2013 Q3 Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2013
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-11796
____________________________
Masonite International Corporation
(Exact name of registrant as specified in its charter)
____________________________
British Columbia, Canada
(State or other jurisdiction of
incorporation or organization)
 
98-0377314
(I.R.S. Employer
Identification No.)
2771 Rutherford Road
Concord, Ontario L4K Canada
(Address of principal executive offices)(Zip Code)
(800) 895-2723
(Registrant’s telephone number, including area code)
____________________________
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 x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
x (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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 28,682,929 shares of Common Stock, no par value, as of November 1, 2013.


MASONITE INTERNATIONAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 29, 2013

 
Page No.
PART I.
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
PART II.
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 

 

2

Table of Contents

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,” “will,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” 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” 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:

•
our ability to successfully implement our business strategy;
•
general economic, market and business conditions;
•
levels of residential new construction; residential repair, renovation and remodeling; and non-residential building construction activity;
•
competition;
•
our ability to manage our operations including integrating our recent acquisitions and companies or assets we acquire in the future;
•
our ability to generate sufficient cash flows to fund our capital expenditure requirements, to meet our pension obligations, and to meet our debt service obligations, including our obligations under our senior notes and our senior secured asset-based credit facility, or our ABL Facility;
•
labor relations (i.e., disruptions, strikes or work stoppages), labor costs and availability of labor;
•
increases in the costs of raw materials or any shortage in supplies;
•
our ability to keep pace with technological developments;
•
the actions by, and the continued success of, certain key customers;
•
our ability to maintain relationships with certain customers;
•
new contractual commitments;
•
the ability to generate the benefits of our restructuring activities;
•
retention of key management personnel;
•
environmental and other government regulations; and
•
limitations on operating our business as a result of covenant restrictions under our existing and future indebtedness, including our senior notes and our ABL Facility.

We caution you that the foregoing list of important factors is not exclusive. 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.

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PART I – FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands of U.S. dollars, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Net sales
$
433,051

 
$
424,957

 
$
1,310,668

 
$
1,257,846

Cost of goods sold
374,082

 
369,520

 
1,136,629

 
1,094,400

Gross profit
58,969

 
55,437

 
174,039

 
163,446

 
 
 
 
 
 
 
 
Selling, general and administration expenses
51,386

 
52,653

 
154,378

 
155,646

Restructuring costs
1,265

 
3,829

 
4,467

 
5,051

Operating income (loss)
6,318

 
(1,045
)
 
15,194

 
2,749

 
 
 
 
 
 
 
 
Interest expense, net
8,330

 
7,969

 
24,788

 
23,073

Other expense (income), net
(255
)
 
80

 
(776
)
 
1,197

Income (loss) from continuing operations before income tax expense (benefit)
(1,757
)
 
(9,094
)
 
(8,818
)
 
(21,521
)
 
 
 
 
 
 
 
 
Income tax expense (benefit)
(6,272
)
 
(141
)
 
(7,716
)
 
(6,338
)
Income (loss) from continuing operations
4,515

 
(8,953
)
 
(1,102
)
 
(15,183
)
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of tax
(62
)
 
(50
)
 
(196
)
 
1,520

Net income (loss)
4,453

 
(9,003
)
 
(1,298
)
 
(13,663
)
 
 
 
 
 
 
 
 
Less: Net income (loss) attributable to noncontrolling interest
838

 
913

 
2,123

 
2,131

Net income (loss) attributable to Masonite
$
3,615

 
$
(9,916
)
 
$
(3,421
)
 
$
(15,794
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share attributable to Masonite:
 
 
 
 
 
 
 
Basic
$
0.13

 
$
(0.36
)
 
$
(0.12
)
 
$
(0.57
)
Diluted
$
0.12

 
$
(0.36
)
 
$
(0.12
)
 
$
(0.57
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share from continuing operations attributable to Masonite:
 
 
 
 
 
 
 
Basic
$
0.13

 
$
(0.36
)
 
$
(0.11
)
 
$
(0.63
)
Diluted
$
0.12

 
$
(0.36
)
 
$
(0.11
)
 
$
(0.63
)
 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
4,453

 
$
(9,003
)
 
$
(1,298
)
 
$
(13,663
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign exchange gain (loss)
10,284

 
19,571

 
(13,577
)
 
7,932

Amortization of actuarial net losses
349

 
422

 
1,047

 
1,267

Income tax benefit (expense) related to other comprehensive income (loss)
(136
)
 
1,034

 
(408
)
 
294

Other comprehensive income (loss), net of tax:
10,497

 
21,027

 
(12,938
)
 
9,493

Comprehensive income (loss)
14,950

 
12,024

 
(14,236
)
 
(4,170
)
Less: comprehensive income (loss) attributable to noncontrolling interest
962

 
1,543

 
1,737

 
2,604

Comprehensive income (loss) attributable to Masonite
$
13,988

 
$
10,481

 
$
(15,973
)
 
$
(6,774
)

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
ASSETS
September 29, 2013
 
December 30, 2012
Current assets:
 
 
 
Cash and cash equivalents
$
113,172

 
$
122,314

Restricted cash
14,138

 
12,769

Accounts receivable, net
270,642

 
256,666

Inventories, net
234,878

 
208,783

Prepaid expenses
21,674

 
19,546

Assets held for sale
3,338

 
7,211

Income taxes receivable
4,900

 
6,502

Current deferred income taxes
16,936

 
18,681

Total current assets
679,678

 
652,472

Property, plant and equipment, net
619,317

 
648,360

Investment in equity investees
8,422

 
7,633

Goodwill
78,450

 
78,122

Intangible assets, net
207,824

 
219,624

Long-term deferred income taxes
11,434

 
14,502

Other assets, net
25,809

 
25,235

Total assets
$
1,630,934

 
$
1,645,948


 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
109,403

 
$
93,311

Accrued expenses
140,581

 
139,383

Income taxes payable
2,509

 
2,194

Total current liabilities
252,493

 
234,888

Long-term debt
378,040

 
378,848

Long-term deferred income taxes
105,009

 
119,139

Other liabilities
68,123

 
75,258

Total liabilities
803,665

 
808,133

Commitments and contingencies (Note 9)


 


Equity:
 
 
 
Share capital: unlimited shares authorized, 28,438,664 and 27,943,774 shares issued and outstanding as of September 29, 2013, and December 30, 2012, respectively.
641,311

 
633,910

Additional paid-in capital
238,769

 
240,784

Accumulated deficit
(52,588
)
 
(49,167
)
Accumulated other comprehensive income (loss)
(31,536
)
 
(18,984
)
Total equity attributable to Masonite
795,956

 
806,543

Equity attributable to noncontrolling interests
31,313

 
31,272

Total equity
827,269

 
837,815

Total liabilities and equity
$
1,630,934

 
$
1,645,948


See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
 
 
Common Shares Outstanding
 
Common Stock Amount
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Equity Attributable to Masonite
 
Equity Attributable to Noncontrolling Interests
 
Total Equity
Balances as of January 2, 2012
 
27,531,792

 
$
626,787

 
$
241,496

 
$
(25,922
)
 
$
(27,728
)
 
$
814,633

 
$
33,850

 
$
848,483

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
(23,245
)
 
 
 
(23,245
)
 
2,923

 
(20,322
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
8,744

 
8,744

 
234

 
8,978

Dividends to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
—

 
(5,735
)
 
(5,735
)
Share based awards
 
 
 
 
 
6,517

 
 
 
 
 
6,517

 
 
 
6,517

Common shares issued for delivery of share based awards
 
411,982

 
7,123

 
(7,123
)
 
 
 
 
 
—

 
 
 
—

Reduction of return of capital payable due to forfeitures of share based awards
 
 
 
 
 
(11
)
 
 
 
 
 
(11
)
 
 
 
(11
)
Common shares withheld to cover income taxes payable due to delivery of share based awards
 
 
 
 
 
(95
)
 
 
 
 
 
(95
)
 
 
 
(95
)
Balances as of December 30, 2012
 
27,943,774

 
$
633,910

 
$
240,784

 
$
(49,167
)
 
$
(18,984
)
 
$
806,543

 
$
31,272

 
$
837,815

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
(3,421
)
 
 
 
(3,421
)
 
2,123

 
(1,298
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
(12,552
)
 
(12,552
)
 
(386
)
 
(12,938
)
Dividends to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
—

 
(1,696
)
 
(1,696
)
Share based awards
 
 
 
 
 
5,752

 
 
 
 
 
5,752

 
 
 
5,752

Common shares issued for delivery of share based awards
 
494,890

 
7,401

 
(7,401
)
 
 
 
 
 
—

 
 
 
—

Common shares withheld to cover income taxes payable due to delivery of share based awards
 
 
 
 
 
(366
)
 
 
 
 
 
(366
)
 
 
 
(366
)
Balances as of September 29, 2013
 
28,438,664

 
$
641,311

 
$
238,769

 
$
(52,588
)
 
$
(31,536
)
 
$
795,956

 
$
31,313

 
$
827,269


See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)
 
Nine Months Ended
Cash flows from operating activities:
September 29,
2013
 
September 30,
2012
Net income (loss)
$
(1,298
)
 
$
(13,663
)
Adjustments to reconcile net income (loss) to net cash flow provided by (used in) operating activities, net of acquisitions:
 
 
 
Loss (income) from discontinued operations, net of tax
196

 
(1,520
)
Depreciation
47,682

 
47,486

Amortization of intangible assets
12,883

 
11,070

Amortization of debt issue costs
368

 
446

Share based compensation expense
5,752

 
4,605

Deferred income taxes
(8,826
)
 
(8,794
)
Unrealized foreign exchange loss (gain)
(298
)
 
782

Share of loss (income) from equity investees, net of tax
(789
)
 
(479
)
Pension and post-retirement expense (funding), net
(4,608
)
 
(4,248
)
Non-cash accruals and interest
404

 
611

Loss (gain) on sale of property, plant and equipment
(1,810
)
 
683

Impairment of property, plant and equipment
1,904

 
911

Changes in assets and liabilities:
 
 
 
Accounts receivable
(18,091
)
 
(15,080
)
Inventories
(24,084
)
 
(14,656
)
Prepaid expenses
(2,577
)
 
(817
)
Accounts payable and accrued expenses
21,142

 
20,921

Other assets and liabilities
1,897

 
487

Net cash flow provided by (used in) operating activities - continuing operations
29,847

 
28,745

Net cash flow provided by (used in) operating activities - discontinued operations
—

 
(315
)
Net cash flow provided by (used in) operating activities
29,847

 
28,430

Cash flows from investing activities:
 
 
 
Proceeds from sale of property, plant and equipment
9,288

 
280

Additions to property, plant and equipment
(24,850
)
 
(32,873
)
Cash used in acquisitions, net of cash acquired
(15,082
)
 
(87,732
)
Restricted cash
(1,369
)
 
94

Other investing activities
(2,471
)
 
(1,575
)
Net cash flow provided by (used in) investing activities - continuing operations
(34,484
)
 
(121,806
)
Net cash flow provided by (used in) investing activities - discontinued operations
—

 
1,703

Net cash flow provided by (used in) investing activities
(34,484
)
 
(120,103
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
—

 
103,500

Payment of financing costs
—

 
(2,035
)
Distributions to non-controlling interests
(1,696
)
 
(3,599
)
Return of capital paid
(1,321
)
 
(1,333
)
Net cash flow provided by (used in) financing activities - continuing operations
(3,017
)
 
96,533

Net cash flow provided by (used in) financing activities - discontinued operations
—

 
—

Net cash flow provided by (used in) financing activities
(3,017
)
 
96,533

Net foreign currency translation adjustment on cash
(1,488
)
 
982

Increase (decrease) in cash and cash equivalents
(9,142
)
 
5,842

Cash and cash equivalents, beginning of period
122,314

 
109,205

Cash and cash equivalents, at end of period
$
113,172

 
$
115,047

See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Business Overview and Significant Accounting Policies

Masonite International Corporation (“Masonite” or the “Company”) is one of the largest manufacturers of doors in the world, with significant market share in both interior and exterior door products. Masonite operates 64 manufacturing locations in 11 countries and sells doors to customers in countries throughout the world, including the United States, Canada and France.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the results for the interim periods presented have been included. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. These estimates are based on information available as of the date of the unaudited condensed consolidated financial statements; therefore, actual results could differ from those estimates. Interim results are not necessarily indicative of the results for a full year.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements, including the accompanying notes, which are included in the Form 10 filed with the SEC on August 19, 2013. On September 6, 2013, the Form 10 was declared effective by the SEC, resulting in the Company becoming subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. On September 9, 2013, the common shares of the Company began trading on the New York Stock Exchange under the ticker symbol "DOOR".

There have been no changes in the significant accounting policies from those that were disclosed in the 2012 audited consolidated financial statements included in the Form 10. Certain prior year amounts have been reclassified to conform to the current basis of presentation.

The Company’s fiscal year is the 52- or 53-week period ending on the Sunday closest to December 31. In a 52-week year, each fiscal quarter consists of 13 weeks. For ease of disclosure, the 39- and 13-week periods are referred to as nine month and three month periods, respectively.

Changes in Accounting Standards and Policies
Adoption of Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU amends Accounting Standards Codification (“ASC”) 220, “Comprehensive Income,” and requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items of net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional details about those amounts. This ASU is effective prospectively for annual reporting periods beginning after December 15, 2012, and interim periods within those annual periods. The adoption of this standard did not result in a change to the accounting treatment of comprehensive income and did not have a material impact on the presentation of the Company’s financial statements.


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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU addresses annual impairment testing for indefinite-lived intangible assets other than goodwill as contemplated in ASC 350, “Intangibles-Goodwill and other,” and was issued to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by permitting an entity to perform a qualitative assessment to determine whether an indefinite-lived intangible asset other than goodwill is impaired. If the qualitative assessment leads to the determination that it is more likely than not that an indefinite-lived intangible asset other than goodwill is impaired, further impairment testing is necessary using the current two-step quantitative impairment test. This pronouncement is effective for reporting periods beginning after September 15, 2012, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s reported results of operations, cash flows or financial position.

Other Recent Accounting Pronouncements not yet Adopted

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which amended ASC 740, “Income Taxes.” This ASU addresses the diversity in practice regarding financial statement presentation of an unrecognized tax benefit when a net operating loss, a similar tax loss or a tax credit carryforward exists. This ASU requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective prospectively for reporting periods beginning after December 15, 2013, and early adoption is permitted. The adoption of this standard is not expected to have an impact on the presentation of the Company’s financial statements.

In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” which amended ASC 830, “Foreign Currency Matters.” This ASU updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This ASU resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This ASU is effective prospectively for annual reporting periods beginning after December 15, 2013, and interim periods within those annual periods. The Company is in the process of evaluating this guidance to determine the magnitude of its impact on the Company’s financial statements.
2. Acquisitions

2013 Acquisition

On July 9, 2013, the Company completed the acquisition of the door manufacturing operations of Masisa S.A. (“Masisa”) for total consideration of $12.2 million. The transaction includes the door component operations in Cabrero, Chile, and a door assembly factory in Chillan, Chile. The operations acquired primarily manufacture high quality stile and rail panel and French wood doors for the North American market. The excess purchase price over the fair value of net tangible and intangible assets acquired of $0.3 million was allocated to goodwill. The goodwill principally represents anticipated synergies to be gained from integration into the Company’s North American wood door business. This goodwill is not deductible for tax purposes and relates to the North America segment. The Masisa acquisition acts as a natural complement to the Company's existing North American interior stile and rail residential wood door operations.


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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The aggregate consideration paid for the acquisition during 2013 was as follows:
(In thousands)
 Masisa Acquisition
Inventory
$
5,174

Property, plant and equipment
6,228

Goodwill
316

Other assets and liabilities, net
508

Cash consideration
$
12,226


Amounts of revenue and earnings included in the condensed consolidated statements of comprehensive income (loss) for Masisa were not material for the three and nine months ended September 29, 2013.

2012 Acquisitions

On August 1, 2012, the Company completed the acquisition of Portes Lemieux Inc. (“Lemieux”), headquartered in Windsor, Quebec, for total consideration of $22.1 million, net of cash acquired. The Company acquired 100% of the equity interests in Lemieux through the purchase of all of the outstanding shares of common stock at the acquisition date. Lemieux manufactures interior and exterior stile and rail wood doors for residential applications at its two facilities in Windsor, Quebec. The excess purchase price over the fair value of net tangible and intangible assets acquired of $0.4 million was allocated to goodwill. The goodwill principally represents anticipated synergies to be gained from the integration into the Company’s North American wood door business. This goodwill is not deductible for tax purposes and relates to the North America segment. The acquisition of Lemieux complements Masonite’s residential wood door business and provides an additional strategic growth platform for the Company.

On April 20, 2012, the Company completed the acquisition of Algoma Holding Company (“Algoma”), headquartered in Algoma, Wisconsin, for total consideration of $55.6 million, net of cash acquired. The Company acquired 100% of the equity interests in Algoma through the purchase of all of the outstanding shares of common stock at the acquisition date. Algoma manufactures interior wood doors and components for commercial and architectural applications at its facilities in Algoma, Wisconsin, and Jefferson City, Tennessee. The acquisition of Algoma complements Masonite’s existing Marshfield, Mohawk and Baillargeon branded commercial and architectural interior wood door business and provides strategic growth opportunities for the Company in its Architectural DoorSystems business in North America. The excess purchase price over the fair value of net tangible and intangible assets acquired of $20.0 million was allocated to goodwill. The goodwill principally represents anticipated synergies to be gained from the integration into the Company’s Architectural DoorSystems business. This goodwill is not deductible for tax purposes and relates to the North America segment.

On March 26, 2012, the Company completed the acquisition of Les Portes Baillargeon, Inc. (“Baillargeon”), headquartered in St. Ephrem, Quebec, for total consideration of $9.9 million. The Company acquired 100% of the equity interests in Baillargeon through the purchase of all of the outstanding shares of common stock at the acquisition date. Baillargeon is a Canadian manufacturer of interior wood doors for commercial and architectural applications. The Baillargeon acquisition strengthens the Company’s Architectural DoorSystems business in North America. The excess purchase price over the fair value of net tangible and intangible assets acquired of $1.1 million was allocated to goodwill. The goodwill principally represents anticipated synergies to be gained from the integration into the Company’s Architectural DoorSystems business. This goodwill is not deductible for tax purposes and relates to the North America segment.


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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The aggregate consideration paid for acquisitions during 2012 was as follows:
(In thousands)
Lemieux Acquisition
 
Algoma Acquisition
 
Baillargeon Acquisition
 
Total 2012 Acquisitions
Accounts receivable
$
3,547

 
$
8,874

 
$
3,105

 
$
15,526

Inventory
6,013

 
6,391

 
1,758

 
14,162

Property, plant and equipment
15,148

 
9,658

 
7,054

 
31,860

Goodwill
397

 
20,049

 
1,113

 
21,559

Intangible assets
3,900

 
28,600

 
—

 
32,500

Deferred income taxes
(3,023
)
 
(11,866
)
 
(929
)
 
(15,818
)
Other assets and liabilities, net
(3,915
)
 
(6,073
)
 
(2,158
)
 
(12,146
)
Cash consideration, net of cash acquired
$
22,067

 
$
55,633

 
$
9,943

 
$
87,643


The fair values of intangible assets acquired are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach. Intangible assets acquired from Lemieux and Algoma consist of customer relationships, and will be amortized over the weighted average amortization period of 7.8 years. The intangible assets are not expected to have any residual value.

The gross contractual value of acquired trade receivables was $5.1 million, $9.0 million and $3.1 million from Lemieux, Algoma and Baillargeon, respectively.

The following schedule represents the amounts of revenue and earnings which have been included in the condensed consolidated statements of comprehensive income (loss) for the periods indicated subsequent to the respective acquisition dates:
 
Three Months Ended September 29, 2013
(In thousands)
Lemieux
 
Algoma
 
Baillargeon
 
Total
Net sales
$
15,188

 
$
16,405

 
$
4,862

 
$
36,455

Net income (loss) attributable to Masonite
1,695

 
655

 
374

 
2,724

 
Three Months Ended September 30, 2012
(In thousands)
Lemieux
 
Algoma
 
Baillargeon
 
Total
Net sales
$
7,072

 
$
17,005

 
$
5,355

 
$
29,432

Net income (loss) attributable to Masonite
357

 
1,061

 
330

 
1,748

 
Nine Months Ended September 29, 2013
(In thousands)
Lemieux
 
Algoma
 
Baillargeon
 
Total
Net sales
$
42,474

 
$
50,724

 
$
14,812

 
$
108,010

Net income (loss) attributable to Masonite
4,793

 
1,815

 
687

 
7,295

 
Nine Months Ended September 30, 2012
(In thousands)
Lemieux
 
Algoma
 
Baillargeon
 
Total
Net sales
$
7,072

 
$
31,942

 
$
11,028

 
$
50,042

Net income (loss) attributable to Masonite
357

 
1,471

 
732

 
2,560



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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Marshfield Business Interruption Insurance Proceeds

In August 2011, the Company completed the acquisition of Marshfield DoorSystems, Inc. (“Marshfield”), for net consideration of $102.4 million. Prior to acquisition, Marshfield experienced a loss of certain property, plant and equipment, as well as a partial and temporary business interruption, due to an explosion that impacted a portion of its manufacturing facility in Marshfield, Wisconsin. Losses related to the event were recognized by Marshfield prior to the acquisition. Marshfield was insured for these losses, including business interruption, and the Company retained rights to this insurance claim subsequent to acquisition. During the fourth quarter of 2012, the Company recognized $3.3 million as partial settlement for business insurance losses. In the first quarter of 2013, the Company recognized an additional $4.5 million as final settlement of the business interruption insurance claim. These proceeds were recorded as a reduction to selling, general and administration expense in the condensed consolidated statements of comprehensive income (loss). No further business interruption insurance proceeds are expected as a result of this event.

Pro Forma Information

The following unaudited pro forma financial information represents the unaudited condensed consolidated financial information as if the Company’s acquisitions had been included in the unaudited condensed consolidated results of the Company beginning on the first day of the fiscal year prior to their respective acquisition dates. The pro forma results have been derived from unaudited 2012 financial results of the acquired entities. The pro forma results have been calculated after adjusting the results of the acquired entities to remove intercompany transactions and transaction costs incurred and to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to inventory, property, plant and equipment and intangible assets had been applied on the first day of the fiscal year prior to acquisition, together with the consequential tax effects. The pro forma results do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the acquisitions; the costs to combine the companies’ operations; or the costs necessary to achieve these costs savings, operating synergies and revenue enhancements. The pro forma results do not necessarily reflect the actual results of operations of the combined companies under ownership and operation of the Company.

Pro forma information relating to the Masisa acquisition is not materially different from amounts reported.
 
Three Months Ended September 30, 2012
(In thousands, except per share amounts)
Masonite
 
2012 Acquisitions
 
Pro Forma
Net sales
$
424,957

 
$
3,501

 
$
428,458

Net income (loss) attributable to Masonite
(9,916
)
 
383

 
(9,533
)
 
 
 
 
 
 
Basic earnings (loss) per common share
$
(0.36
)
 
 
 
$
(0.34
)
Diluted earnings (loss) per common share
$
(0.36
)
 
 
 
$
(0.34
)
 
Nine Months Ended September 30, 2012
(In thousands, except per share amounts)
Masonite
 
2012 Acquisitions
 
Pro Forma
Net sales
$
1,257,846

 
$
50,267

 
$
1,308,113

Net income (loss) attributable to Masonite
(15,794
)
 
2,232

 
(13,562
)
 
 
 
 
 
 
Basic earnings (loss) per common share
$
(0.63
)
 
 
 
$
(0.49
)
Diluted earnings (loss) per common share
$
(0.63
)
 
 
 
$
(0.49
)



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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


3. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the periods indicated are as follows:
(In thousands)
North America Segment
January 1, 2012
$
56,563

Goodwill from 2012 acquisitions
21,559

December 30, 2012
78,122

 
 
Goodwill from 2013 acquisitions
316

Foreign exchange fluctuations
12

September 29, 2013
$
78,450


The cost and accumulated amortized values of the Company’s intangible assets as of September 29, 2013, and December 30, 2012, are presented in the following tables:
 
September 29, 2013
(In thousands)
 Cost
 
 Accumulated Amortization
 
 Translation Adjustment
 
 Net Book Value
Definite life intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
82,333

 
$
(18,794
)
 
$
(328
)
 
$
63,211

Patents
27,289

 
(11,471
)
 
140

 
15,958

Software
26,901

 
(14,843
)
 
350

 
12,408

Other
11,923

 
(5,120
)
 
(1,417
)
 
5,386

 
148,446

 
(50,228
)
 
(1,255
)
 
96,963

Indefinite life intangible assets:
 
 
 
 
 
 
 
Trademarks and tradenames
109,789

 
—

 
1,072

 
110,861

Total intangible assets
$
258,235

 
$
(50,228
)
 
$
(183
)
 
$
207,824

 
December 30, 2012
(In thousands)
 Cost
 
 Accumulated Amortization
 
 Translation Adjustment
 
 Net Book Value
Definite life intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
82,333

 
$
(11,373
)
 
$
(169
)
 
$
70,791

Patents
26,277

 
(9,521
)
 
148

 
16,904

Software
25,806

 
(12,491
)
 
423

 
13,738

Other
11,923

 
(3,960
)
 
(950
)
 
7,013

 
146,339

 
(37,345
)
 
(548
)
 
108,446

Indefinite life intangible assets:
 
 
 
 
 
 
 
Trademarks and tradenames
109,789

 
—

 
1,389

 
111,178

Total intangible assets
$
256,128

 
$
(37,345
)
 
$
841

 
$
219,624


Amortization of intangible assets was $4.3 million and $12.9 million for the three and nine months ended September 29, 2013, respectively, and was $4.4 million and $11.1 million for the three and nine months ended September 30, 2012. Amortization expense is classified within selling, general and administration expenses in the condensed consolidated statements of comprehensive income (loss).


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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The estimated future amortization of intangible assets with definite lives as of September 29, 2013, is as follows:
(In thousands)
 
Fiscal year:
 
2013 (remaining three months)
$
4,225

2014
16,976

2015
16,436

2016
15,220

2017
13,108


4. Accounts Receivable

The Company’s customers consist mainly of wholesale distributors, dealers, and retail home centers. The Company’s ten largest customers accounted for 41.5% and 42.5% of total accounts receivable as of September 29, 2013, and December 30, 2012, respectively. The Company’s largest customer, The Home Depot, Inc., accounted for more than 10% of the consolidated gross accounts receivable balance as of September 29, 2013, and December 30, 2012. The Company’s second largest customer, Lowe’s Companies, Inc., accounted for more than 10% of the consolidated gross accounts receivable balance as of December 30, 2012. No other individual customer accounted for greater than 10% of the consolidated gross accounts receivable balance at either September 29, 2013, or December 30, 2012.

The allowance for doubtful accounts balance was $3.9 million as of both September 29, 2013, and December 30, 2012.

The Company maintains an accounts receivable sales program with a third party (“AR Sales Program”). Under the AR Sales Program, the Company can transfer ownership of eligible trade accounts receivable of a large retail customer. Receivables are sold outright to a third party that assumes the full risk of collection, without recourse to the Company in the event of a loss. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the condensed consolidated balance sheets and are reflected as cash provided by operating activities in the condensed consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold under the AR Sales Program were not material for any of the periods presented and were recorded to selling, general and administration expense within the condensed consolidated statements of comprehensive income (loss).

5. Inventories

The following sets forth the amounts of inventory on hand as of September 29, 2013, and December 30, 2012:
(In thousands)
September 29, 2013
 
December 30, 2012
Raw materials
$
159,993

 
$
138,997

Finished goods
74,885

 
69,786

Inventories, net
$
234,878

 
$
208,783


The Company carried an inventory provision of $7.9 million and $7.6 million as of September 29, 2013, and December 30, 2012, respectively. This provision is the result of obsolete or aged inventory.



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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


6. Property, Plant and Equipment

The following sets forth the amounts of property, plant and equipment held by the Company as of September 29, 2013, and December 30, 2012:
(In thousands)
September 29, 2013
 
December 30, 2012
Land
$
51,134

 
$
54,888

Buildings
190,490

 
187,967

Machinery and equipment
571,412

 
550,280

Property, plant and equipment, gross
813,036

 
793,135

Accumulated depreciation
(193,719
)
 
(144,775
)
Property, plant and equipment, net
$
619,317

 
$
648,360


Total depreciation expense was $15.5 million and $47.7 million in the three and nine months ended September 29, 2013, respectively, and was $15.9 million and $47.5 million in the three and nine months ended September 30, 2012, respectively. Depreciation expense is included primarily within cost of goods sold in the condensed consolidated statements of comprehensive income (loss).

7. Long-Term Debt
(In thousands)
September 29,
2013
 
December 30,
2012
8.25% Senior Notes due 2021
$
375,000

 
$
375,000

Unamortized premium on Senior Notes
2,906

 
3,194

Capital lease obligations and other long-term debt
134

 
654

Total long-term debt
$
378,040

 
$
378,848


Senior Notes

In April 2011, the Company issued $275.0 million aggregate principal senior unsecured notes (the “Initial Notes”), and in March 2012, the Company issued an additional $100.0 million aggregate principal senior unsecured notes (the “Add-On Notes”). The Add-On Notes have the same terms, rights and obligations as the Initial Notes, and were issued in the same series as the Initial Notes (collectively, the “Senior Notes”). In total, the Company has issued $375.0 million aggregate principal amount of 8.25% senior unsecured notes due April 15, 2021, in two private placements for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to buyers outside the United States pursuant to Regulation S under the Securities Act. The Senior Notes were issued without registration rights and are not listed on any securities exchange. The Senior Notes bear interest at 8.25% per annum, payable in cash semiannually in arrears on April 15 and October 15 of each year. The Company received net proceeds of $101.5 million in 2012 from the Add-On Notes and $265.5 million in 2011 from the Initial Notes, after deducting $2.0 million and $9.5 million of transaction issuance costs, respectively. The transaction costs were capitalized as deferred financing costs (included in other assets) and are being amortized to interest expense over the term of the Senior Notes using the effective interest method. The Initial Notes were issued at par, while the Add-On Notes were issued at 103.5% of the principal amount. The resulting premium of $3.5 million from the issuance of the Add-On Notes is being amortized to interest expense over the term of the Add-On Notes using the effective interest method. The net proceeds from the Senior Notes were used to fund a $125.0 million return of capital to shareholders during 2011, in the form of cash, in the amount of $4.54 per share; as well as the acquisitions of six companies during the past several years for aggregate consideration of $243.2 million. Interest expense relating to the Senior Notes was $8.0 million and $23.9 million for the three and nine months ended September 29, 2013 and was $7.7 million and $21.9 million for the three and nine months ended September 30, 2012.


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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The Company may redeem the Senior Notes, in whole or in part, at any time prior to April 15, 2015, at a price equal to 100% of the principal amount plus the applicable premium, plus accrued and unpaid interest, if any, to the date of redemption. The applicable premium means, with respect to a note at any date of redemption, the greater of (i) 1.00% of the then-outstanding principal amount of such note and (ii) the excess of (a) the present value at such date of redemption of (1) the redemption price of such note at April 15, 2015, plus (2) all remaining required interest payments due on such note through such date (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (b) the principal amount of such note on such redemption date. The Company may also redeem the Senior Notes, in whole or in part, at any time on or after April 15, 2015, at the applicable redemption prices specified under the indenture governing the Senior Notes, plus accrued and unpaid interest, if any, to the date of redemption. In addition, the Company may redeem up to 35% of the Senior Notes before April 15, 2014, with the net cash proceeds from certain equity offerings at a redemption price of 108.25% of the principal amount plus accrued and unpaid interest. If the Company experiences certain changes of control or consummates certain asset sales and does not reinvest the net proceeds, the Company must offer to repurchase all of the Senior Notes at a purchase price of 101.00% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.

Obligations under the Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of the Company’s directly or indirectly wholly-owned subsidiaries.

The indenture governing the Senior Notes contains restrictive covenants that, among other things, limit the ability of the Company and its subsidiaries to: (i) incur additional debt and issue disqualified or preferred stock, (ii) make restricted payments, (iii) sell assets, (iv) create or permit restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other distributions to the Company, (v) create or incur certain liens, (vi) enter into sale and leaseback transactions, (vii) merge or consolidate with other entities and (viii) enter into transactions with affiliates. The foregoing limitations are subject to exceptions as set forth in the indenture governing the Senior Notes. In addition, if in the future the Senior Notes have an investment grade rating from at least two nationally recognized statistical rating organizations, certain of these covenants will be replaced with a less restrictive covenant.

The indenture governing the Senior Notes contains customary events of default (subject in certain cases to customary grace and cure periods). As of September 29, 2013, and December 30, 2012, the Company was in compliance with all covenants under the indenture governing the Senior Notes.

ABL Facility

In May 2011, the Company and certain of its subsidiaries, as borrowers, entered into a $125.0 million asset-based revolving credit facility (the “ABL Facility”). The borrowing base is calculated based on a percentage of the value of selected U.S. and Canadian accounts receivable and U.S. and Canadian inventory, less certain ineligible amounts. In conjunction with this ABL Facility, the Company’s $30.0 million Bilateral Loan Facility was terminated during the second quarter of 2011.

Obligations under the ABL Facility are secured by a first priority security interest in substantially all of the current assets of the Company and its subsidiaries. In addition, obligations under the ABL Facility are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of the Company’s directly or indirectly wholly-owned subsidiaries.

Borrowings under the ABL Facility will bear interest at a variable rate per annum equal to, at the Company’s option, (i) LIBOR, plus a margin ranging from 2.00% to 2.50% per annum, or (ii) the Base Rate (as defined in the ABL Facility agreement), plus a margin ranging from 1.00% to 1.50% per annum.

In addition to paying interest on any outstanding principal under the ABL Facility, the Company is required to pay a commitment fee in respect of unutilized commitments of 0.25% of the aggregate commitments under the ABL Facility if the average utilization is greater than 50% for any applicable period, and 0.375% of the aggregate commitments under the ABL Facility if the average utilization is less than or equal to 50% for any applicable period. The Company must also pay customary letter of credit fees and agency fees.


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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The ABL Facility contains various customary representations, warranties and covenants by the Company, that, among other things, and subject to certain exceptions, restrict the Company’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness, (ii) pay dividends on the Company’s common stock and make other restricted payments, (iii) make investments and acquisitions, (iv) engage in transactions with the Company’s affiliates, (v) sell assets, (vi) merge and (vii) create liens. As of September 29, 2013, and December 30, 2012, the Company was in compliance with all covenants under the credit agreement governing the ABL Facility and there were no amounts outstanding under the ABL Facility.

8. Share Based Compensation Plans

Share based compensation expense was $1.8 million and $5.8 million for the three and nine months ended September 29, 2013, respectively, and was $1.8 million and $4.6 million for the three and nine months ended September 30, 2012. As of September 29, 2013, the total remaining unrecognized compensation expense related to share based compensation amounted to $11.1 million, which will be amortized over the weighted average remaining requisite service period of 2.4 years. Share based compensation expense is recognized using a graded-method approach, or to a lesser extent a cliff-vesting approach, depending on the terms of the individual award and is classified within selling, general and administration expenses in the condensed consolidated statements of comprehensive income (loss). All share based awards are settled through issuance of new shares of the Company’s common stock. The share based award agreements contain restrictions on sale or transfer other than in limited circumstances. All other transfers would cause the share based awards to become null and void.

Equity Incentive Plan

Prior to July 9, 2012, the Company had a management equity incentive plan (the “2009 Plan”). The 2009 Plan required granting by June 9, 2012, equity instruments which upon exercise would result in management (excluding directors) owning 9.55% of the common equity (3,554,811 shares) of the Company on a fully diluted basis, after giving consideration to the potential exercise of warrants and the equity instruments granted to directors. Under the 2009 Plan, the Company was required to issue to directors equity instruments that represented 0.90% (335,004 shares) of the common equity on a fully diluted basis. The requirement for issuance to employees was satisfied in June 2012, and the requirement for issuance to directors was satisfied in July 2009. Aside from shares issuable for outstanding awards, there are no further shares of common stock available for future issuance under the 2009 Plan.

On July 12, 2012, the Board of Directors adopted the Masonite International Corporation 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan is effective for 10 years from the date of its adoption. Awards granted under the 2012 Plan are at the discretion of the Compensation Committee of the Board of Directors. The 2012 Plan was adopted because the Board believes awards granted will help to attract, motivate and retain employees and non-employee directors, align employee and stockholder interests and encourage a performance-based culture based on employee stock ownership. Prior to June 21, 2013, the aggregate number of common shares that could be issued with respect to equity awards under the 2012 Plan could not exceed 1,500,000 shares plus the number of shares subject to existing grants under the 2009 Plan that may expire or be forfeited or cancelled. On June 21, 2013, the Board of Directors approved an increase of 500,000 common shares issuable under the 2012 Plan, bringing the total number of shares issuable under the 2012 Plan to 2,000,000 plus the number of shares subject to existing grants under the 2009 plan that may expire or be forfeited or cancelled. As of September 29, 2013, there were 1,503,621 shares of common stock available for future issuance under the 2012 Plan.

Deferred Compensation Plan

Effective August 13, 2012, the Board of Directors adopted a Deferred Compensation Plan (“DCP”) whereby certain employees and directors in the United States may elect to defer to a later date a portion of their base pay, bonuses, restricted stock awards and director fees. The DCP is an unfunded participant-directed plan where the Company has the option to contribute the deferrals into a rabbi trust where investments could be made.

Assets of the rabbi trust, other than Company stock, are recorded at fair value and included in other assets in the condensed consolidated balance sheets. These assets in the rabbi trust are classified as trading securities and changes in their fair values are recorded in other income (loss) in the condensed consolidated statements of comprehensive income

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


(loss). The liability relating to deferred compensation represents the Company’s obligation to distribute funds to the participants in the future and is included in other liabilities in the condensed consolidated balance sheets. Any unfunded gain or loss relating to changes in the fair value of the deferred compensation liability are recognized in selling, general and administration expense in the condensed consolidated statements of comprehensive income (loss).

As of September 29, 2013, participation in the deferred compensation plan is limited and no restricted stock awards have been deferred into the deferred compensation plan.

Stock Appreciation Rights

The Company has granted Stock Appreciation Rights (“SARs”) to certain employees. 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 four years, and have a life of ten years. It is assumed that all time-based SARs will vest.

The total fair value of SARs vested was $1.4 million and $2.5 million in the three and nine months ended September 29, 2013, respectively, and was $1.6 million and $2.6 million during the three and nine months ended September 30, 2012.
Nine Months Ended September 29, 2013
Stock Appreciation Rights
 
Aggregate Intrinsic Value (in thousands)
 
 Weighted Average Exercise Price
 
 Average Remaining Contractual Life (Years)
Outstanding, beginning of period
2,628,448

 
$
21,005

 
$
15.76

 
6.9
Granted
212,550

 
 
 
32.68

 
 
Exercised
(116,135
)
 
 
 
13.67

 
 
Cancelled
(42,887
)
 
 
 
14.60

 
 
Outstanding, end of period
2,681,976

 
$
41,478

 
$
17.21

 
5.9
 
 
 
 
 
 
 
 
Exercisable, end of period
2,251,929

 
$
38,567

 
$
15.55

 
5.4

During the nine months ended September 29, 2013, the Company granted 212,550 units of SARs to certain employees.
The value of the SARs granted in 2013, as determined using the Black-Scholes-Merton valuation model, was $2.7 million and is being recognized over the weighted average requisite service period of 3.0 years. Expected volatility is
based on the historical volatility of the Company’s public industry peers’ common shares, amongst other considerations.
Following are the weighted average grant date assumptions used for the SARs granted in 2013:
Option value (model conclusion)
$
12.53

Risk-free rate
1.8
%
Expected dividend yield
0.0
%
Expected volatility
35.1
%
Expected term (in years)
6.5


Restricted Stock Units

The Company has granted Restricted Stock Units (“RSUs”) to directors and certain employees. The RSUs confer the right to receive shares of the Company’s common stock at a specified future date or when certain conditions are met. The compensation expense for the RSUs awarded is based on the fair value of the RSUs at the date of grant and is recognized over the requisite service period. The RSUs vest over a maximum of four years, and call for the underlying shares to be delivered no later than the fourth anniversary of the grant dates. It is assumed that all time-based RSUs will vest.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Nine Months Ended September 29, 2013
 Unvested Restricted Stock Units
 
 Vested and Undelivered Restricted Stock Units
 
 Total Restricted Stock Units Outstanding
 
 Weighted Average Grant Date Fair Value
Outstanding, beginning of period
625,750

 
296,196

 
921,946

 
$
17.75

Granted
324,358

 
—

 
324,358

 
23.80

Delivered
—

 
(460,512
)
 
(460,512
)
 
 
Withheld to cover (1)
—

 
(11,968
)
 
(11,968
)
 
 
Cancelled
(48,119
)
 
—

 
(48,119
)
 
 
Vested
(188,049
)
 
188,049

 
—

 
 
Outstanding, end of period
713,940

 
11,765

 
725,705

 
$
21.19


(1) A portion of the vested RSUs delivered were net share settled to cover the minimum statutory requirements for income and other employment taxes, at the individual employee’s election. The equivalent cash is then remitted by the Company to the appropriate taxing authorities. These net share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting.

During the nine months ended September 29, 2013, the Company granted 324,358 RSUs to certain employees. Approximately half of the RSUs vest at specified future dates, with only service requirements, while the remaining portion of the RSUs vest based on both performance and service requirements. The value of RSUs granted in 2013 was $7.7 million and is being recognized over the weighted average requisite service period of 2.3 years.

Return of Capital

On May 17, 2011, (the “Declaration Date”) the Company declared a return of capital to shareholders in the form of cash in the amount of $4.54 per share. In accordance with the RSU agreements, RSUs which were outstanding on the Declaration Date had the right to participate in the return of capital. The accumulated return of capital on RSUs will be paid when the underlying RSUs are delivered. The unpaid portion of the return of capital was $0.2 million and $1.5 million as of September 29, 2013, and December 30, 2012, respectively, which is included in accrued expenses in the condensed consolidated balance sheets.

Warrants

On June 9, 2009, the Company issued 5,833,335 warrants, representing the right to purchase the Company’s common shares for $55.31 per share, subsequently adjusted to $50.77 per share for the return of capital in 2011. Of these, 3,333,334 expire on June 9, 2014, and 2,500,001 expire on June 9, 2016. The Company has accounted for these warrants as equity instruments. Future exercises and forfeitures will reduce the amount of warrants. Future exercises will increase the amount of common shares outstanding and additional paid-in capital.



19

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


9. Commitments and Contingencies

For lease agreements that provide for escalating rent payments or rent-free occupancy periods, the Company recognizes rent expense on a straight line basis over the non-cancelable lease term and any option renewal period where failure to exercise such option would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to be reasonably assured. The lease term commences on the date when all conditions precedent to the Company’s obligation to pay rent are satisfied. The leases contain provisions for renewal ranging from zero to three options of generally five years each. Minimum payments, for the following future periods, under non-cancelable operating leases and service agreements with initial or remaining terms of one year or more consist of the following:
(In thousands)
 
Fiscal year:
 
2013 (remaining three months)
$
4,941

2014
15,827

2015
14,739

2016
11,523

2017
9,867

Thereafter
59,482

 
$
116,379


Total rent expense, including non-cancelable operating leases and month-to-month leases, was $6.1 million and $18.9 million for the three and nine months ended September 29, 2013, respectively, and was $6.4 million and $18.7 million for the three and nine months ended September 30, 2012.

Masonite has provided customary indemnifications to its landlords under certain property lease agreements for claims by third parties in connection with its use of the premises. Masonite has also provided routine indemnifications against adverse effects to changes in tax laws and patent infringements by third parties. The maximum amount of these indemnifications cannot be reasonably estimated due to their nature. In some cases, Masonite has recourse against other parties to mitigate its risk of loss from these indemnifications. Historically, the Company has not made any significant payments relating to such indemnifications.

From time to time, the Company is involved in various claims and legal actions. In the opinion of management, the ultimate disposition of these matters, individually and in the aggregate, will not have a material effect on the Company’s condensed consolidated financial statements, results of operations or liquidity.


20

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


10. Restructuring Costs

The following presents changes in the accrual for restructuring and severance by activity:
(In thousands)
December 30, 2012
 
 Expense
 
 Payments
 
September 29, 2013
Restructuring plans in 2009 and prior
$
1,675

 
$
380

 
$
962

 
$
1,093

2012 closures and exit activities
2,893

 
3,579

 
4,929

 
1,543

2013 closures and severance
—

 
508

 
412

 
96

 
$
4,568

 
$
4,467

 
$
6,303

 
$
2,732

(In thousands)
January 1, 2012
 
Expense
 
Payments
 
Non-Cash Items
 
September 30, 2012
Restructuring plans in 2009 and prior
$
3,130

 
$
—

 
$
1,365

 
$
—

 
$
1,765

Reduction in staff levels in 2011 and other
401

 
161

 
562

 
—

 
—

2012 closures and exit activities
—

 
4,890

 
1,964

 
911

 
2,015

 
$
3,531

 
$
5,051

 
$
3,891

 
$
911

 
$
3,780


The following presents changes in the accrual for restructuring and severance by segment:

(In thousands)
December 30, 2012
 
 Expense
 
 Payments
 
September 29, 2013
North America
$
497

 
$
1,095

 
$
1,310

 
$
282

Europe, Asia and Latin America
4,071

 
3,372

 
4,993

 
2,450

 
$
4,568

 
$
4,467

 
$
6,303

 
$
2,732


(In thousands)
January 1, 2012
 
Expense
 
Payments
 
Non-Cash Items
 
September 30, 2012
North America
$
858

 
$
690

 
$
1,010

 
$
—

 
$
538

Europe, Asia and Latin America
2,673

 
4,361

 
2,881

 
911

 
3,242

 
$
3,531

 
$
5,051

 
$
3,891

 
$
911

 
$
3,780



21

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Certain information pertaining to total restructuring costs by plan as well as by segment is as follows:
(In thousands)
Nine Months Ended September 29, 2013
 
Cumulative Amount Incurred to Date
Restructuring plans in 2009 and prior
$
380

 
$
3,390

Reduction in staff levels in 2010
—

 
7,383

Reduction in staff levels in 2011 and other
—

 
4,574

2012 closures and exit activities
3,579

 
14,708

2013 closures and severance
508

 
508

 
$
4,467

 
$
30,563

 
 
 
 
North America
$
1,095

 
$
11,016

Europe, Asia and Latin America
3,372

 
19,547

 
$
4,467

 
$
30,563


The Company expects to incur approximately $1.1 million of additional restructuring costs related to activities initiated as of September 29, 2013. Although each restructuring action is unique, based upon the nature of the Company’s operations, the Company expects that the allocation of future restructuring costs will be consistent with its historical experience.

During 2013, the Company began implementing plans to rationalize certain international facilities, including related headcount reductions, in order to respond to declines in demand in international markets. Costs associated with these actions include closure and severance charges and are expected to be substantially completed by the end of 2013.

During 2012, the Company began implementing plans to close certain of its U.S. manufacturing facilities due to the start-up of its new highly automated interior door slab assembly plant in Denmark, South Carolina, synergy opportunities related to recent acquisitions in the commercial and architectural interior wood door market and footprint optimization efforts resulting from declines in demand in specific markets. The Company also began implementing plans during 2012 to permanently close its businesses in Hungary and Romania and to cease manufacturing operations in Poland, due to the continued economic downturn and heightened volatility of the Eastern European economies. Costs associated with these closure and exit activities relate to closures of facilities and impairment of certain tangible and intangible assets and are expected to be completed by the end of 2013.

Prior years’ restructuring costs relate to headcount reductions and facility rationalizations as a result of weakened market conditions. In response to the decline in demand, the Company reviewed the required levels of production and reduced the workforce and plant capacity accordingly, resulting in severance charges. These actions were taken in order to rationalize capacity with existing and forecasted market demand conditions. The 2011 restructuring plans were completed during 2012 and the 2009 and prior restructuring plans are substantially completed, although cash payments are expected to continue through 2014, primarily related to lease payments at closed facilities.



22

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


11. Income Taxes

Income tax expense (benefit) for income taxes consists of the following:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Current
$
308

 
$
1,093

 
$
1,110

 
$
2,456

Deferred
(6,580
)
 
(1,234
)
 
(8,826
)
 
(8,794
)
Income tax expense (benefit)
$
(6,272
)
 
$
(141
)
 
$
(7,716
)
 
$
(6,338
)

The effective tax rate differs from the Canadian federal statutory rate of 25.9% primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates, tax exempt income, and $4.4 million of discrete income tax benefits recorded in 2013 resulting primarily from the Company entering into voluntary disclosure agreements which reduced the reserve for unrecognized tax benefits.

The Company currently has deferred tax assets in certain jurisdictions resulting from net operating losses and other deductible temporary differences, which will reduce taxable income in these jurisdictions in future periods. The Company has determined that a valuation allowance of $24.6 million and $24.3 million was required for its deferred income tax assets as of September 29, 2013, and December 30, 2012, respectively. A valuation allowance has been established on deferred tax assets resulting from net operating loss carry forwards and other carry forward attributes primarily in Canada and the United Kingdom. The Company expects to record valuation allowances on deferred tax assets arising in these jurisdictions until a sustained level of taxable income is reached.

On June 26, 2013, Canada’s Bill C-48, Technical Tax Amendments Act, 2012, was enacted for U.S. GAAP reporting purposes. As it pertains to the Company, this legislation included new rules associated with upstream loans and indebtedness between a foreign affiliate and its Canadian parent company. As of September 29, 2013, the Company believes the enacted legislation does not materially impact the income tax provision.


12. Supplemental Cash Flow Information

The following presents certain cash and non-cash transactions:
 
Nine Months Ended
(In thousands)
September 29, 2013
 
September 30, 2012
Transactions involving cash:
 
 
 
Interest paid
$
15,503

 
$
15,740

Interest received
388

 
411

Income taxes paid
5,171

 
5,412

Income tax refunds
687

 
2,927

Non-cash transactions:
 
 
 
Property, plant and equipment additions in accounts payable
1,160

 
590




23

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


13. Segment Information

The Company’s reportable segments are organized and managed principally by geographic region: North America; Europe, Asia and Latin America; and Africa. The Company’s management reviews net sales and Adjusted EBITDA (as defined below) to evaluate segment performance and allocate resources. Net assets are not allocated to the geographic segments.

Adjusted EBITDA is a measure used by management to measure operating performance. It is defined as net income (loss) attributable to Masonite adjusted to exclude the following items:

•
depreciation;
•
amortization of intangible assets;
•
share based compensation expense;
•
loss (gain) on sale of property, plant and equipment;
•
impairment of property, plant and equipment;
•
restructuring costs;
•
interest expense (income), net;
•
other expense (income), net;
•
income tax (benefit) expense,
•
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 indenture governing the Senior Notes and the credit agreement governing the ABL Facility. Although Adjusted EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, it is used to evaluate and compare the operating performance of the segments and it is one of the primary measures used to determine employee incentive compensation. Intersegment transfers are negotiated on an arm’s length basis, using market prices.



24

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Certain information with respect to geographic segments is as follows:
 
North America
 
Europe, Asia and Latin America
 
Africa
 
Total
(In thousands)
Three Months Ended September 29, 2013
Sales
$
333,116

 
$
85,972

 
$
18,051

 
$
437,139

Intersegment sales
(22
)
 
(4,066
)
 
—

 
(4,088
)
Net sales to external customers
$
333,094

 
$
81,906

 
$
18,051

 
$
433,051

 
 
 
 
 
 
 
 
Adjusted EBITDA
$
23,117

 
$
1,484

 
$
1,833

 
$
26,434

 
Three Months Ended September 30, 2012
Sales
$
319,307

 
$
89,822

 
$
20,048

 
$
429,177

Intersegment sales
(275
)
 
(3,906
)
 
(39
)
 
(4,220
)
Net sales to external customers
$
319,032

 
$
85,916

 
$
20,009

 
$
424,957

 
 
 
 
 
 
 
 
Adjusted EBITDA
$
19,825

 
$
3,725

 
$
1,435

 
$
24,985

 
Nine Months Ended September 29, 2013
Sales
$
999,493

 
$
270,621

 
$
53,370

 
$
1,323,484

Intersegment sales
(380
)
 
(12,396
)
 
(40
)
 
(12,816
)
Net sales to external customers
$
999,113

 
$
258,225

 
$
53,330

 
$
1,310,668

 
 
 
 
 
 
 
 
Adjusted EBITDA
$
71,672

 
$
10,403

 
$
3,997

 
$
86,072

 
Nine Months Ended September 30, 2012
Sales
$
918,712

 
$
290,334

 
$
62,040

 
$
1,271,086

Intersegment sales
(1,044
)
 
(12,056
)
 
(140
)
 
(13,240
)
Net sales to external customers
$
917,668

 
$
278,278

 
$
61,900

 
$
1,257,846

 
 
 
 
 
 
 
 
Adjusted EBITDA
$
53,522

 
$
12,971

 
$
5,151

 
$
71,644



25

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The table below provides a reconciliation of the Company’s consolidated Adjusted EBITDA to net income (loss) attributable to Masonite:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Adjusted EBITDA
$
26,434

 
$
24,985

 
$
86,072

 
$
71,644

Less (plus):
 
 
 
 
 
 
 
Depreciation
15,505

 
15,859

 
47,682

 
47,486

Amortization of intangible assets
4,277

 
4,356

 
12,883

 
11,070

Share based compensation expense
1,841

 
1,786

 
5,752

 
4,605

Loss (gain) on disposal of property, plant and equipment
(2,772
)
 
200

 
(1,810
)
 
683

Impairment of property, plant and equipment
—

 
—

 
1,904

 
—

Restructuring costs
1,265

 
3,829

 
4,467

 
5,051

Interest expense, net
8,330

 
7,969

 
24,788

 
23,073

Other expense (income), net
(255
)
 
80

 
(776
)
 
1,197

Income tax expense (benefit)
(6,272
)
 
(141
)
 
(7,716
)
 
(6,338
)
Loss (income) from discontinued operations, net of tax
62

 
50

 
196

 
(1,520
)
Net income (loss) attributable to noncontrolling interest
838

 
913

 
2,123

 
2,131

Net income (loss) attributable to Masonite
$
3,615

 
$
(9,916
)
 
$
(3,421
)
 
$
(15,794
)

14. Fair Value of Financial Instruments

The carrying amounts of the Company’s 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 estimated fair value of the Senior Notes as of September 29, 2013, and December 30, 2012, was $409.2 million and $400.3 million, respectively, compared to a carrying value of $377.9 million and $378.2 million, respectively. This estimate is based on market quotes and calculations based on current market rates available to the Company and is 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 the Company’s debt instruments and are obtained from and corroborated with multiple independent sources. The market quotes obtained from independent sources are within the range of the Company’s expectations.

The Company had assets held for sale of $7.2 million as of December 30, 2012. During the nine months ended September 29, 2013, the Company divested four locations which had a book value of $3.8 million. The sale of these locations resulted in the recognition of a gain of $3.0 million representing the excess of the consideration received over the book value of the divested assets. Foreign exchange fluctuations in the nine months ended September 29, 2013, decreased the value of foreign assets held for sale by $0.1 million, resulting in a balance of assets held for sale as of September 29, 2013, of $3.3 million. Assets held for sale are stated at the lower of carrying amount or fair value less cost to sell and are revalued at each reporting date. This valuation is performed on a recurring basis, and is categorized as having Level 2 valuation inputs as established by the FASB’s Fair Value Framework. The related charges due to revaluation were not material in the three or nine months ended September 29, 2013, or September 30, 2012.



26

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


15. Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing earnings attributable to Masonite by the weighted-average number of the Company’s 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, SARs and warrants outstanding during the period.
 
Three Months Ended
 
Nine Months Ended
(In thousands, except share and per share information)
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Net income (loss) attributable to Masonite
$
3,615

 
$
(9,916
)
 
$
(3,421
)
 
$
(15,794
)
Income (loss) from discontinued operations, net of tax
(62
)
 
(50
)
 
(196
)
 
1,520

Income (loss) from continuing operations attributable to Masonite
$
3,677

 
$
(9,866
)
 
$
(3,225
)
 
$
(17,314
)
 
 
 
 
 
 
 
 
Shares used in computing basic earnings per share
28,021,671

 
27,806,339

 
28,081,966

 
27,624,652

Effect of dilutive securities:
 
 
 
 
 
 
 
Incremental shares issuable under share compensation plans
1,873,361

 
—
 
—
 
—
Shares used in computing diluted earnings per share
29,895,032

 
27,806,339

 
28,081,966

 
27,624,652

 
 
 
 
 
 
 
 
Earnings (loss) per common share attributable to Masonite:
 
 
 
 
 
 
 
Basic - from continuing operations
$
0.13

 
$
(0.36
)
 
$
(0.11
)
 
$
(0.63
)
Diluted - from continuing operations
$
0.12

 
$
(0.36
)
 
$
(0.11
)
 
$
(0.63
)
 
 
 
 
 
 
 
 
Basic - from discontinued operations, net of tax
$
—

 
—

 
$
(0.01
)
 
$
0.06

Diluted - from discontinued operations, net of tax
$
—

 
—

 
$
(0.01
)
 
$
0.06

 
 
 
 
 
 
 
 
Basic
$
0.13

 
$
(0.36
)
 
$
(0.12
)
 
$
(0.57
)
Diluted
$
0.12

 
$
(0.36
)
 
$
(0.12
)
 
$
(0.57
)
 
 
 
 
 
 
 
 
Incremental shares issuable from anti-dilutive instruments excluded from diluted earnings per common share:
 
 
 
 
 
 
 
Warrants
5,833,335