ | $ | $ | |||||||||||||||||||||||
| Total Restructuring (Benefit) Costs | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Cumulative Amount Incurred Through March 31, 2024 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| 2024 Plan | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 2022 Plan | |||||||||||||||||||||||||||||
| Total Restructuring Costs | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The changes in the accrual for restructuring by activity were as follows for the periods indicated:
| (In thousands) | December 31, 2023 | Severance | Closure Costs | Cash Payments | March 31, 2024 | ||||||||||||||||||||||||
| 2024 Plan | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| 2022 Plan | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
10. Income Taxes
The effective tax rate differs from the Canadian statutory rate of 26.13 % 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 $1.1 million of income tax benefit due to exercise and delivery of share based awards during the three months ended March 31, 2024, compared to zero income tax benefit during the three months ended April 2, 2023.
11. Earnings 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.
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| (In thousands, except share and per share information) | Three Months Ended | ||||||||||
| March 31, 2024 | April 2, 2023 | ||||||||||
| Net income attributable to Masonite | $ | $ | |||||||||
| Shares used in computing basic earnings per share | |||||||||||
| Effect of dilutive securities: | |||||||||||
| Incremental shares issuable under share compensation plans | |||||||||||
| Shares used in computing diluted earnings per share | |||||||||||
| Basic earnings per common share attributable to Masonite | $ | $ | |||||||||
| Diluted earnings per common share attributable to Masonite | $ | $ | |||||||||
| Anti-dilutive instruments excluded from diluted earnings per common share | |||||||||||
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.
The Company's Board of Directors 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 Arrangement Agreement (as defined herein) with Owens Corning restricts our ability to repurchase our shares and therefore our share repurchase program is currently suspended through February 8, 2025, other than for the repurchase of shares associated with tax withholding requirements for share-based compensation.
12. Segment 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;
• registration and listing fees;
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• restructuring costs (benefit);
• asset impairment;
• loss (gain) on disposal of subsidiaries;
• interest expense (income), net;
• loss on extinguishment of debt;
• other expense (income), net;
• income tax expense (benefit);
• other items;
• 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.
Certain information with respect to reportable segments is as follows for the periods indicated:
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Intersegment sales | ( | ( | ( | ( | |||||||||||||||||||||||||
| Net sales to external customers | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| Three Months Ended April 2, 2023 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Intersegment sales | ( | ( | ( | ( | |||||||||||||||||||||||||
| Net sales to external customers | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
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A reconciliation of our net income attributable to Masonite to consolidated Adjusted EBITDA is set forth as follows for the periods indicated:
| Three Months Ended | |||||||||||
| (In thousands) | March 31, 2024 | April 2, 2023 | |||||||||
| Net income attributable to Masonite | $ | $ | |||||||||
| Plus: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Share based compensation expense | |||||||||||
| Loss on disposal of property, plant and equipment | |||||||||||
| Restructuring costs | |||||||||||
| Interest expense, net | |||||||||||
Other (income) expense, net (1) | ( | ||||||||||
| Income tax expense | |||||||||||
Other items (2) | |||||||||||
| Net income attributable to non-controlling interest | |||||||||||
| Adjusted EBITDA | $ | $ | |||||||||
(1) Other (income) expense, net includes $85,250 in income primarily related to the PGTI termination fee received in the three months ended March 31, 2024.
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13. Accumulated Other Comprehensive Loss and Other Comprehensive (Loss) Income
A rollforward of the components of accumulated other comprehensive loss is as follows for the periods indicated:
| Three Months Ended | |||||||||||
| (In thousands) | March 31, 2024 | April 2, 2023 | |||||||||
| Accumulated foreign currency translation losses, beginning of period | $ | ( | $ | ( | |||||||
| Foreign currency translation (loss) gain | ( | ||||||||||
| Income tax (benefit) expense on foreign currency translation loss | ( | ||||||||||
| Less: foreign currency translation (loss) gain attributable to non-controlling interest | ( | ( | |||||||||
| Accumulated foreign currency translation losses, end of period | ( | ( | |||||||||
| Accumulated pension and other post-retirement adjustments, beginning of period | ( | ( | |||||||||
| Amortization of actuarial net losses | |||||||||||
| Income tax expense on amortization of actuarial net losses | ( | ||||||||||
| Accumulated pension and other post-retirement adjustments | ( | ( | |||||||||
| Accumulated other comprehensive loss | $ | ( | $ | ( | |||||||
| Other comprehensive (loss) income, net of tax | $ | ( | $ | ||||||||
| Less: other comprehensive (loss) income attributable to non-controlling interest | ( | ( | |||||||||
| Other comprehensive (loss) income attributable to Masonite | $ | ( | $ | ||||||||
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 March 31, 2024, were $4.9 million, primarily driven by the weakening of the Canadian dollar, the British pound sterling and the Euro in comparison to the U.S. dollar during the period.
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14. Supplemental Cash Flow Information
Certain cash and non-cash transactions were as follows for the periods indicated:
| Three Months Ended | |||||||||||
| (In thousands) | March 31, 2024 | April 2, 2023 | |||||||||
| Transactions involving cash: | |||||||||||
| Interest paid | $ | $ | |||||||||
| Interest received | |||||||||||
| Income taxes paid | |||||||||||
| Income tax refunds | |||||||||||
| Cash paid for operating lease liabilities | |||||||||||
| Cash paid for finance lease liabilities | |||||||||||
| Non-cash transactions: | |||||||||||
| Right-of-use assets acquired under operating leases | |||||||||||
| Holdback of portion of Endura purchase payable | |||||||||||
The following reconciles total cash, cash equivalents and restricted cash as of the dates indicated:
| (In thousands) | March 31, 2024 | December 31, 2023 | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
Property, plant and equipment additions in accounts payable were $9.5 million and $9.0 million as of March 31, 2024, and December 31, 2023, respectively.
On December 17, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with PGT Innovations, Inc., (“PGTI”) in which Masonite would have acquired PGTI for a combination of cash and Masonite shares with a total transaction value of $3.0 billion. On January 15, 2024, PGTI delivered to Masonite a notice of receipt of a Superior Proposal (as defined in the Merger Agreement) in accordance with Section 6.04(d) of the Merger Agreement. On January 16, 2024, Masonite agreed to waive the four business day match period provided under the Merger Agreement. Accordingly, on January 16, 2024, PGTI terminated the Merger Agreement pursuant to Section 10.01(d)(i) thereunder, and, consistent with the terms of the Merger Agreement, Masonite received a termination fee of $84.0 million in cash. The termination fee was recognized as other income in the consolidated statements of income and comprehensive income.
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 $12.6 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. Fair 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. The estimated fair values and carrying values of our long-term
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senior note debt instruments were as follows for the periods indicated:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||
| (In thousands) | Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
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.
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16. Subsequent Event
Architectural Disposition
On April 23, 2024 (the "Signing Date"), the Company entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") providing for the disposition (the "Disposition") of the Company's Architectural reporting segment (the "Architectural Business") for a purchase price of approximately $75 million subject to customary post-closing adjustments. The Disposition is expected to be completed in the second quarter of 2024.
The Company applied the criteria in ASC 360-10-45-9, "Property, Plant and Equipment - Long-Lived Assets Classified as Held for Sale," to determine whether the aforementioned long-lived asset group should be classified as held for sale as of the Signing Date and concluded that the material long-lived asset group did meet all the requisite criteria as of the Signing Date. The net assets will be recorded at fair value less the estimated cost to sell. Masonite anticipates recording a net non-cash impairment charge during the second quarter of 2024 in the preliminary range of $90 to $100 million (the “Impairment”) as a result of the Disposition. Masonite does not anticipate that this charge will result in future cash expenditures. The final amount of the non-cash impairment charge may vary from the preliminary range as a result of a number of factors, including (i) the fair value of any indemnification liabilities, (ii) changes in foreign exchange rates, (iii) the working capital of the Architectural Business upon consummation of the transaction, (iv) the evaluation of any income tax impacts and (v) other assumptions used including discount rates, allocations and costs to sell.
The carrying value of the Architectural asset group as of March 31, 2024 consisted of the following:
| (In millions) | |||||
| Architectural Assets | March 31, 2024 | ||||
| Accounts Receivable | $ | ||||
| Inventory | |||||
| Other Current Assets | |||||
| PP&E | |||||
| Intangibles | |||||
| Other Assets | |||||
| Current Liabilities | ( | ||||
| Long Term Liabilities | ( | ||||
| Net Assets | $ | ||||
Owens Corning Tender Offer
As previously disclosed, on April 15, 2024, the Company and Owens Corning jointly issued a press release to announce, in connection with the anticipated acquisition of the Company by Owens Corning, (i) the commencement of an offer (the “Offer to Purchase”) by Owens Corning to purchase for cash any and all of the 2028 Notes, issued pursuant to that certain Indenture, dated as of July 25, 2019 (the “Base Indenture” and, as amended, supplemented or otherwise modified prior to the Supplemental Indenture defined below, the “Indenture”), among Masonite International Corporation, the guarantors party thereto (the “Guarantors”) and Computershare Trust Company, N.A., as trustee (the “Trustee”), and (ii) a related consent solicitation by the Company soliciting consents of holders of the 2028 Notes to adopt certain proposed amendments (the “Proposed Amendments”) to the Indenture to eliminate certain covenants, restrictive provisions and events of default from the Base Indenture (the “Consent Solicitation”). The Offer to Purchase and Consent Solicitation were each made to holders pursuant to the terms of and subject to the conditions set forth in the offer to purchase and consent solicitation statement dated April 15, 2024 (the “Statement”).
As of 5:00 p.m., New York City time, on April 26, 2024, $441,351,000 of the 2028 Notes, or approximately 88.27 % of the outstanding principal amount thereof, were tendered and not validly withdrawn, and the related consents were delivered and not validly revoked, which amount was sufficient to constitute the requisite consents under the Indenture to approve the Proposed Amendments. On April 29, 2024, Masonite International Corporation, the Guarantors
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and the Trustee accordingly entered into the Fourth Supplemental Indenture to the Indenture (the “Supplemental Indenture”) in order to adopt the Proposed Amendments.
The Supplemental Indenture became effective upon execution. However, the Proposed Amendments will not become operative unless and until all conditions to the Consent Solicitation set forth in the Statement have been satisfied or waived, as applicable, including, among other conditions, (i) that the 2028 Notes that are validly tendered (and not validly withdrawn) have been accepted for purchase and paid for by Owens Corning in accordance with the terms of the Offer to Purchase and the Consent Solicitation set forth in the Statement and (ii) the consummation of the anticipated acquisition of the Company by Owens Corning. As a result, the Proposed Amendments will have no force or effect unless and until all conditions set forth in the Statement have been satisfied or waived, as applicable, and all terms and conditions as set forth in the Indenture immediately prior to the execution of the Supplemental Indenture will continue to govern.
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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 months ended March 31, 2024, and April 2, 2023. 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 December 31, 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 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 64 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, provides 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 three months ended March 31, 2024, we generated net sales of $530.6 million or 79.4%, $58.4 million or 8.7% and $75.5 million or 11.3% in our North American Residential, Europe and Architectural segments, respectively. See "Segment Information" below for a description of our reportable segments.
During the first quarter, we experienced 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 Fleetwood on October 19, 2023, decreased in our North American Residential segment due to continuing 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 first quarter of 2023 due to lower volumes from consumer sentiment and inflationary pressures, partially offset by favorable foreign exchange. The extent to which changes in interest rates, rising energy and fuel costs, and consumer sentiment impact our business, results of
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operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
Arrangement Agreement with Owens Corning
On February 8, 2024, we entered into an Arrangement Agreement (the “Arrangement Agreement”) with Owens Corning (“Owens Corning”), a Delaware corporation, and MT Acquisition Co LLC (“Purchaser”), a British Columbia unlimited liability company and a wholly owned subsidiary of Owens Corning. Subject to the terms and conditions of the Arrangement Agreement, Owens Corning, through Purchaser, agreed to acquire the Company for $133.00 per issued and outstanding share of our common stock, no par value (the “Shares”), in an all-cash transaction. Pursuant to the Arrangement Agreement, following consummation of implementation of a court-approved plan of arrangement under the Business Corporations Act (British Columbia) (the “Transaction”), the Company will be a wholly owned subsidiary of Owens Corning.
Pursuant to the terms of the Arrangement Agreement, and subject to the terms and conditions set forth therein, at the effective time of the Transaction (the “Effective Time”), each Share (other than any Share that is held by Owens Corning or any of its subsidiaries or any Share as to which dissent rights have been properly exercised by the holder thereof in accordance with British Columbia law) issued and outstanding immediately prior to the Effective Time will be cancelled and automatically converted into the right to receive $133.00 in cash, without interest.
If the Arrangement Agreement is terminated under certain specified circumstances, we or Owens Corning will be required to pay a termination fee. We will be required to pay Owens Corning a termination fee of $75.0 million under specified circumstances, including (a) termination of the Arrangement Agreement in connection with our entry into an agreement with respect to a Superior Proposal (as defined in the Arrangement Agreement) prior to us receiving stockholder approval of the Transaction, (b) termination by Owens Corning upon an Adverse Recommendation Change (as defined in the Arrangement Agreement), or (c) termination in certain circumstances by either Owens Corning or us upon failure to obtain Masonite Shareholder Approval (as defined in the Arrangement Agreement) or by Owens Corning if we breach our representations, warranties or covenants in a manner that would result in a failure of an applicable closing condition to be satisfied and, if curable, we fail to cure such breach during specific time periods, in each case, if certain other conditions are met. Owens Corning will be required to pay us a reverse termination fee under specified circumstances, including termination of the Arrangement Agreement due to a permanent injunction arising from Competition Laws (as defined in the Arrangement Agreement) when we are not then in material breach of any provision of the Arrangement Agreement and if certain other conditions are met, in an amount equal to $150.0 million.
The consummation of the Transaction is subject to customary closing conditions, including, among others, (1) the adoption of a resolution approving the Transaction by at least two-thirds of the votes cast by our shareholders represented in person or by proxy at the special meeting, (2) the issuance of interim and final orders by the Supreme Court of British Columbia approving the Transaction, (3) the expiration or termination of any applicable waiting period or periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and the receipt of certain required regulatory clearances and approvals in other jurisdictions under applicable antitrust and foreign direct investment laws and regulations, including in Canada, Mexico and the United Kingdom, and (4) the absence of any law, injunction, order or other judgment prohibiting, rendering illegal or permanently enjoining the consummation of the Transaction, certain of which are still pending. On April 25, 2024, Masonite shareholders approved the Transaction at a special meeting of shareholders and the applicable waiting period under the HSR Act expired at 11:59 p.m. on April 26, 2024. Each of Masonite’s and Owens Corning’s obligation to consummate the Transaction is also subject to the accuracy of the other party’s representations and warranties contained in the Arrangement Agreement (subject, with specified exceptions, to materiality or “Material Adverse Effect” standards), the other party’s performance of its covenants and agreements in the Arrangement Agreement in all material respects, and in the case of Purchaser’s obligation to consummate the Transaction, the absence of any “Material Adverse Effect” relating to us. The Transaction is currently expected to close by mid-2024, subject to the satisfaction (or waiver, if applicable) of each closing condition.
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
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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 2023, we began implementing a plan 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 Europe reportable segment (collectively, the "2024 Plan"). The optimization of our manufacturing capacity involves specific plants in the Europe segment and costs associated with the closure of these plants and related headcount reductions. Costs associated with the 2024 Plan include severance and closure charges and will continue throughout 2024.
In December 2022, we began implementing a plan to improve overall business performance that includes the optimization of our manufacturing capacity and reduction of our overhead and selling, general and administration
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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 and will continue throughout 2024.
Inflation
In prior years, we realized higher costs across the various materials we purchase as a result of macroeconomic factors as well as increased logistics costs, wages and energy and fuel costs. We expect the macroeconomic pressures on wood, resins and other certain key product categories and supply chain costs will moderate throughout 2024. 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 we are not able to pass these costs on to our customers or otherwise mitigate the impact of these inflationary pressures.
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 December 17, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with PGT Innovations, Inc., (“PGTI”) in which Masonite would have acquired PGTI for a combination of cash and Masonite shares with a total transaction value of $3.0 billion. On January 15, 2024, PGTI delivered to Masonite a notice of receipt of a Superior Proposal (as defined in the Merger Agreement) in accordance with Section 6.04(d) of the Merger Agreement. On January 16, 2024, Masonite agreed to waive the 4 business day match period provided under the Merger Agreement. Accordingly, on January 16, 2024, PGTI terminated the Merger Agreement pursuant to Section 10.01(d)(i) thereunder, and, consistent with the terms of the Merger Agreement, Masonite received a termination fee of $84.0 million in cash. The termination fee was recognized as other income in the consolidated statements of income and comprehensive income.
Acquisitions
•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 total consideration of approximately $279.5 million. 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.
•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. The total consideration was funded with borrowings under our Term Loan Facility and ABL Facility. Endura is a leading innovator and manufacturer of high-performance door frames and door system components in the United States.
Divestitures
•On April 23, 2024, we entered into an agreement to sell our Architectural reporting segment for a purchase price of approximately $75 million subject to customary post-closing adjustments. We expect to complete the transaction in the second quarter of 2024.
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Results of Operations
| Three Months Ended | |||||||||||
| (In thousands) | March 31, 2024 | April 2, 2023 | |||||||||
| Net sales | $ | 668,339 | $ | 725,984 | |||||||
| Cost of goods sold | 502,869 | 555,493 | |||||||||
| Gross profit | 165,470 | 170,491 | |||||||||
| Gross profit as a % of net sales | 24.8 | % | 23.5 | % | |||||||
| Selling, general and administration expenses | 152,644 | 101,705 | |||||||||
| Selling, general and administration expenses as a % of net sales | 22.8 | % | 14.0 | % | |||||||
| Restructuring costs | 1,394 | 3,678 | |||||||||
| Operating income | 11,432 | 65,108 | |||||||||
| Interest expense, net | 12,022 | 14,252 | |||||||||
| Other (income) expense, net | (85,250) | 52 | |||||||||
| Income before income tax expense | 84,660 | 50,804 | |||||||||
| Income tax expense | 23,278 | 11,360 | |||||||||
| Net income | 61,382 | 39,444 | |||||||||
| Less: net income attributable to non-controlling interests | 327 | 953 | |||||||||
| Net income attributable to Masonite | $ | 61,055 | $ | 38,491 | |||||||
Three Months Ended March 31, 2024, Compared with Three Months Ended April 2, 2023
Net Sales
Net sales in the three months ended March 31, 2024, were $668.3 million, a decrease of $57.7 million from $726.0 million in the three months ended April 2, 2023. Foreign exchange rate fluctuations positively impacted net sales in the first quarter of 2024 by $2.4 million. The acquisition of Fleetwood in late 2023 increased net sales by $27.3 million or 3.8%. Excluding the impact of foreign currency and our acquisition of Fleetwood, net sales would have decreased by $87.4 million or 12.0% due to changes in volume, average unit price and sales of components. Lower volumes excluding the incremental impact of acquisitions or divestitures ("base volume") decreased net sales by $72.8 million or 10.0% in the first quarter of 2024 compared to the 2023 period. Average unit price decreased net sales in the first quarter of 2024 by $10.1 million or 1.4% compared to the 2023 period. Net sales of components to external customers decreased $4.5 million or 0.6% in the first quarter of 2024 compared to the 2023 period.
Net Sales and Percentage of Net Sales by Reportable Segment
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Net sales | $ | 531,357 | $ | 58,487 | $ | 78,743 | $ | 3,765 | $ | 672,352 | |||||||||||||||||||
| Intersegment sales | (714) | (95) | (3,204) | — | (4,013) | ||||||||||||||||||||||||
| Net sales to external customers | $ | 530,643 | $ | 58,392 | $ | 75,539 | $ | 3,765 | $ | 668,339 | |||||||||||||||||||
| Percentage of consolidated external net sales | 79.4 | % | 8.7 | % | 11.3 | % | |||||||||||||||||||||||
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| Three Months Ended April 2, 2023 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Net sales | $ | 569,429 | $ | 63,716 | $ | 92,861 | $ | 5,349 | $ | 731,355 | |||||||||||||||||||
| Intersegment sales | (390) | (22) | (4,959) | — | (5,371) | ||||||||||||||||||||||||
| Net sales to external customers | $ | 569,039 | $ | 63,694 | $ | 87,902 | $ | 5,349 | $ | 725,984 | |||||||||||||||||||
| Percentage of consolidated external net sales | 78.4 | % | 8.8 | % | 12.1 | % | |||||||||||||||||||||||
North American Residential
Net sales to external customers from facilities in the North American Residential segment in the three months ended March 31, 2024, were $530.6 million, a decrease of $38.4 million or 6.7% from $569.0 million in the three months ended April 2, 2023. Foreign exchange rate fluctuations positively impacted net sales in the first quarter of 2024 by $0.2 million. The acquisition of Fleetwood in late 2023 increased net sales by $27.3 million or 4.8% in the first quarter of 2024. Excluding the impact of foreign currency and our acquisition of Fleetwood, net sales would have decreased by $65.9 million or 11.6% due to changes in volume, average unit price and sales of components. Lower base volume decreased net sales in the first quarter of 2024 by $57.7 million or 10.1% compared to the 2023 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 first quarter of 2024 by $8.7 million or 1.5% compared to the 2023 period. Net sales of components to external customers were $0.5 million higher in the first quarter of 2024 compared to the 2023 period.
Europe
Net sales to external customers from facilities in the Europe segment in the three months ended March 31, 2024, were $58.4 million, a decrease of $5.3 million or 8.3% from $63.7 million in the three months ended April 2, 2023. Foreign exchange rate fluctuations positively impacted net sales in the first quarter of 2024 by $2.3 million. Excluding this exchange rate impact, net sales would have decreased by $7.6 million or 11.9% due to changes in average unit price, volume and sales of components. Average unit price decreased net sales in the first quarter of 2024 by $3.6 million or 5.7% compared to the 2023 period. Lower base volume decreased net sales by $3.5 million or 5.5% in the first quarter of 2024 compared to the 2023 period due to overall economic trends in the United Kingdom. Net sales of components to external customers were $0.5 million lower in the first quarter of 2024 compared to the 2023 period.
Architectural
Net sales to external customers from facilities in the Architectural segment in the three months ended March 31, 2024, were $75.5 million, a decrease of $12.4 million or 14.1% from $87.9 million in the three months ended April 2, 2023. Lower base volume decreased net sales in the first quarter of 2024 by $11.7 million or 13.3% compared to the 2023 period. Net sales of components to external customers were $2.5 million lower in the first quarter of 2024 compared to the 2023 period. Average unit price increased net sales in the first quarter of 2024 by $1.8 million or 2.0% compared to the 2023 period.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 75.2% and 76.5% for the three months ended March 31, 2024, and April 2, 2023, respectively. Material cost of sales as a percentage of net sales decreased by 4.5% compared to the first quarter of 2023. Overhead, depreciation, distribution and direct labor as a percentage of net sales increased by 1.6%, 0.9%, 0.4% and 0.3%, respectively, compared to the 2023 period. The decrease in material cost of sales as a percentage of net sales was driven by anti-dumping and countervailing duty recoveries and other material cost savings projects. Overhead as a percentage of net sales increased due to higher factory costs and wage inflation as compared to the 2023 period. The increase in depreciation as a percentage of net sales was driven by accelerated depreciation on certain fixed assets as compared to the 2023 period. Distribution as a percentage of net sales increased due to outbound freight inflation as compared to the 2023 period. Direct labor as a percentage of net sales increased due to manufacturing wage and benefit inflation.
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Selling, General and Administration Expenses
In the three months ended March 31, 2024, selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 22.8%, as compared to 14.0% in the three months ended April 2, 2023, an increase of 880 basis points.
SG&A expenses in the three months ended March 31, 2024, were $152.6 million, an increase of $50.9 million from $101.7 million in the three months ended April 2, 2023. The overall increase was driven by a $36.5 million increase in acquisition and due diligence related costs; incremental SG&A from the acquisition of Fleetwood of $9.3 million; a $4.5 million increase in professional and other fees; a $1.1 million increase in non-cash items including share based compensation, deferred compensation and depreciation and amortization; and $0.3 million of unfavorable foreign exchange impacts. These increases were partially offset by a $0.8 million decrease in personnel costs.
Restructuring Costs
Restructuring costs in the three months ended March 31, 2024, were $1.4 million, compared to $3.7 million in the three months ended April 2, 2023. Restructuring costs in the prior year period related primarily to the 2022 Plan.
Interest Expense, Net
Interest expense, net, in the three months ended March 31, 2024, was $12.0 million, compared to $14.3 million in the three months ended April 2, 2023. The decrease in interest expense, net, is primarily due to the incremental borrowings under the Term Loan Facility and ABL Facility related to the Endura and Fleetwood acquisitions in the prior year.
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 March 31, 2024, was $85.3 million of income, compared to $0.1 million of expense in the three months ended April 2, 2023. The change in other (income) expense, net is primarily due to a change in non-recurring income as a result of the termination fee paid to Masonite.
Income Tax Expense
Income tax expense in the three months ended March 31, 2024, was $23.3 million, compared to $11.4 million in the three months ended April 2, 2023. The increase in income tax expense is primarily due to the mix of income and losses within the tax jurisdictions in which we operate.
Segment Information
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 106,801 | $ | 1,941 | $ | 4,816 | $ | (16,458) | $ | 97,100 | |||||||||||||||||||
| Adjusted EBITDA as a percentage of segment net sales | 20.1 | % | 3.3 | % | 6.4 | % | 14.5 | % | |||||||||||||||||||||
| Three Months Ended April 2, 2023 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 107,881 | $ | 5,151 | $ | 5,350 | $ | (12,217) | $ | 106,165 | |||||||||||||||||||
| Adjusted EBITDA as a percentage of segment net sales | 19.0 | % | 8.1 | % | 6.1 | % | 14.6 | % | |||||||||||||||||||||
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The following reconciles net income (loss) attributable to Masonite to Adjusted EBITDA:
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Net income (loss) attributable to Masonite | $ | 83,282 | $ | (4,286) | $ | 1,595 | $ | (19,536) | $ | 61,055 | |||||||||||||||||||
| Plus: | |||||||||||||||||||||||||||||
| Depreciation | 15,392 | 2,285 | 3,070 | 6,821 | 27,568 | ||||||||||||||||||||||||
| Amortization | 7,137 | 2,836 | 185 | 718 | 10,876 | ||||||||||||||||||||||||
| Share based compensation expense | — | — | — | 6,930 | 6,930 | ||||||||||||||||||||||||
| Loss (gain) on disposal of property, plant and equipment | 95 | 7 | (34) | 1,000 | 1,068 | ||||||||||||||||||||||||
| Restructuring costs (benefits) | 450 | 961 | — | (17) | 1,394 | ||||||||||||||||||||||||
| Interest expense, net | — | — | — | 12,022 | 12,022 | ||||||||||||||||||||||||
Other expense (income), net (1) | 11 | 138 | — | (85,399) | (85,250) | ||||||||||||||||||||||||
| Income tax expense | — | — | — | 23,278 | 23,278 | ||||||||||||||||||||||||
Other items (2) | 145 | — | — | 37,687 | 37,832 | ||||||||||||||||||||||||
| Net income attributable to non-controlling interest | 289 | — | — | 38 | 327 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 106,801 | $ | 1,941 | $ | 4,816 | $ | (16,458) | $ | 97,100 | |||||||||||||||||||
(1) Other expense (income), net includes $85,250 in income primarily related to the PGTI termination fee in the three months ended March 31, 2024.
(2) Other items include $37,832 in acquisition and due diligence related costs in the three months ended March 31, 2024, and were recorded in selling, general and administration expenses within the condensed consolidated statements of income and comprehensive income.
| Three Months Ended April 2, 2023 | |||||||||||||||||||||||||||||
| (In thousands) | North American Residential | Europe | Architectural | Corporate & Other | Total | ||||||||||||||||||||||||
| Net income (loss) attributable to Masonite | $ | 86,755 | $ | 203 | $ | 1,465 | $ | (49,932) | $ | 38,491 | |||||||||||||||||||
| Plus: | |||||||||||||||||||||||||||||
| Depreciation | 13,232 | 2,204 | 2,957 | 3,092 | 21,485 | ||||||||||||||||||||||||
| Amortization | 3,790 | 2,808 | 252 | 571 | 7,421 | ||||||||||||||||||||||||
| Share based compensation expense | — | — | — | 6,054 | 6,054 | ||||||||||||||||||||||||
| Loss (gain) on disposal of property, plant and equipment | 1,040 | (3) | (13) | 14 | 1,038 | ||||||||||||||||||||||||
| Restructuring costs | 2,380 | — | 684 | 614 | 3,678 | ||||||||||||||||||||||||
| Interest expense, net | — | — | — | 14,252 | 14,252 | ||||||||||||||||||||||||
| Other (income) expense, net | (28) | (61) | — | 141 | 52 | ||||||||||||||||||||||||
| Income tax expense | — | — | — | 11,360 | 11,360 | ||||||||||||||||||||||||
Other items (1) | — | — | 5 | 1,376 | 1,381 | ||||||||||||||||||||||||
| Net income attributable to non-controlling interest | 712 | — | — | 241 | 953 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 107,881 | $ | 5,151 | $ | 5,350 | $ | (12,217) | $ | 106,165 | |||||||||||||||||||
(1) Other items include $1,381 in acquisition and due diligence related costs in the three months ended April 2, 2023, and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income.
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Adjusted EBITDA in our North American Residential segment was $106.8 million in the three months ended March 31, 2024, a decrease of $1.1 million, or 1.0%, from $107.9 million in the three months ended April 2, 2023. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $24.0 million and $22.7 million in the first quarter of 2024 and 2023, 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 $1.9 million in the three months ended March 31, 2024, a decrease of $3.3 million, or 63.1%, from $5.2 million in the three months ended April 2, 2023. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $1.3 million and $1.8 million in the first quarter of 2024 and 2023, 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 $4.8 million in the three months ended March 31, 2024, a decrease of $0.6 million, or 10.3%, from $5.4 million in the three months ended April 2, 2023. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $2.5 million and $2.9 million in the first quarter of 2024 and 2023, 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, an accounts receivable sales program with a third party ("AR Sales Program") and our existing cash balance. Our anticipated uses of cash in the near term include working capital needs and capital expenditures for critical maintenance. On a continual basis, we evaluate and consider strategic acquisitions, divestitures and joint ventures to create shareholder value and enhance financial performance.
We believe that our cash balance on hand, future cash generated from operations, the use of our AR Sales Program, our ABL Facility and our Term Loan Facility along with our ability to access the capital markets will provide adequate liquidity for the foreseeable future. As of March 31, 2024, we had $230.4 million of cash and cash equivalents, $249.1 million of availability under our ABL Facility and $27.9 million of availability under our AR Sales Program.
Cash Flows
Cash provided by operating activities was $133.3 million during the three months ended March 31, 2024, compared to $56.3 million in the three months ended April 2, 2023. This $77.0 million increase in cash provided by operating activities was due to $33.7 million in cash provided by working capital and other assets and liabilities and a $43.3 million increase in net income attributable to Masonite, adjusted for non-cash and non-operating items in the first three months of 2024 compared to the same period in 2023.
Cash used in investing activities was $26.6 million during the three months ended March 31, 2024, compared to $373.0 million in the three months ended April 2, 2023. This $346.4 million decrease in cash used in investing activities was primarily driven by the absence of $353.2 million in cash used in the acquisitions of Endura and Fleetwood (net of cash acquired), a $3.1 million decrease in cash used in other investing activities and $2.1 million fewer additions of property, plant and equipment, partially offset by the absence of $12.0 million of proceeds from repayment of a note receivable in the first three months of 2024 compared to the same period in 2023.
Cash provided by financing activities was $13.1 million during the three months ended March 31, 2024, compared to $229.1 million of cash provided by financing activities during the three months ended April 2, 2023. This $242.2 million increase in cash used in financing activities was driven by the absence of $255.8 million in cash provided by debt-related transactions, a $1.0 million increase in distributions to non-controlling interests and a $0.1 million increase in cash used for tax withholding on share based awards, partially offset by a $14.7 million decrease in cash used for repurchases of common shares in the first three months of 2024 compared to the same period in 2023.
Share Repurchases
The Company's Board of Directors 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
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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 Arrangement Agreement (as defined herein) with Owens Corning restricts our ability to repurchase our shares and therefore our share repurchase program is currently suspended through February 8, 2025, other than for the repurchase of shares associated with tax withholding requirements for share-based compensation. During the three months ended March 31, 2024, we did not repurchase any of our common shares in the open market. During the three months ended April 2, 2023, we repurchased and retired 168,523 of our common shares in the open market at an aggregate cost of $14.7 million as part of the share repurchase programs and ASR. As of March 31, 2024, there was $200.3 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 March 31, 2024, 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.
Senior Notes
On July 26, 2021, we issued $375.0 million aggregate principal senior unsecured notes (the "2030 Notes"), all of which was outstanding as of March 31, 2024. 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 March 31, 2024, we were in compliance with all covenants under the indenture governing the 2030 Notes.
On July 25, 2019, we issued $500.0 million aggregate principal senior unsecured notes (the "2028 Notes"), all of which was outstanding as of March 31, 2024. 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 March 31, 2024, 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
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(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 March 31, 2024, 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 $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 March 31, 2024, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $249.1 million under our ABL Facility, and there were no amounts outstanding as of March 31, 2024.
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.
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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
Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) under 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 Securities and Exchange Commission’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.
Based on management's evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting previously identified and disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, the end of the most recent fiscal year. Specifically, management identified a material weakness in our internal control over financial reporting relating to business combinations. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
Notwithstanding the above, the material weakness did not result in any material misstatements to the condensed consolidated financial statements. Further, management believes and has concluded that the condensed consolidated financial statements included in this report fairly present, in all material respects, the Company's financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Management continues to work to improve its controls related to the material weakness and believes that the implementation of business combination controls relating to finalizing the preliminary purchase allocations or to new business combinations will substantially remediate the material weakness identified. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may determine to take additional actions to address control deficiencies or determine to modify certain of the remediation measures described above.
Changes in Internal Control over Financial Reporting
Other than the material weakness detailed above, 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.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The information required with respect to this item can be found in Note 7. Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report and is incorporated by reference into this Part II, Item 1. Such information should be read in conjunction with the information contained under Part I, Item 3 "Legal Proceedings" included in our Annual Report.
Item 1A. Risk Factors
You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results as set forth under Item 1A "Risk Factors" in our Annual Report. There have been no material changes from the risk factors disclosed in such Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sale of Equity Securities.
None.
(b) Use of Proceeds.
Not applicable.
(c) Repurchases of Our Equity Securities.
During the three months ended March 31, 2024, we did not repurchase any of our common shares in the open market.
The Company's Board of Directors 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 Arrangement Agreement (as defined herein) with Owens Corning restricts our ability to repurchase our shares and therefore our share repurchase program is currently suspended through February 8, 2025, other than for the repurchase of shares associated with tax withholding requirements for share-based compensation. As of March 31, 2024, $200.3 million was available for repurchase in accordance with the share repurchase programs.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(c) Trading Plans
During the three months ended March 31, 2024, no director or Section 16 officer (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) adopted terminated
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Item 6. Exhibits
The following is a list of all exhibits filed or furnished as part of this report:
| Exhibit No. | Description | |||||||
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) | ||||||||
| Arrangement Agreement, dated as of February 8, 2024, by and among Owens Corning, MT Acquisition Co ULC and Masonite International Corporation (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on February 8, 2024) | ||||||||
| Form of Restricted Stock Unit Agreement pursuant to the Masonite International Corporation 2021 Omnibus Incentive Plan (February 2024) | ||||||||
| 2024 Masonite Incentive Plan (MIP) Plan Document (correcting Exhibit 10.4 to the Company's Annual Report on Form 10-K (File No. 011-11796) filed with the Securities and Exchange Commission on February 29, 2024) | ||||||||
| Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| 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 months ended March 31, 2024, and April 2, 2023; (ii) the Registrant's Condensed Consolidated Balance Sheets as of March 31, 2024, and December 31, 2023; (iii) the Registrant's Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2024, and April 2, 2023; (iv) the Registrant's Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024, and April 2, 2023; 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) | |||||||
| * | Filed or furnished herewith. | |||||||
| # | Denotes management contract or compensatory plan. | |||||||
| † | 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. | |||||||
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SIGNATURES
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.
| MASONITE INTERNATIONAL CORPORATION | ||||||||||||||
| (Registrant) | ||||||||||||||
| Date: | May 7, 2024 | By | /s/ Russell T. Tiejema | |||||||||||
| Russell T. Tiejema | ||||||||||||||
| Executive Vice President and Chief Financial Officer | ||||||||||||||
| (Principal Financial Officer) | ||||||||||||||
| Date: | May 7, 2024 | By | /s/ Catherine A. Shellabarger | |||||||||||
| Catherine A. Shellabarger | ||||||||||||||
| Vice President, Chief Accounting Officer | ||||||||||||||
| (Principal Accounting Officer) | ||||||||||||||
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